Q3 2020 Linamar Corp Earnings Call
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I'd now like to hand, the conference over to your speaker for today and Tomorrow, CEO Ms., Linda Haas and Fred. Thank you Ma'am. Please go ahead.
Thank you.
Afternoon, everyone and welcome to our third quarter Conference call.
Joining me this afternoon on the call are members of our executive team Jim Gerald sales shot her bicycle Ted My daughter, Kevin Hanrahan remember, our corporate <unk> marketing finance and legal teams.
Before I begin I will draw your attention to the disclaimer that is currently being Brock.
[music], Okay, why don't we start off with an update on the company's 19 crisis and what the market's reaction cheese cheese that now you know we get reports type approach to Delhi, what's called the 19th we assembled the team we gather data they need a plan and we executed on that plan and we communicated broadly at least.
Do you need to make excellent.
Right.
One of these debt.
Our focus now is very much on the next phase of this crisis restarting rejuvenating and recovery.
First and foremost we are determined to create a work environment, where people feel are at stake or safer come into work, they're not coming to work we watched the chassis pilot and I guess to regularly cap displays that to site and go out to prove we're not seeing transmission in the plants have any asymptomatic bought that people.
Or any positive cases whatsoever, we.
We plan to continue with the study for a few more months.
More than 94% of our employees are now actively back at work, which is great to see how those 97% or physically back at the office or brand and have been since may.
Safety protocols in both office and the plants are protecting our people and we are not seeing transmission outside of the virus well.
We're working with the balance of our people on appropriate return to work plans that makes sense for them and when the time is right.
We are actively building market share and our business is particularly well there may be some weakness in the competitor right.
Fourth we continue to be very cautious around cost reduction and cash management, although many of our cost reductions are only temporary measures. We do believe trokendi permanent changes in how we manage these costs.
I think were protocol is based on five key principles screening P.E. that includes Matt.
Endorphins shield distancing increased training and hygiene and contact tracing we are regularly survey shortening our employees as to how safe they feel that work and the adequacy of the safe work protocol and are continuing to see consistently strong scores for both metrics since we started doing.
So if there's a concern in any one plant or region in terms of how people are feeling we can quickly focusing on not through the data that we're gathering which allows us to drill down by region and by plant.
We are making excellent progress on the financial aspects of our lender My House first action plan as is evidenced by our great results the order.
On the piano side, you can see we have it implemented strong level of cost reduction and I know they continue to be very cautious around spending we have an excellent system. We put in place to accurately forecast. Our next five quarters on a biweekly basis, which is now part of the read out how we manage.
From a balance sheet perspective, we continue to operate with the highest levels of cash payment control.
Capital spending was cut by more than 50% in the quarter compared to last year and we continue to stress tests are forecast to evaluate impact on cash I cabinet.
Our stress test continues to show we are well in control in terms of still generating profit free cash flow and saying well away from debt covenants.
That covenant levels this year ads.
And then just a further risk mitigate our balance sheet given uncertainties in the current environment. We early negotiated terms for refinancing a piece of debt that was due in January the 435 million at U.S. dollar principal amount only under facility be about bad credit.
Green that matures in mid January up 2021, we have identified a preferred option for replacing that financing circled preliminary trends with our lenders for stature and are confident in completing the paper close in the next few weeks.
Another key area of focus of course have been community support I think that what we've done in terms of rapidly retooling lines or ventilator components and full assembly production up at a later is a great example, I've, let him our innovation responsiveness and flexibility we were at a car production on several orders the pen.
Two weeks of the first phone call we.
We were assembly, but he did bill did you give it disinfection units for clean slate in four weeks and we were at assembly ready to build the IPO in a box integrated that's later on life support system for Thornhill comprised by the way of 1700 different components in only six weeks.
How did we do that we were able to do it because we are a real markedly agile flexible company, both in our management style or engineering and supply chain management capabilities and in our actual equipment, which can be easily and rapidly be tool to new programs. We are technically incredibly deep our team on for you.
That topic adaptable and I'm, so proud of them and the excellent job that they got now avoid the core and a little as we were often challenged about how linear <unk> handle a changing landscape of design and technology and feel that we focus electrified vehicles. As one example, Lamar isn't advanced manufacturing company through a true.
We can design and major product manufactured product for all kinds of industries, and we did and we will continue to do so long into the future regardless of where technology faith that we see technology change, there's only one thing opportunity and we will as we always have to chase these opportunities down and continue to prosper.
We are at various stages of completion for the Friday for the component work for GE out of the old than those who we're competing for sorry, you know we had built nearly 300 units and we'll have the full order of more than 1100 complete within a few months. There is some potential for additional volumes on this product as well.
Similarly, we have built nearly 200 units for clean slate on the UBI disinfection products and will continue to ramp up production as we get into the fall. There's also some potential for additional volume by this past the swap.
Okay with that let's jump into some of the specifics about the Florida, I will start off and usual with sales earnings and content.
Sales for the quarter were 1.64 billion down 5.9% from last year.
So selfish bounced back nicely from Q2 levels, although as Bob just just filling a drag from the pandemic.
Lost your coverage is ramping up and that's not a strong quarter as well that Jack is definitely still feeling the pinch of the pandemic, but we did see a little better market performance in the quarter compared to Q2.
In terms of earnings normalized net earnings are up 46% to 140.5 million driven by the strong sales performance improved margins on larger cost reductions implemented and government support programs, earning our better than expected last quarter and thanks to a stronger than expected for tomorrow.
<unk> in Asia, and also at Max on and higher government supports a habit forecast.
In North America concept, so difficult for the quarter was $182 or 76 cents up 9.6% over last year with customers. We haven't had been waiting were also seeing the biggest market share gain vehicles.
Vehicle production levels were down 1% compared to last year, meaning automotive sales in North America grew 8.4%.
And your content per vehicle dropped from $77.72 and a market down significantly. It makes the continued impact of the pandemic, we're seeing volumes pick up as of Q4, but we do know is an element of risk given the strength of the second wave of the pandemic in Europe.
In Asia <unk> content per vehicle was also up significantly at $12 was 74 cents up 25.5% over last year again due to our key customers seeing strong market share gains in certain product in a market that was actually down 1.8%.
It gave a 23% due to auto sales in the region.
Global content per vehicle was also up driven mainly by the strong growth in North America.
Commercial and industrial sales were down 20% in the quarter due to lower skies <unk> sales on North American and European markets down, 30% to 40% somewhat improved from last quarter, but still a very that decline.
On the cost side Max on flat sales growth over last year with the Draper Hatter market up in double digits in Canada, and the U.S. and the quarter recovering much of the ground lost after a tough first half, but also saw market share gains again in Europe and see I would also crops should be is resolved.
Carefully managing Capex continues to be <unk> theme for us in these uncertain times, we were down 53% from last year. Although up of course are the lows of Q2, let me hit more solid ground. The year, we'll end up with Capex down at least 40% from last year, but.
But your 2021, we will be back to a more normal range of spending as a percent of sales.
When my utilization of flexible programmable equipment is the key factor in allowing us flexibility in times of market softness we continued to do a lot of new business without requiring significant capex.
This is a massive advantage one of them are happening comparison with competitors, who may invest in more dedicated equipment, which although cheaper and often requiring less labor is not easy to reallocate to new programs or to scale. The line to match actual capacity needs.
I have to say, we had an absolutely outstanding quarter in terms of free cash flow was $445 million generated to further reduce net debt level net debt now sits at $877 million, which is down over $1 billion from a year ago. Despite the pressures of the pandemic.
Leverage likewise improved dramatically to 1.1 times last 12 months because yet.
Noted, we have circled turns to refinance debt due in January and have no other debt due until 2023, so our balance sheet is in excellent shape.
Free cash flow is something when a lidar is quite good at managing and generating we have seen strong where your cash flow over the last five years I clearly expect to see strong positive free cash flow this year as well given the performance through the first three quarters, which has been more than double last year at this time.
Free cash flow yield fits that 44%, which I think is pretty impressive we have $1.3 billion before maybe be available to us which is also outstanding.
A strong balance sheet and liquidity I mean, we have the ability to take my take on more work or acquisitions as they arise in an opportunistic market and drive even more wells.
In addition, our strong cash position has allowed us to double the dividend to 12 cents per share for Q3.
Turning to our market outlook, we're seeing markets equally down across the board. This year, what you shouldn't be a surprise.
Industry experts are predicting steeply declining declining light vehicle volumes globally. This year to 13 million or 16.4 million and 39.7 million vehicles in North America, Europe, and Asia, respectively. It's expected that each market will see a strong recovery in 2021 at 22 point.
3%, 15.9% to 9.2% respectively.
On highway medium heavy truck volumes are predicted to be down significantly in North America Europe. This year with solid growth next year Asia will see small declines this year a bigger decline next year.
And access markets are similarly down this year in most regions, but expected to grow next year.
Looking at a little more detail on the auto side, you can see an increase for 2021 in every region globally. After a very past 2029.
Not surprising not quite easily 2020 is expected to be the trough for global <unk>.
Production levels and now at now 73 million up a little bit away from expectations last quarter.
[laughter] production for a family of course fried she'll consumer demand you can see here, how the consumer some bounce back in the different regions very different curves in each attack China was sharp indeed, now back up well over last year consistently every month your Caribbean deep abroad with low levels of demand late.
Great for much longer although finally back up over prior year two of the last three months.
And the U.S., a shallow, but broad and notably backed up over prior year for the last two months, so not nearly as big a drop in North America, which is great to see and a big reason why production is pulling so strongly here inventory levels dropped quite low after two months of shutdown and the shallower drop in demand, particularly for popular.
The pickup truck.
October had the highest monthly sales volume up 1.35 million units seen since the start of the pandemic.
It's great to see all three regions globally profitable again in comparison to prior year, which bodes well for continued strength in production.
You can see here the changes to both Q3 and Q4 from what was predicted last quarter in global light vehicle production I think it is highly notable that's the first time and literally two years, we're seeing the forecast improving versus prior year order forecast.
Growth in both Q3, and Q4 girls, mainly out of Asia like Europe is notably running hotter for Q4 as well.
Similar Similarly, we are also seeing a positive change in comparison to prior prior quarter estimates for full year production level now expected to be three and a half million units higher this year and 4 million yet up higher next year with gains in every region.
In terms of types of correction in North America. This correction 50 standard level of reduction seen historically, which is good news.
I was hoping 19 did accelerate this change painfully for us. It doesn't mean, we can now look forward to volumes starting to build again, which is absolutely what we are seeing in the forecast.
Looking at the access market in more detail industry experts expect significant decline well into double digits for the access market globally. This year driven out of the cold and 19 pandemic impact, adding significant pressure to an already thought here in terms of demand we.
We are finally seeing some positive market indicators, which suggests next year should feed demand improve in double digits in North America and Europe in particular.
Equipment utilization levels are increasing with levels of 95% to 98% as last year seen consistently over the last couple of months.
She three was down less than half.
In North America, and Europe in another positive sign.
In the agricultural business the interest rate expectation is for a moderately lower club like rape or how to market. This year in Canada. Thanks to a test harvest last year, as well as Paris, and political backlash pretty farmers, and therefore, dampening demand, particularly in soybean and canola.
The call my bigger better market in the U.S. will be up modestly for the year offsetting the drop in Canada to result in North America being recently flat the European market is still expected to decline this year.
Australia is also expected to see a decline that South America and yeah, I asked show more positive signs to more than offset the decline in Australia for an overall positive outlet for rest of world.
After a rough first half across north American market, most notably in Canada or Mac on market share a strong we're seeing a positive trend in the back half, which is helping to offset earlier decline.
Combined the sales in both Canada, and the U.S. were both up in double digits in Q3 over prior year.
That's why we continue to build market share in international markets, most notably in Europe to offset market declined, but nevertheless, we will see sales down 2020, as a whole with market improvements in the back half not enough to offset a tough first half in Canada.
We are seeing positive signs, indicating market growth for 2021 here as well, what's the fall order intake running well above last year at this time.
Turning to an update on growth and outlets you'll be pleased to know that we had another solid quarter and new business wins out.
I'll highlight a few of our more strategic wins in a moment let.
Electrified vehicles continued to provide great opportunities for it you can see a steady deal and our global content per vehicle for battery electric vehicles as a result of recent win.
The lives of the internal combustion engine and battery electric vehicles local content for vehicle are converging, which of course is the goal.
Our content per vehicle and electric vehicles is not predicted to surpass SATA hybrid that a couple of years as we see more and more about wins and.
Also importantly, our <unk>, our global content per vehicle for bad it's only three years out which is equivalent to our global content per vehicle for internal combustion engine vehicles three years ago, which is fantastic news.
Our addressable market across a range of vehicle propulsion type continued to look at what was our total addressable market for us today around $80 billion growing to more than $300 billion in the future or an increase of more than three times.
You can see the market potential for each type of vehicle internal combustion hybrid battery electric fuel cell electric are all starting to even out this was largely driving some of the higher potential content for vehicle. We now have in the battery electric fuel cell electric and hybrid vehicle sales to continue product development efforts such as.
Assembled battery trades or hydrogen fuel tanks that other products.
Oh, the casual contact for all vehicles is now equivalent in fact, just exceeding the current potential I'm internal combustion engine vehicles at roughly $3200 per vehicle, which is great.
I think it's also critically important to point out that the type of equipment utilized the machine parts for electrified vehicles, there's literally identical to them just equipment used to machine part or internal combustion engine vehicle electric vehicles, you geared chat structural parts and a variety of how they just like internally.
Question engine vehicles.
I give rider or shape are used to make it easier for an internal combustion engine vehicles. The very same equipment. We were used to make it easier for an electric vehicle I highlight this point is it means we will not have significant levels of TRID stranded assets to deal with as the world transitions into electric vehicles.
Our launch because solid and expected to peak at more than $4.1 billion in sales at this time, we saw a shift of about $140 million of programs moving from launch into production last quarter, we should be hitting somewhere around a third and mature levels on launches this year and expanding that to ward SAP I've met.
Sure level next year.
As usual we are summarizing all of these expectations of market changes on our outlook slide that you can see that and now showing we continue to expect significant double digit declines in both sales and earnings this year, but do you expect to be profitable overall AD in both segments.
Neither side that will be in a normal range on normalized operating margin, but they will be within a few percentage points at bat that margins should be between four and 5% for the year.
2021 should see strong growth on rallying markets in the double digits for both top and bottom line.
Really that means expansion to wars or into normal operating margin ranges for each segment and that margin that is moving closer to our normal range of 7% to 9%.
We expect to maintain leverage level under 1.25 for the year and improved significantly from back in 2021.
Free cash flow both years will be strongly positive as already demonstrated.
Looking specifically at Q4, you should expect to see auto dial back from Q3, giving our customers in North America basically did not shutdown in Q3, but are expected to have their normal seasonal shutdown. In Q4. In addition, there are some key customer platform changeovers planned for Q4, which will also.
[noise] impact volumes in the auto business.
I thought I should see a similar performance to Q3, noting there could be seasonal slowdown as we often see as God that will definitely dial back from Q3 as it normally does seasonally in.
In addition, Q4 is not currently expected to have significant levels of government subsidies in comparison to Threeq and Q2 as the calculation has changed significantly from the original roll out of the way that the program as we return to more normal levels of business.
We're still assessing what the impact will be in Q4, given still pending government guidelines around such what all that means is you should expect to see a material earnings and dial back in Q4 in comparison to Q3, but still looking positive in comparison to prior year.
I will add is the whereas it's just that idea that impact from the cold like 19 outbreak are currently not fully understand or determinable in terms of the impact to all segment that was like a forth risks remain in particular, we are conscious of the fact that potential customer shutdowns are always at risk and should be considered.
I'm going to stop highlighting a few of our more interesting wins. This quarter first we picked up multiple wins again in the quarter for battery electric vehicle, many of which were in China, where of course battery electric vehicles are predicted to more quickly penetrate the market in aggregate, they're more than 11 million a year ago sales and they will start production.
In a couple of years.
Notably electric vehicle programs have represented nearly one third of total wins this year, great to see but he's vehicle of the teacher.
Secondly, we are seeing a pickup in quoting activity in the commercial vehicle space, we have quite a successful quarter in that regard securing several wins representing more than $90 million a year in sales.
We saw multiple driveline business wins for our Canadian plants, helping us to continue to drive our growing choppy business in aggregate. These programs represent nearly 30 million in sales and finally, we saw another meaningful driveline system win for a full R&D you sent them the volume for this system fully designed and.
Somewhat by landmark by the way is more than 40000 per year. This job will also be housed in one of our Canadian plant with that I'm going to turn it over to our CFO, Dan Schneider to lead us through a more in depth financial review already though.
Thank you Linda and good afternoon, everyone.
Then I noted Q3 was a strong recovery from the Cobra shutdowns that occurred earlier in the year.
Great quarter for cash generation as we generated 445.1 million of free cash flow, which brings the year to date total to 762.7 million.
Additionally were able to maintain our strong level of liquidity and increase it to 1.3 billion.
For the quarter sales were 1.6 million down a 102.6 million from 1.7 billion last year.
Earnings or normalize for FX losses related to the revaluation of the balance sheet and any unusual items that occurred in the quarter.
In Q3 earnings were normalized for the cost impact of announcing the closure of our Eagle manufacturing facility in Kentucky during the quarter.
Under water for us.
We are required to accrue the closure costs of the plants one announcement, even though the plant is not scheduled to close until May 2021.
The closure costs impacted the quarter by $13.8 million of which the majority of the cost related to the impairment of fixed assets in the amount of 11.7 million.
The impact on EPS from the plant closure announcement was 15 cents per share.
Earnings were further normalize for FX losses related to the revaluation of the balance sheet, which impacted EPS by eight cents per share.
Normalized operating earnings for the quarter were 197.4 million that's.
This compares to earnings of 139.2 million in Q3, 2019, an increase of 58 million or 41.8%.
Normalized net earnings increased 44.3 million.
Or 46% quarter to reach 140.5 million.
Fully diluted normalized EPS increased by 68 cents.
Or 46.3% to $2.15.
Included in our earnings for the quarter was a foreign exchange loss of 6.6 million, which resulted from a $7 million or loss from the revaluation of operating balances and a $900000 gain on evaluation of financing offices.
I mentioned, the net FX losses impacted the quarter's GPS by eight cents.
For our business segment perspective, the Q3 FX loss due to the revaluation of operating balances the southern <unk> million was fully associated with the industrial sales.
[noise] further looking at the segments industrial sales decreased 21.6% or 82.2 million to 298.4 million in Q3.
Sales decrease for the quarter was due to the access equipment sales declines associated with the COVID-19 pandemic for.
Which were partially offset or growing or cultural sales at night gone.
Normalized industrial operating earnings in Q3 increased 9 million or 24.2% over last year.
To 48.7 million.
The primary drivers impacting industrial where the government support programs increased agricultural sales, which was tempered partially by the softer access equipment market.
Turning to transportation sales decreased by 20.4 million or.
For Q3 last year to 1.3 billion sales.
Sales decrease in the third quarter is driven by the impact of COVID-19 have a tragic transportation markets have not fully recovered.
Which was locked into by a favorable FX impact due to the changes in rates of last year.
Q3 normalized earnings for transportation were higher by 48.7 million or 48.7% over last year.
In the quarter transportation earnings for permanently impacted by government support programs.
Continued ramp up of launching programs that are adding to earnings the targeted cost reductions achieved in the quarter and favorable FX impact to changes in rates since last year.
All of which was partially offset by the lower volumes and transportation markets.
Returning to the overall Mynamar results. The company's gross margin was 273.5 million an increase of 43.4 million compared to last year, primarily due to the utilization of ground support programs.
Good margins from launch programs favorable FX impacts.
Targeted cost reductions achieved all of which was partially offset by the lower earnings from the impact of COVID-19 on volumes in both segments.
Cause amortization.
<unk> expense for the third quarter was 109, nine Cogs amortization percentage sales increase of 6.7% primarily due to the impact of launching programs in the quarter.
Selling general and administration costs decreased in the quarter to 89.8 million from 94.3 million last year.
The decrease is mainly due to the targeted cost reduction and due to the impact of government support programs.
Finance expenses decreased 9.6 million since last year due to reducing our average daily debt level by $655 million since Q3 2019.
And reducing our effective interest rate by 100 basis points a.
Consolidated effective interest rate for Q3 declined to 1.8% from 2.8% last year.
The effective tax rate for the third quarter increased to 26.3% compared to last year, mainly due to unfavorable mix and foreign tax rates.
As a result, we're now expecting the full year 2020 effective tax rate to be in the range of 24% to 26%, which is up slightly from our Q2 expectations.
[noise] summers cash position was $570.1 million on September Thirtyth, an increase of 175.3 million compared to September 2019.
Third quarter generated 518.9 8.4 million in cash from operating activities used mainly to fund capex and debt repayments.
This also resulted in free cash flow generation 445.1 billion in the quarter.
As a result net debt to EBITDA decreased significantly to 1.1 times in the quarter.
Based on our current estimates we're now expecting to remain under 1.25 times by the end of the year due to the seasonality impacts of Q4, which is which has in the past caused the usage of cash.
This is subject to change as the impacts of COVID-19.
It's still very fluid and not currently fully understood.
The amount available credit on our credit facilities was 757 million at the end of the quarter.
Our available liquidity at Q3 increased to 1.3 billion as a result.
We currently believe we have sufficient liquidity to satisfy our financial obligations during 2020.
Three cap sales and earnings for the quarter was a story recovery and rejuvenation.
But the dramatic impact to the pandemic has had on Latam or this year. The critical story still remains one of cash and liquidity minimize had a remarkable cash generation quarter as we generated 445.1 million in the quarter and 762 million year to date free cash flow, while maintaining strong liquidity above December two at 29.
Keen levels to reach 1.3 billion.
That concludes my commentary and I now like to open up for questions.
Ladies and gentlemen, just as a reminder, if you'd like to ask a question at this time. Please press Star then the number one on your telephone keypad. Once again that is star and the number one.
And your first question comes from the line of Mark Neville with Scotia Bank.
Hi, Good evening excuse me first impressive results so great job.
Maybe when those when.
I just wanted to clarify the comment on Q4, sorry. The guide was earnings would be down sequentially.
Still up year over year is that right.
That's correct, yeah, we'll be down from Q3.
Yes based on basically you know strict the subsidy out dial back on auto and Sky, Jack and say you know, we're going to be a lot lower than Q3, but we do expect to be above Q4 2018.
Okay.
In Q3, I didn't catch but did you quantify the email to the support programs.
Ah yes, that's in the eye in the financial statements.
Yes.
Oh look about freely on the.
On the cost improvements.
Usually don't anyway at this point you to quantify sort of how much is temporary and how much is structural just trying to think as we go forward.
The <unk>.
I guess what comes back and sort of what margins look like as we sort of I was born in Europe.
Yeah, I mean, it's the best path to add to quantify I can't really give you a specific dollar figure or percentage, but I.
I will say that weve always learn from being forced to do things differently and and of course, we're going to try and retain anything that we can.
In terms of you know where cost will trend I think an obvious area is travel for instance, I mean quite outside of the pandemic. We found we can you know avoid some of the traveler we were doing to some extent by utilizing technology that we've all become a very accustomed to now add to it to do.
Remote a face to face to some extent and eating so that's obviously going to help us to save on time of costs and there's other things as well and that we think we can retain yeah. I think we've we've ratcheted back to the awesome software billings and subscriptions and things like that that would probably stay.
Please no market it's just.
Again, the things that when I was saying like you don't travel who knows right I mean, we're going to start traveling again.
No we're going to work more professionally remotely. So we always have to go somewhere for that meeting and stuff like that so I mean, we're watching everything we have a lot of this every week of the cost savings that we thought we've implemented and we are talking to group operationally the CEO will maintain them or you should not place.
In terms of margin expectations I would encourage you scale to reference the normal margin ranges that you can see right here on the outlook slide that we would normally have both from a net add perspective as well as in in terms of the individual segment I think those are still good margin levels.
I'm not expecting that you know as a massive change from up from that from those levels.
I'm sure you've heard us that's one last question I'm, just sort of free cash flow, obviously, great quarter, I always sort of thought im just given the restart of operation there would be maybe bigger or somebody that's been a working cap. So I'm just trying.
Trying to understand sort of what happens in Q4 or sort of how you manage to do that and just any color drama it's very impressive.
Yeah, I mean, it was a it was a variety of things I mean, some of the de receivable sales program, we have out there that we're able to.
Tap into our great managed Matt I noncash from Bell at NASDAQ and snapped on I think made big differences as well and we also continued.
To be I really cautious in terms that our overall I cash spending just in light of continued and uncertainties. So.
You know if you can see the results at you know I will say Q4 I am as we've noted on the slide here.
Hi is likely to see you know neutral to a small decline on non cash.
We normally do see.
Hey, I'm, sorry, I'm not neutral just small decline in terms of cash generation. So it is not viewed in other words, a small use of cash in Q4. It is a good estimation. That's just sort of a normal seasonal change from Q3 to Q4 to see noncash increase a little bit.
It.
Certainly, we all guys still struggling.
Sales for the industrial side, we do build up a little bit in Q4, but patients coming along so.
Thanks, Mike on the industrial side, Yeah, and then on that the financing programs that lender referred to keep in mind that we weren't even.
Even close to the wholesale to the end of Q2, so those programs work that fully utilized and obviously with the market's recovery in auto and back on you being able to utilize more tied to Q3.
So it's around the use of cash there they'll be for.
For Q4 that was strictly on board does would go bought well production.
Not sorry.
Sure It was for the working capital Tomorrow.
He wants me to do a ball pretty desolate.
Negative from people Yeah, I mean, we I, we expect to see non cash youth I in a in the fourth quarter. I mean, you know as noted we'll still be profitable, but I mean, you should expect capex to start to pick up a bit I guess.
[laughter].
Sorry, Thanks appreciate it.
Your next question comes from the line of Kevin Chiang with T.I.B.C.
Hi, Thanks for taking my question and good afternoon everybody.
That's a good question differently.
In your disclosure.
If I read from real quick with 47 million.
EUR 40 million contribution to earnings.
How to think of the contribution or offer.
Operating and combined with this isn't a simple.
Taking effect to talk through the quarter would.
I said some capex is talking about 47 million or is anything else I should be thinking about.
No that's basically it and does that all flow through operating Aaron.
[laughter].
A couple of blips between your two divisions in terms of how about how about Kunes wasn't was oh like us.
Netted against or because the costs are two segments.
I mean, I don't think we disclose that specifically by a I mean, obviously the lion share of the people are in the travel transportation segments. Though you know you can safely assume that you know 70, 75% there at least.
Okay, well that makes sense.
Yeah, maybe just.
Looking at your shareholder return program yet.
You bet your dividend.
But this quarter.
You know, but a couple of gold.
Go back or will your presentation you just went through in the leverage at 1.1 times.
Typically optimistic outlook for your.
Business outlook said that although obviously the fluidity of the situation with Obama participants.
If it gets was 1.8% just wondering how you how you decided that but the dividend, which I know was not a huge council will book.
Why the dividend maybe.
Share buyback program, one that you look the other share buyback program, just given where your balance sheet today.
That's a tough generation you're seeing the business.
Yeah, I mean, I think that both dividends and share buybacks are effective means by which to return cash to shareholders. A we had cut the dividend. So we thought it was the prudent sat for SAP to add to restore that to our shareholders and of course, we will continue to back you know dividend levels.
And buyback potential.
And the contract some ongoing cash needs and and leverage levels. So you know I think it is prudent to be conservative right now I just given there are some uncertainties in the road ahead and then you know current wave of the pandemic a factor so we're going to be cautious, but it's for sure a topic that we discussed at every single Board meeting.
Huh.
I don't.
I didn't catch this in the presentation, we happen to like what.
Terms Oh.
Isn't that equipment market you walk through <unk>.
Mark This is performing in terms of scars that specifically outperforming the market alone.
<unk> has been self performance similar to what the overall market it seems like though.
Yeah.
Yeah, I mean, we're still seeing market share growth for Sky Jack in in a targeted area is a great example is that been thing Europe, where we've seen good you know good continued a market share growth and and say you know the trend is positive, but you know when the overall market down 30, 40%.
I mean, obviously, you're gonna be you're going to be down in that territory as well.
The thing is we've got a sky has a lot of excellent product launches coming up with vertical for us I mean, Theres also Michael scissors and refresh on our keys that are coming over rocks range right. So there's a lot of a new product launches that are coming.
Well, that's my top color and just last one for me just.
I think you weren't you're planning, we're lucky to have actually put in some sort of third party financing within that Don Smith should do it.
Scott Jackson doesn't so backed up at that point out because it's under the old balance sheet.
Is that something you're still looking to a push for tier.
Actually we implemented that in Q4 of 2019.
Performance Don.
Before my time, yes, we have that.
Financing programs in the auto assign him back on hands Skyjackings being in a number of years.
Also.
You said that it would be a working capital.
To pick off one they've got some took on some of the moving parts with working capital.
In terms of how that one actually flow through to your balance sheet.
Take that offline. Thank you very much and good quarter everybody. Thanks.
Thanks Sam.
Your next question comes from the line of Peter Sklar with BMO capital markets.
Back on the wage subsidy program.
The the amount you articulated in the note that 47 million. That's that's for the Canadian wage subsidy program. The Cws program, but are there like the subsidy programs you would have benefited from it other jurisdictions, where those amounts substantial or were they minor compared to the.
Jim program well to be honest the Canadian program as a World Class example, government support no other country in the World has a program given similar to the key one.
Generally in other countries is a reimbursement of wages, we're paying for employees that are laid off.
So it's almost like we are in the country.
Countries, Yeah, I kinda kinda [laughter] is reimbursing, so there's no impact to our results from.
From those programs.
But the Canadian program does provide subsidy to working and nonworking. Please.
Okay.
And in terms of the fourth quarter outlook I know.
Linda in your comments, you said, you're still working on the numbers, but just maybe qualitatively do you assume that there will be some recovery from the wage program, but it's going to be substantially less than Q3 is that what's your thinking is yeah.
Yeah, absolutely I mean substantially less right and you know that the the way that the program is designed that it drives off the you know comparisons to private yard. So now that you know the sales are becoming more normalized the the levels of subsidy will will come back.
The problem is that the rules aren't all out yet for how to calculate what the subsidy is gonna be would still waiting to see what they exactly will be so it makes it a little more difficult to to predict specifically.
Which is exactly what happened last quarter frankly.
Right and.
What are you hearing in terms of a replacement program because I understand this program winds down in the third week of December and so are you anticipating a replacement program in 2021 or is it about likely not be irrelevant because you.
I'll be back to norm more normal levels and you won't have that much eligibility. So.
So in a throne speech and the government did talk about extending it into 2021.
So there will be a benefit currently they have only describe.
Up to the first claim period, which is a two week period. So first claim in October.
So we don't really have any insight on what that extension is going to be or how it's going to impact us at.
But obviously as the markets continue to recover in 21.
As we've seen so far in Q3 and expecting Q4.
Even if that program extends lennar Mars ability to utilize it will diminish.
Right, Okay shifting gears here.
On the industrial segment can you talk a little bit about Mac Dawn and Sky Joc and what is the normal seasonal pattern like in a typical year from Q3 to Q4 and how does that change this year because of all the volatility we've had because of cold it.
Yeah, I mean, Scott would normally dial back pretty significantly seasonally in Q4, I mean, we've seen that but anything from 2030, 35%.
Dialing back from Q3 levels I am not in Q4. So you know that not kind of a normal you know a normal level seasonably seasonally I'm not time can be a little more changeable. That's why we're suggesting you know flattish to Q3 that's it.
Essentially a better seasonal dial back a.
Because sometimes they can be you know flat, sometimes they can be down a little but they don't you don't see the same kind of a big change like you do with Skyjackings. Okay.
Okay.
Howard and Sky Joc, how is the the order book like is the order book picking up or is it stable or is it declining.
A I would say the backlog if you look year over year down compared to year over year and the take rate now is showing that we'll need to plan for next year and increase for next year right. So we're getting a little bit more sense of increasing into next year.
Right, Okay, and then Linda Lastly, you showed a chart that was very interesting your presentation. It.
Slide 31.
And that's where you showed the content per vehicle the content potential Freeport electric hybrid.
Internal combustion engine I don't know if you have quick access to the chart.
We're just pulling it right back up Okay now that's not what I'm worried that's not.
Yeah, sorry, Peter go ahead ask your question, Yeah could you spend a little more time, that's an interesting chart explaining it. Unlike some it's based on your order book and assumed volumes and.
You know are you growing very quickly notwithstanding that BD is growing quickly could you just reflect a little more on the chart.
Sure. So first of all this is not charting potential it is charting actual booked content. So this is based on booked business. We are not putting anything in a in here that is speculative that we haven't won yet.
So were taking actual booked sales for programs that we've been awarded a.
By internal combustion and a battery electric and hybrid and that would just dividing them by the current forecast for a number of vehicles to be produced in those years, you know for each of those propulsion type. So you know playing it right out of my job.
So when you show a content per vehicle in 2024 for like I'm looking at electric the Black line.
$50, the numerator would be your anticipated revenue and.
The denominator that the total number of battery electric vehicles produced or total global vehicle production of all propulsion type.
It is divided by the total number of battery electric vehicle is forecast to be produced globally.
Okay and.
And then just lastly on that this growth that you're having and.
Battery electric and the electric is that mostly the axle system that youve been marketing or there are other significant area.
There's other areas as well I mean battery trains or a very high content SAP.
Potential and assembled product as well as other chassis components structural component I mean chassis structural golans future assemblies differentials and what's your Bayes electric motor housing coolers, yet so.
A wide variety of book goals.
Right.
Okay. Finally, I mentioned in my comments I, our total content potential in electric vehicles, if we add up all the different components and subassemblies and and systems that we can produce is approximately $3200 right. That's our potential in electric vehicle or the other.
The other exciting part two pieces is that it's not just with traditional customers. This with new customers are well that are well established that are coming online too. So it's pretty diversified that way okay.
I also just wanted to make one last point with regard to your earlier questions on the wage subsidy I know that that caught all of your attention I, but I do want to point out that even if you strip those subsidies out our results this quarter were a significant and.
Higher than last year and that you know in the transit overall and certainly in the transportation segment. So there's a lot more going on here than just that wakes up city [laughter] turns up what we delivered in the quarter.
Yeah, no I see that in the numbers. Thank you.
Your last question comes from the line of Brian Morrison with TD Securities.
Thank you so just a clarifying that last comment window. So the allocation that you mentioned earlier, it's fair to say the transportation would have been a low 8% operating margin industrial would have been sort of mid thirteens is that fair.
[noise], even if you strip out the a if you strip the subsidy out the dire wouldn't we have where would we have landed in terms of.
Of margin correct.
Yeah, I mean, I, Yeah, I you know the transportation segment had its wrong that had a strong showing even if you strip that the margins out in the neighborhood of what you you talked about.
Excellent so to discretionary cost savings, obviously, you've done a very good job there, but specifically on the transportation side. When you look at 2021 global production volumes as compared to that of 2019, they are going to be down based on the forecast. So you've got an operating margin target. That's essentially flat. So is this sustainable cost savings that are full.
Read through or is this product mixes us better launches or or a combination.
It's a combination, but I would say primarily the launches. So I you know as our launches I reach more mature levels of a volume there their margins get out to more normalized levels. So you know a year ago, we were our worst pool.
Hi.
You know and 2019 aware the launches were so.
Level at a volume that was the sub optimal I in terms of margin delivery cannot you know nearly filling capacity and at the same time, our mature programs were coming down in volume and we're also running at sub optimal levels of volume and capacity utilization. So.
You know what sort of the worst possible point I in 2019, where I you know we have kind of the worst at both world now we're seeing you know watching programs continuing to pick up and that's been a big driver of what is driving those that better margins and we'll continue to do next year.
Helpful. Thank you and then one last question, maybe maybe for Jim or for Merck actually so on the industrial side I think if you take a look at it right now it really looks underappreciated within your share price. So when I take a look at sky Joc, even though we've got some positive or stable trends now utilization rates improving fleets are aging just wondering you know how.
Quickly you can adjust to various upward trajectory levels and then up at Dawn also looks like industry trends are improving commodity prices et cetera. So maybe just comment on the state of inventory at your North American dealers, if you could.
Matt Dawn I mean, they're in the order intake could find right now and we see that a ramping up so we're from a production perspective, very well prepared for that sort of increase dealers are good name.
I mean, the farmers actually have had agreed to fees I would say in both Canada and the USA, So I'm not gonna side as well.
Ready to roll with that increased its guy Jarvis Dan we're planning on it so.
So again, our production site and for us its really going through distribution to the rental companies and those those are beautiful well inventories on the on the AG side [noise] dealers are you know.
Chipping away at inventories and they are dropping so.
So that is also another good sign I think on Sky Jack side, as Jim mentioned with a lot of new products.
We've got a lot of prototypes that are just finishing up the prototype testing and everything so we're well actually I was 2021 increases.
Production and sales requirements. So we've got a lot of new models out. There also so I think we're in a good position for a first projects and one other thing on this guy is a sign that you know that some companies a lot of them or selling off used right now which is another indicator for us that there should be some pull off.
Thank you all.
There are no further questions at this time I'd like to turn the call back over to Linda Linda possibly for any closing comments.
Thank you very much let's conclude this evening I'd like to leave you with three key messages first we are thrilled to have generated an outstanding $445 million in free cash flow. This quarter liquidity has reached 1.3 billion, we have reduced that more than $1 billion from a year ago and refinanced next year.
Got to mitigate risk further our balance sheet looks fantastic second it's great to see despite challenges around restarting and lingering impact I've got.
Of the 19 on demand that launching business increased margin in the transportation sector and finally, it's great to see those green shoots starting to pop up in terms of market growth at both knocked on where market growth has already begun and that's got back where market growth is now expected in 2021, thanks very much.
And have a great evening.
Ladies and gentlemen, this concludes today's conference call. We thank you for your participation you may now disconnect.
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