Q1 2021 Linamar Corp Earnings Call
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Close to the last leg of the pandemic is the same as the first a year ago as we continue to focus on our employees shareholders communities net customers in on a litter of our health plan.
And the stage of the pandemic of our focus is really three key areas first insuring. We continue to have the safe workplace will the remain vigilant about following protocols in implementing regular casting and encouraging in the enabling high vaccination rate.
We are big believers the regular testing is key the controlling community spread of the and the only way along with vaccinations that we get back to normal. We have also been very focused on communication with our people and communities about the importance of vaccination, which allowance testing again of how we keep ourselves safe.
Or muscle on safe and healthy and how we get back to normal.
Given where normally not being transmission of the virus on our plant. Some may question of why we decided to implement this rapid update and our wealth for plants of more of a nice <expletive> on people twice weekly and the answer is pretty simple you are most contagious and the one for three days before you show you the first symptoms.
You may be positive not yet feel sick and the actively spreading the virus to other than your family or community and if we can stop that our community spread goes down and everyone's day safer.
And vaccination is the last key area of focus for US we launched our vaccination clinic in the early March after four weeks of focus work by our team. We have vaccinated 11235 people already in our two months in operation and expect to ramp up more significantly the.
Month as more vaccine the comes available we actually out of capacity to do 2000 shots per day, given the not the vaccine to assist the other companies interest of their Monte on their own clinic, we have developed the playbook of all the information needed to enable uneven quicker time to launch the flavor of the posted on our web.
And we encourage the information to be shared and hopefully utilized.
Okay with that let's jump in for some of the specifics about the quarter and we'll start off as usual with sales earnings at content.
As I mentioned at the outset that we have the names are where transportation segment mobility to better reflect the broader business focus of the side of our business.
All of our reporting has been updated to reflect the new terminology and I will do my very best months of slip out the use the wrong word for that.
Sales for the quarter were one $7 billion to $8 billion up 15% from last year the.
On the sector continues to perform very well in North America, and Asia and largely program for the project better volume and margin global vehicle market for up 14.7% driving some great market rebounds, the cloud on the horizon and of course, we're customer plant shutdowns related the shortfall and the supply of.
The semiconductor chips.
My son also saw a very strong quarter of driving less of the industrial segment growth over the last year. Although we are of lasting skyjack market's recovery market share growth and targeted regions in both industrial businesses also helps to this bill.
Normalised net earnings are up 133% to 158 3 million driven by the strong sales growth of course as well as cost reductions that has been implemented and governments force program. The change of that tax credit from last year also provided tailwind this quarter.
In North America of content per vehicle for the quarter was $196 of five another new record level up $14 50 per cent over the last year was customers. We have the heavy weight and was also seen the biggest for market share gains the.
Vehicle production levels were down 3.9% compared to latches due to those just shortages. However, our automotive sales in North America grew 10.2% of.
Should be noted the power transplant closure do tenths of lag vehicle plant closures. Typically this is relevant although although we did feel of impact on the chip shortages in Q1, we expect to likely futile of bigger impact in queue too.
This would also share to enhance north American of content for vehicles somewhat in the queue one.
In Europe content per vehicle dropped a little too $82 in the 81 of the market that was slightly down due to our customer of mix the resulting in modern automotive sales declines in comparison for last year. The market in Europe continues to be difficult with continued showroom shutdowns and the results in the <unk>.
Packed on consumer demand as well as complications for chip shortages production of levels and as a result of CPB are likely to remain volatile until the region's settles out once we move into the posted on that my period.
In Asia content per vehicle increased significantly again to $13 of 51.
Of $25 for for sent over the last share with key customer of seeing strong market share gains of certain products as well as additional sales for launching programs.
In the market that was also on the $32 for percent we call nearly all pandemic related of production has been 2020 for Asia, We're actually concentrated in Q1.
So this gave us of $66 for percent boot to automotive sales in the region two of $147 for million.
Global automotive sales were up in the quarter driven mainly by the strong growth in North America and Asia.
Commercial and industrial sales were of $25 two percentage of the quarter, mainly due to the strong macron performance. Although the Kazakh is now seen some growth over prior year as well healthcare sales for also up over prior year as the final. That's the later program units for delivered and Synoptist deliveries of robot.
The digital surgical microscope began.
Carefully manage the Capex continues to the key for US in Q1, we were down significantly in Capex from last year at $59 $5 million of spend for the full year 2020 wildly expect to see an increase from last year, but still on the local end of our normal range of 6% to 8%.
In order to continue to be somewhat conservative.
Minimize utilization of flexible programmable equipment is the key factor in allowing us flexibility in tons of market confidence to continue to to a lot of new business without requiring significant capex. This is a massive advantage of that Linda Martin has been comparisons competitors, who may invest in more dedicated equipment.
Withdraw the cheaper and also requiring less flavor is not easy to reallocate for new programs or the scale of the lines of Madison actual capacity.
We have continued on track record of generating free cash flow. Despite the pressures of working capital normally seen in the first quarter of the year, we generated on $166 million of free cash flow and expect to see solidly positive free cash flow for the full year 2021, we have one.
$6 billion of liquor.
Quiddity available to us as well, which is also outstanding.
Are strong balance sheet and liquidity mean, we have the ability of you to take on takeover work or acquisition as they arise in an opportunistic market and drive even more growth tomorrow.
The solid cash flow has allowed us to reduce net debt level net debt now sits at 309 million, which is down now over of 185 billion from its peak in the early 2018, despite the pressures of the pandemic leverage likewise improved dramatically to now.
Three times last 12 months.
Turning to the market Atlas, we are seeing markets of sharply up across the board this year, which should come as the surprise after a ton of 2020 industry experts are predicting solid growth in light vehicle volume globally. This year, $215 7 million $18 $6 million and $44.
3 million vehicles in North America of Europe, and Asia, respectively. Next year will see continued growth in the mid the highest single digits.
On highway medium heavy truck volumes are expected to be followed the app in North America and Europe. This year, but down in Asia next year, we will see continued growth monitoring in North America stronger in Europe that again down in the Asia.
Industry experts predict double digit growth and the access market in North America of Europe. This year and next share coming off the very top 20 as construction projects start to wrap packed up and consumer confidence bills post of damage.
Asia will continue to grow by the little last strongly than what we saw last year backlog is meaningfully app for prior year add more of a double the level. We were at in Q1 of 2020.
Lastly industries predicting solid growth in the cold light gray for header market. This year in double digits in North America, Australia, and Cif and mid of single digits in Europe, and South America the.
The order book is up significantly from last year was farmers feeling more confident with a rally a committed commodity prices at the harvest last year and of perception of of more stable international trade environment.
Looking at a little more detail on the other side you can see of pattern of recovery in every region on vehicle sales in comparison of prior year, notably once we hit the months where the client.
We're really starting to hit last year, China is quite consistently up in double digits, you have a little bit up and down based on lockdown and north American consistently except the higher.
In fact, the vehicle sales of North America are nearing record level April 2021 far in North America was the second highest and reported history.
2021 was the third highest sorry in history. This while vehicle bills are constrained by the chip shortages. What this means is we should expect robust production of level of once the just the issue of salt and of sustained period of strong performance, while the industry catches up to demand and rebuild vehicle inventory.
Sorry to normal levels.
And looking at protection of levels compared to what was the forecast at our last conference call at the beginning of of March you can see a slightly strands of Q1 than was forecast really driving out of the stronger recovery in China.
Two two is now expected to be a little softer than we saw in March again. This is because of the ongoing chip shortage issue with the trimming another 1.1 million units out of production in queue too.
This is the is a similar story for the full year for that same really 1.1 million units.
Are impacting the overall full year performance for 2021 now that says production in Q1, two two and 2021 for year are all of significantly from 2020 Q1 was at 14% Q2, 58% is the the forecast at 2021 full year 12.
Per cent for double digit goes across the board.
The of types of the chip shortage of the other supply chain issue seems to be changing day to day and it's very difficult per day, we will have a better sense for you as we see housing by out of in the next six weeks and can provide an update with our mid quarter of market update that will provided early July.
Looking at the assets market of more detail you can see first but also the market's showed growth over prior year. The first quarter of which is very positive further growth for the full year in for North American and European markets are expected to be even better which is of great sites.
Put in utilization level of continue to look positive in Q1 of 2021 utilization levels were between 95% of 105% of 2019 level and well ahead of last year's level, which is also a very that's fine.
And most of April utilization was 98% to 102% of 2019 level. So continue to prove improvements happening to the year.
Double digit growth is expected of coral North American and European markets in 2021 and in 2022.
The strong backlog already know the day, Scott Tech support fifth and should drive double digit sales growth of Skyjack This year and next year.
And the agricultural business for seeing a very optimistic outlook of North America in particular for a double digit growth. This year after a soft 2020.
Q1 combine the details in North America was 17% of that from prior year with the strongest showing in Canada, which was up 21% of new S. Also showing strongly adds up 16% of.
International markets on predicting high single digit or double digit growth pretty much across the board.
At the installation and full chassis solution.
We are targeting pass cars as well as commercial vehicle trucks of average class and off road vehicles.
We are targeting all types of electrified propulsion battery electric hybrid and fuel cell electric vehicles.
Targeting traditional Oems and new entrants to the vehicle field.
For the electric vehicle feel very successfully.
Finally, we're open to a variety of the scalable solutions for our customers from individual components of the sub assembly simple systems on them.
Based on the last point is really important for our customers are still developing their own manufacturing strategies in that regard being flexible means you get on the platform, one way or another and as the incumbent or in a much better place to take on more responsibility as the Oems evolve their strategies, we believe being source on two as many new.
Electrified platforms of possible in any way is absolutely key in this emerging market.
The strategy is paying off as we win business in all of these different areas and a variety of combinations of such.
Once again, the flexibility of Linda My strategy is key to our success.
Equally important for success in the electrified future is the flexibility of our manufacturing assets when I'm out of the model believes in the importance of using flexible programmable equipment in our production lines to allow us to maximize the utilization of our investment and better scale on match line capacity the fluctuating demand.
What does that mean says the same equipment can be used to make a variety of types of parts with minimal investment in new tooling of programming and that means that capital assets that are currently employ the inland <unk> operations today can be adapted to manufacturer of electrified components at little incremental cost as volumes on an internal combustion engine.
The vehicle decline in volumes on electrified vehicles growth. So for instance, the same gear grinding equipment can produce gear for electric vehicles E axle and for internal combustion engine powertrain for like as you can see illustrated on this slide.
The same is true for our laser machining centers, our seed treated quite bad Straighteners, primarily equipment et cetera. The list goes on their side of equipment of course, which is more product specific like assembly equipment for instance, but even these slides can have some element of reuse for a new program. The bottom line is we don't expect to see of.
Inefficient amount of stranded assets over the next decade, as we transition into electrified vehicles and we think this is very good news from a risk perspective.
Our addressable market across a range of vehicle propulsion types continues to look excellent with our total addressable market for us today of somewhere around $80 billion growing to more than 300 billion in the future an increase of more than three times.
As you can see the market potential for each type of vehicle, whether internal combustion hybrids battery electric fuel cell electric are all really starting to even out. This is largely driving from the higher potential content per vehicle. We have now in the battery electric fuel cell electric and hybrid vehicle areas.
Two the continued product development efforts for products like assembled battery trays hydrogen fuel tanks and others.
On a potential content for all types of vehicles are roughly $3200 per vehicle.
With respect to launches we are back to seeing ramping volumes on launching transmission engine and driveline for platforms, which are predicted to reach 40%, 50% of mature levels, this year, which should generate incremental sales of $500 million to $600 million.
These programs will peak at nearly $3 $7 billion net sales, we saw a shift of more than $70 million of programs moving from launch of production last quarter, which was more than offset by solid business wins next.
The next year, we should see growth of 30% to 40% for launches to generate additional incremental sales of $600 million to $700 million.
As usual we are of summarizing all of these expectations of market changes on our outlook five that is now being displayed.
With markets recovering as described we're expecting to see double digit growth on the top line and strong double digit growth on the bottom line in 2021, and we will see continued growth in 2022.
This drive from double digit growth at both Skyjack and Mac on the this year as well as significant market growth in auto and continued ramping of launching business in that segment.
Next year should see continued growth of all three businesses based again on growing market growing market share and launching business.
Margins will be back into our normal range of 7% to 9% at the net level. This year driving from the mobility segment margins being back into the mid normal range and industrial margins getting close to being back to normal levels net.
The next year should see normal margin ranges for both segments and overall.
Leverage levels continue to improve based on continued positive free cash flow both years.
Looking specifically on Q2, you should expect to see significant growth in the mobility segment based on the much higher production levels forecast this year, but I would recommend being cautious about the impact of the plant shutdowns related to chip shortages.
As noted earlier the powertrain plants tend to lag the vehicle plants in terms of timing of shutdown.
Plus the issue seems to be far from resolved and really is playing out on a week to week basis.
We'll know better the impact of the shutdown of as we get closer to the end of the quarter, but it is safe to assume that the impact to EPS in Q2 will be higher than what we saw in Q1.
Agriculture on access for both the solid growth driving out of that strong backlog and again, a much stronger market the last year.
I think it's the foreign convention also the both segments are feeling some cost pressures due to supply chain issues at the moment, we expect to see to feel some impact of that throughout the balance of the year that means you won't see a repeat of the very strong Q1 mobility excitement of margin. Although as noted we still do expect to the.
The up from loss share and a mid normal range for the full year. Similarly, although industrial margins will grow as they normally do in Q2 Q3, they will be tempered somewhat based on these cost issues, hence our suggestion of getting close to a normal range of earnings in terms of margin performance in the industrial segment. This year.
We will also see continued dial back on the government support as our recovery continues.
I will add is the lawyers interest I view that impacts from COVID-19 outbreak of subsequent supply chain challenges of currently not fully understood or determinable in terms of their impact. So all segments. At this point so of course risks remain.
So I'm going to highlight a few of our more interesting business wins. This quarter first we picked up another significant program for next generation battery electric vehicles will be manufacturing more of a 70000 units per year of this sub frame assembly for one of our customers as the 2023, although the fall.
<unk> found the 10th substantial the price point of the program is substantial so it is evidenced by the complex assembly, making that kind of notable win for our team in North Carolina.
Net is a major differential assembly win for a very high efficiency transmission for a Japanese automaker that we've been focused on for years. This is a notable win given the automaker rarely strayed from their in house manufacturing or Crestview partners for this particular type of product.
Third we had a very the asset quarter in lightweight filmed ahead of loss of wins over $100 million in fact in annualized business. These wins of the key as they are likely the last generation of internal combustion engines that will see us out for decades.
As a huge opportunity in these types of programs over the next 10 years.
Careful of equipment selection as referenced earlier earlier will ensure of any capital can be reallocated to new energy vehicles as they develop over that timeframe and then for the 2030.
And finally, a win in the off highway market versus some substantial sales as well the commercial vehicle on off highway vehicle markets of both picking up in terms of opportunities at the moment after few dry years.
Turning to and the innovation the review I would like to highlight a few great technology developments that we launched this quarter.
First I'd like to share some new product offerings that are matched on growth has recently introduced the T. M of 100 of attractor of mountain Draper header that can be used the cross was swapping is required prior to harvest day, but the total acreage doesn't justify the investment in the soft propelled the blend dweller, the gray per head or can be amount of the.
Directly to the farmer's existing tractor.
On the sunflower attachment options that can be assembled for the bottom front of our current flat state Draper header. This is another great example of the multi crop versatility of our <unk> for product.
And lastly, Mac on its adding its own transport header trailer solution, which is really a month for markets like Europe, where field sizes are smaller and roadways are more narrow all of these features are of great. Examples of markdowns the ability to adapt to the needs of the regional markets. It serves and the significant reason on why we are growing so strongly.
Our share in Europe Mcis.
Next I would like to highlight one of our innovation hub projects as you know the IHOP as we call. It is our incubation and development center for future diversification efforts aligned to our lender on 'twenty 100 planned for.
First of all of that is one of our early stage startup partners, who we are helping to scale up and commercialize by using our manufacturing expertise design test and supply chain capabilities. The residential receipts of pumps system can replace a home furnace water heater and air Conditioner, all from a single unit.
And as significantly less energy requirements, and therefore of course initially.
We've been conducting validation test at our Mclaren Engineering Center and the design is progressing well towards the end the important durability cycle of milestone.
Early trial units will be going out into the field later this year.
Lastly, our product development efforts for electrified mobility and continue by incorporating innovative new solutions into our E axle offering we're proving performance safety and EV range with features like electronic limited slip differential park loss and disconnect.
These features are both for our light vehicle and commercial vehicle E axle applications as you can see illustrated here on the slide.
We also continue to make great progress on our Digitization efforts across our operations with notable increases in both the levels of automation as well as the inflection points across our connected equipment to optimize the equipment performance and efficiency.
Turning to the strategic update we announced this week. These cabo split of the strategic alliance as a first step towards the possible joint venture looked at Canadian leader in fuel cell technology balance Ballard power systems Lindemulder of Ballard have evidence of an agreement to jointly develop and market of fuel cell powertrains.
And chassis systems for cars, Suvs and trucks up the class of two and including class III for sale in North America and Europe. The partnerships will have a flexible approach the customers where some may be interested on the entire rolling chassis system inclusive of the fuel theft powertrain and E axle propulsion.
The one which is basically the gearbox electric motor and controller and is mounted on the wheels of casting and others just might be interested in the satisfactions as such the.
The partnership is really intended to leverage the expertise and skill sets of both companies. So obviously <unk> expertise in fuel cells and then our expertise in electric vehicle propulsion, the hydrogen tanks chassis systems and manufacturing overall.
And together, we think we're really bringing a couple of world class companies together to lead.
Fuel cell powertrains for the market.
I think the schematic helps to clarify the roles of of what each company is going to do so with them on basically what's possible for four key areas behind it the pain.
The actual share so that's the gearbox electric motor and control of the chassis systems, so that things like the frame or unit of body structure or some kind of called skateboard.
On the steering wheel end shocks of spring breaks hard for et cetera, and then the for the balance of plant requirements of kind of pull the system together, which we be essentially everything and if youll saw that isn't in the stack like air compressors are of Pompe humidifiers cooling.
Benzene closure or cradle et cetera, and then balance would be responsible for three key areas. The <unk>.
Fuel cell stacks of the proton exchange membrane or pan fuel cell stack the.
Secondly, the fuel cell control system, and then finally, various fueling subsystems and components related to the sort of mechanical thermal noise vibration system.
One of the concepts that we're exploring is to design the fuel cells and K system into a package that will replicate the sizing dimension of it typically battery pack the benefits of the survival of the B the ability of the customer to convert a battery electric vehicle into a fuel cell electric vehicle with minimal cost.
The minimal challenges around changeover by simply pulling out of the battery pack and replacing it with the fuel solar tank system.
The balance of the chassis, including the E axle propulsion system would remain in tact a battery electric vehicle on if you felt like ocs on actually quite similar in terms of operations. Both drive the vehicle off of an electric motor systems, which is the E axle.
And in the fat in the battery electric vehicle of the power source of that is the large battery back and then the fuel cell electric vehicle all of the power source is the fuel cell system.
That's what makes the plug and play concept.
We believe of hydrogen based future utilizing fuel cell technology is the best solution for mobility and really for for the reasons first is clean it is truly zero emission hydrogen fuel of mobility is truly green generating zero emissions from the few force and generation of white.
Through the vehicle operations in contrast, the battery electric vehicles, which of course will lie on the source of electricity to determine their carbon footprint.
The Gen can be made from water using wind or solar electricity to power of the process of electrolysis of the water when the fuel cell of the operator.
Hydrogen has reignited the oxygen to create energy was a byproduct of water and some of it is a fuel cell vehicle is really being powered on the wind or solar energy, which has been temporarily stored in the hydrogen.
Secondly, fuel sales can be quickly refueled as we've become accustomed to in an internal combustion engine of world.
Thirdly hydrogen has a very high density of energy, making it a very efficient source of fuel for powered vehicles and lastly fuel cell electric vehicles don't rely on sort of regionally concentrated the forces of certain minerals, such as cobalt and lithium which are currently largely controlled by the Republic of the <unk>.
Congo, and China, which could create some concerns in the future.
We are very excited about this partnership, which we think levers losses decades of experience in technology development of both companies to pursue in the future of mobility that is truly green.
So with that I will turn it over to our CFO Dale Schneider to lead us through a more in depth financial review sales.
Thank you Linda and good afternoon, everyone.
As Linda noted Q1 was the strong quarter for sales of an exceptional quarter for earnings.
As a result of the recovery from COVID-19 shutdowns that occurred last year. We've also of great quarter for cash generation as of January of the $166 2 million of free cash flow.
Additionally, we were able to maintain our strong levels of liquidity of one 6 billion.
Sure.
For the quarter sales of one $8 billion of $232 million for one 5 billion in Q1 last year.
Earnings are normalized for any FX gains or losses related to the revaluation of the balance sheet and the unusual items that may have occurred in the quarter.
In Q1 earnings were normalized for FX losses related to revaluation of the balance sheet, which impacted EPS by 7%.
Normalized earnings operating earnings for the quarter for $221 million.
Tears to earnings of $103 $5 million for Q1, 2020, and the increase of $118 million for 114%.
Normalized net earnings increased $90 million or 133% in the quarter to $158 million.
Fully diluted normalized EPS increased $1 37 for 132%.
The $2 41.
Included in earnings for the corner of the foreign exchange losses of $6 4 million.
It is almost fully associated.
To the revaluation of financing balance.
As I mentioned, the net FX loss impacted the quarter's EPS by <unk> <unk>.
From a business segment perspective, the Q1 loss of a 100 thousands of dollars was the result of of $10 $2 million loss in industrial on the $10 $1 million gain and mobility.
For the looking at the segments industrial sales increased by 16, 5% or $49 3 million.
$348 3 million.
The sales increase in the quarter was due to the strong demand the market share gains driving agricultural equipment. The.
The strong demand of Merck share gains also driving north American access equipment sales, which were partially offset by declines in the European access equipment.
That is still being adversely affected by COVID-19, and the negative impact on sales for changes in FX rates since last year.
Normalized industrial operating in Q1 increased $14 5 million or 46% over last year to $45 $9 million. The primary drivers impacting industrial where the increased contribution from the strong agricultural volumes and the increased contribution from the net.
The increase in access equipment, which was partially offset by the negative impact from the changes in FX rates.
Turning to mobility sales increased by $183 million over Q1 last year to one 4 billion the.
Sales in the first quarter was driven by the increasing volumes with certain programs, the North America and Asia, the increasing volumes on launching programs.
For the impact of the positive FX rates since last year, partially offset.
The market impact of the semiconductor chip shortage, which is impacting our customers.
Q1 normalized earnings for mobility were higher by $103 million for 143% over last year.
In the quarter mobility earnings were impacted primarily by the net increase in sales of the just described the cost savings we were able to achieve in the quarter the positive impact from FX rates since last year and the utilization of government support programs.
Turning to the overall line of our results. The company's gross margin was $313 million, an increase of $112 million compared to last year due to the same factors that drove the segments.
Cogs amortization expense for the first quarter was $118 million the Cogs amortization of the percentage of sales actually decreased to six 6%, but on the dollar basis. It increased by $9 5 million, primarily due to the impact of launching programs and products in the quarter.
SG&A cost decreased in the quarter to $991 5 million from $97 5 billion last year. The decrease is primarily the result of cost savings achieved since the pandemic started the year ago.
Finance expenses increased by $200000 since last year due to a onetime foreign exchange impacts because of the U S dollar repayments and the funding of the new $320 million Euro of private placement notes in January.
Lower interest earned on declining long term receivable balances.
These increases were also for.
Almost fully offset by the lower interest expense because of the debt reductions that we've been able to achieve in the last year and the lower effective interest rates, which improved by 55 basis points for 20% last year.
The consolidated effective interest rate for Q1 declined to one 9% from two 5% last year.
The effective tax rate for the quarter increased to 26% compared to last year due to an increase in non deductible expenses.
As a result, we are expecting the 2021 full year tax rate to be in the range of 24% to 26% and consistent with the 2020 full year rate.
<unk> cash position was $672 million as of March 31, an increase of $258 million compared to March 2020.
The first quarter generated $224 million in cash from operating activities, which was mainly used to used to fund capex and debt repayments.
The resulting cash flow generation of $166 2 million in the quarter.
As a result net debt to EBITDA decreased significantly to the point.
True.
Three times in the quarter from 157 times, a year ago and from a half a turn at the end of 2020.
Based on the current estimates we are expecting net debt to EBITDA to continue to improve by the end of 2021.
The amount of available credit on our credit facilities was $958 million at the end of the quarter our available liquidity at the end of quarter remains strong at the $6 billion and as a result, we believe we currently has the sufficient liquidity to satisfy our financial obligations during 2021.
To recap sales and earnings for the quarter was the story of a threshold performance driven by strong market.
Recoveries for COVID-19, 19, and market share growth driving normalized net earnings of 133%.
Despite this exceptional performance for the future is not known and as a result of winter market remains focused on cash generation the strong liquidity.
Many of my remarkable quarters.
Of cash generation as we generated $166 million in free cash flow in the quarter, while maintaining our strong liquidity at December 2020 levels of one 6 billion.
That concludes my commentary and I'd like to open up for questions.
Okay.
So operator is here on the line of if you could open open it up for questions that would be great.
Okay.
The city are there.
Okay.
Okay.
Okay.
Hello, Hi, Savi, we are ready for questions in Q&A session, Yes, Sir.
And ladies and gentlemen, as a reminder to ask a question for star.
One on your telephone.
For our first question, we have Chris Doug.
Grayson from CIBC, Chris Sir Your line is open.
Thank you congrats on a on a great quarter just a few questions here. If you can remind me on the commodity front what is your exposure like the steel do you participate in and some of the resale programs with the Oems and I guess not.
The scale, but aluminum of resin as well.
Yes, so on the auto side of the business, we have contract with our customers that allow for metal market price change pass throughs, so on our aluminum contract the.
We're fully covered with metal market.
Adjustments they are done on a quarterly basis on a predetermined metal market index.
On steel based products I wouldn't say at the 100% I would say, it's probably more like $60 or 70% of contracts that would be covered by such.
The metal market adjustment tab program at the same time, we are out in the market trying to protect ourselves in terms of our expected steel purchases not just for the auto business, but also for our industrial businesses. So typically we would have contracts out for at least that.
The current year for the balance of the year.
And not that shape in that regard but of course, we do have to come to an agreement for next year's pricing in that regard and I would just say for the.
On a movie side again.
On our supply side, we definitely would have contracts on the base level and then we also pass through the surcharge that led the restaurants to our requires that comes true the automotive, but we do for tax on our contracts and of course on the.
Industrial side of the Skyjack Mac dawn on us a little bit more openness on the us too.
We don't have on our contracts sort of laid out.
Our suppliers.
On the commodities, which we all of those jumped up quite a bit over the last.
The eight months last year, so we're really of Linda says.
Referencing for the future and then obviously that plays into your pricing models on that with your customer base too because we've got the product pricing abilities as well.
Perfect. Thank you and just on the Skyjack site utilization rates for the access equipment.
The quarter almost day, 100% there.
Was this what you were expecting.
At the beginning of the year or has this maybe accelerated a bit quicker.
Quicker than you thought.
Yeah, I would say is it's quite similar when when we had our call at the beginning of March. We will also cited actually very similar levels of utilization in comparison to 2019, so just to be clear, what I would say, 95% to 105 and comparing equipment.
Utilization levels.
This year compared to what they were in the same week in 2019, 2020, obviously was quite skewed. So I think it's not a very meaningful comparison. So we're running at the same kind of equipment utilization rate out there in the field as as we would have.
Two years ago, just to explain what that is.
Okay and on that.
April April has definitely taken a bit of of Sapphire like we're closer to 98.
Percentage.
As much as of 102% in comparison to 2019.
The equipment utilization for most of April.
Okay.
Great. Thanks, and just on the Skyjack side is that being impacted.
Significantly by the chip shortage.
A little bit Barry.
Very very minimal.
Through the <unk>.
Powertrain side, but.
The very minimal.
The non maturity of all prescribed the drug.
Okay, Great and then the the.
$1 1 million reduction of vehicle production in your outlook are you just assuming that that gets pushed out into 2022 or some of that potentially lost.
Oh, I think it gets pushed out I mean as I as we were showing the demand is very high I mean, we're selling and North America at record rates.
So the demand is 100% there is just how quick can we get the chip too.
To build the vehicles right so.
Whatever can't be made up this year in my mind, we will absolutely be made up next year.
Messaging from the Oems across the Board Europe, and North America.
To make this up.
The messaging.
Perfect. Thank you so much I'll jump back in the queue.
For our next question you have Peter Sklar from BMO capital markets. Peter Your line is open.
Okay. Thank you.
So on the on your results in the mobility.
Segment, where you had this 12, 2% margin.
I was looking back through my <unk>.
I don't think I've ever seen of margin that high.
I was wondering if you could be a little bit more forthcoming on one hand, if you look.
Your revenues.
Q1, 'twenty one versus Q4 'twenty. So just looking at those two quarters.
The Q1 really only had 40 for more $44 million.
More revenue than Q4, so effectively the revenues were at the same but in Q4 of your operating income margin in that segment was nine 8%.
And then in Q1, it was 12, 2% so something happened.
I Wonder if you could just explain a little bit more of the what happened that really drove this high margin in one quarter.
Yes, I mean.
A few things as I mentioned, I mean against the end the year over year.
Comparison, North America, and Asia sales were up significantly.
And in addition, we had cost reductions and we have the government subsidies and we had some tailwind from exchange this quarter. So.
That's sort of explaining explains the year over year change.
Your comparison in looking at.
Q4 sales were up from Q4 for share.
That that definitely drives part of the change and then part of the part of the impact is also the exchange piece.
So that one obviously hard to predict and can be counted on rate to whats going on Apple on quarter to the next so there was some tailwind from exchange so you're absolutely right. The 12 two ads.
And I unusually high level.
For for mobility margins, we do not think it's sustainable.
As I mentioned in my formal comments, we suggest that you dialed back to somewhere around the midpoint of our normal range of 7% to 10%.
For the balance of the year, so that is of more realistic expectation.
Particularly given some of the pressures that we are expecting around some of the costs that.
That we talked about and also being a little bit conservative around out what might happen in terms of the shutdown.
The midpoint of 7% to 10% for the full year.
Okay.
And Linda could you record deal quantify what the dollar amount.
Of contribution to operating income was for that segment as the <unk>.
Results of foreign exchange.
And also could you quantify the amount of government support you received.
The we don't quantify the FX piece that relates to our transactional and translational exchange in and.
Hedging that that sat.
He is not something that we typically quantify I mean, we do quantify the revaluation on the balance sheet, but not the FX seats with respect of subsidies as it was.
Somewhere around $16 million in the quarter and I believe that detailed out in the note on most of that did hit mobility.
Yes.
Did you say 16, one six.
Correct, yes.
Nine.
Okay.
Okay.
Okay, and then just one last question.
You said the third of the orders that you won contract wins during the quarter were battery electric vehicles.
Can you.
Like what is the what is the annual dollar value of those.
I don't know if that's the small number of big number.
Yes, I mean, it is the big number we had a strong quarter in new business wins.
Sure.
I don't have that figure of Andy.
What I do know as we had a strong quarter on new business wins, we are on track for a strong year and 34% of the wins were related to electric vehicles.
Okay.
And then sorry, one last thing I mean, just on the big bogey here, which is what are the Q2.
<unk> volume going to look like.
You have some insight because youre seeing the production schedules of few weeks out of it is there.
Do you have any commentary on what Youre seeing and what your six senses on how Q2 is going to fall on.
Yes.
I mean, the problem assets it is quite difficult to predict its not just asset are having difficult gets difficulty predicting its the automakers as well so I mean, I'll, let Jim comment further, but what I can tell you for sure of Q2 impact is going to be higher than Q1 impact on us.
It's really interesting.
And the reason.
And back on is on the call with the customer.
Peter.
<unk>.
They are chasing market share.
So the problem is.
They have the releases at a high range right now to keep the released the high rate.
And then find out they can cause of mind share.
Take the assembly plant.
Got it down and then those releases immediately go back to the driveline and power of Sam.
The plan for servicing and then some of them keep the release two times the amount of interest you have changed right.
This is the constant.
And for frankly, the comment is we are struggling too.
Schedule of our platform.
On the difficult landscape for you guys.
It is a constant.
On one day.
Day to day.
Net.
Hello, Andrew.
And are they are your customers building inventory of completed engines and transmissions that.
The campaign for the assembly plants because of the assembly.
Yes for sure for sure they're doing that but eventually that gets cut off to Brian.
Thank you Sir.
So I think what we're doing is keeping those inventories and then obviously the whole supply chain has backed up a little bit.
Suppliers.
Our keeping up as well because when they turn it back on.
Net income out of assembled the right.
They can take the second shift and add second on.
On a half shift right.
So I think thats, what theyre, saying theyre going to make.
I think the sort of planning for to that.
As for the comment that Mark.
Mark.
Yes, Peter as we were talking about but I. Thank you.
They are really concerned to keep.
The industry to keep the the.
The process moving in regards to the <unk>.
Product and not have complete shutdowns as we know is coming back out of the shutdown, there's always lots of hiccups in that.
All of the Oems one of them.
<unk> chips, they want to be able to get the vehicles.
Youre seeing the park a lot of more of less finished vehicles.
In lots of that they just need to stick the chips, so that they can get them to dealers. So.
The thing is we've been talking about it's very fluid the day to day.
But it is definitely for the powertrain for the engine on transmission plants, they want to keep them running so that they can build some inventory because they are and the most when it comes from the oil production for the vehicle Assembly plants.
The other new capacities on Microchip Theres, a lot of discussion on that coupon on Peter.
Got it.
On the way rates for any of that can have.
So thank you for the future.
I just wanted to ask you.
But I would think that some point the.
The vehicle Assembly vehicle Assembly volumes.
Really are taken down in the second quarter, because theres no chips right at some point the stock building engines in the trend.
Finally, you will and good.
Good morning, Amit.
That's already happening for Peter Theyre already shutting powertrain that type of Guy.
Okay.
We did feel an impact in Q1, and we will see an impact in Q2, and we think it's going to be a bigger impact but again its.
Very dependent on how quickly the issue resolved and how quickly they ramp production back up so it feels right now like it's going to be a bigger impact if they get going quicker. They may start catching up already in Q2.
Good day.
Okay, and then with Ford specifically like obviously, you know Ford.
Saying that.
Their production schedule in Q2 is going to be hospitals.
Otherwise been are you seeing are you feeling the impact from forward specifically yet.
So we're seeing on the desk.
Hi.
And then also other Oems on corn.
It's not one for one and what I mean, because again the powertrain drive volume they want.
Alright fair perspective, you'd also be willing to make that up and go back to the stronger assets. Shortly what youre doing is keeping us and probably isn't a lot of suppliers have been under the gun product per months, Ryan running seven days a week.
We're growing because they're.
We're going to make.
Sure you can get an extra day on a week price.
Yes, yes, okay.
Those were some of the important thing to focus on is the fact that demand is staying very strong so although it's the distracting the Cvs shutdowns on it is disruptive.
It will be made up and we are we can look forward to a strong surge back.
And a sustained period of higher production. So what we're seeing right now is absolutely temporary.
Okay.
Linda Thanks for all of those comments that was actually very helpful.
Great.
For our next question, we have Brian Morrison from TD Securities Brian Your line is open.
Yes, thanks, very much on and I agree with that with you on the strong demand environment. The deposits going forward just in terms of Peter's question on the operating margin within mobility.
I'm not sure it's truly understand it so if I look at your guidance going forward your midpoint of beat in the half.
Basically revert back to a mid seven or low seven margin operating margin in the back half of the year. So if sales are sort of constant on the average based on your guidance on cost reductions flow through.
The change from Q1 for the remainder of the year to get to that beat in the 5% margin.
Yes, I mean.
Part of what we're expecting is the and the cost impact on the supply chain issues.
And admittedly I'm being.
A bit conservative because we're a little concerned about.
Our volumes are going to go south.
I am trying to be a little bit cautious on where margins are going to land based on.
A conservative outlook on what's going to happen with volume.
Maybe just to comment on the cost side of things.
As we talked about already on the commodity prices. If you look at and again, we got a lot of pass throughs of contract, but when you look at popular.
Cereal now up to the $13 for 200, a tonne versus a year ago six to 700 Bucks a tonne you look at on June.
So the cycle side.
Well, Brian where you have.
For the containers coming out of China that was for.
1000 Bucks a year ago is now 70 885 on a box there is just the.
A lot of these cost elements that are.
There we have stepped up I mean, we haven't really stepped up our cost of intact team efforts in here.
We've talked about.
Keeping certain cost reductions in place.
We use travel of the really good example of subscription.
The subscription software sharing with all of those things were really stepped on to try and mitigate any of that but there is a reality of just some of these cost increases.
And I'd, just like to point out that notwithstanding all of that we're expecting for.
All in double digit earnings growth in both segments, but most of most notably in the mobility segment, where normalized operating earnings are going to be dramatically up from last year. So notwithstanding what's happening with the on the cost side, we're obviously kind of offset that as best we can.
Can it still going to be a fantastic here for the mobility segment just for that you don't get too caught up in all of that.
And what's happening over the next few quarters.
Yes, no I understand that is just the variance from one quarter to the next cycle.
Terms of your guide do you expect the full recovery in volume as it does the full recovering volume is baked into your guidance or do you expect that to.
Does your guidance extend the.
The recovery into 2022.
Well, we're basing it on industry forecasts.
What volumes are forecast.
For the balance of the year on what we're hearing from customers on.
With the bit of conservatism.
Ken manner, so as we talked earlier the.
Is an expectation that some of the missed production from this year will be made up in 2022, So I think that most likely to happen, but we certainly do expect to see a bounce back in the back half of the year.
Okay, and I think maybe overlooked history of the daily Linda.
Overlook here is just how strong your front of your balance sheet has become youre clearly in an advantageous position here and I don't want to ask you about M&A activity, because we're not kind of go there, but what are your plans with your buyback do you plan on getting the act of here.
Yes.
The associated something we talk about with the board every quarter, including the one both dividends and buyback.
So with respect to both questions I mean, we did just increase the dividend two quarters in a row.
Of that didn't seem like that's something that made sense to do so quickly Dan and I will say the buybacks are definitely always an option and one that we would seriously consider.
Based on share values on our expected needs for cash so it's something that we've discussed it's not something we're ready to make a move on at this moment that it's something that would potentially be on the table.
Alright, Thank you very much.
For our next question, we have more <unk> from Scotiabank Mark Your line is open.
Hi, excuse me good evening, Greg Gordon.
I think I'll leave the mobility of Oregon Congress interest alone.
Thank you on industrial.
On the industrial segments.
Greg the strong quarter in.
On the comments around backlog and order and thanks for supported.
There's a lot of the double digit growth, but any of that can be a lot of things.
The curious if you can maybe trading on ballpark of course.
What maybe your expectations on for that business for the year.
Yes, I mean.
I hesitate to get any any more specifics, but I have given you what the market is looking to grow and more specific.
<unk> and <unk>.
We're looking to grow market share. So I think that could give you some.
Level of of guidance as to what we think will happen on the in the industrial segment.
Okay and also I mean, Q1 is obviously, a leading indicator for the year end.
Normally Q2 in Q3 of our stronger quarters than Q1.
Okay. That's helpful. You on it looks okay.
Shoreline is training.
For the Memorial day.
Good morning, guys, I guess moving just to follow up on the balance sheet.
Yes.
Hey, Andrew.
As of close to your point for you Dan, but thank you for the reported.
We're generating lots of cash.
The expectation that sort of the ramp capex backlog.
Understood great understanding of where you sort of.
Want to sort of operate.
Sort of in the absence of M&A.
And then maybe a little too low.
Maybe wondering why you might not want hit the ball.
Well the ball backwards on thanks.
Yes, I think that capex and definitely going to ramp back up I mean, we will be higher this year than last year, we'll be at the low end of our normal range. So that's a bump up from last year for share.
And that will continue to build based on the book of business that that we are winning we are trying to be conservative just given the current.
Situation on <unk>.
Yeah.
Manage things conservatively, so where we have the ability to do that so we're going to do it.
But you can expect capex to ramp up on the M&A side.
Lots of interesting opportunities out there so for sure that's something that we.
I think would be interesting and we can explore some opportunities.
Round.
And then as just noted buybacks and dividends are another obvious use of cash that we would discuss every quarter with our board.
For our next question the half Kevin Chiang from CIBC, Kevin Your line is open.
Thanks for taking my question and congrats on the on final quick start of the year here.
I'd like to just ask about the Ballard joint venture.
It's focused on.
Light duty vehicles and the other slides here of about I guess.
On the fuel cell vehicles over the.
The battery electric I'm, just wondering what you think the penetration rates for fuel cells are just feels the bulk of momentum for battery electric and the.
The first mover advantage.
It's pretty insurmountable no.
If I think of the ability for fuel cell vehicles to get any real traction.
But honestly.
On mobile for sure just wondering how you feel about the Ken I mean for COVID-19.
Yes, you are right that battery electric have a lot of momentum and for share oriented feed lots of growth over the next 10 years on the battery electric side.
And the fuel cell electric will sort of come in.
Behind that so I'm, not saying there won't be anything for 10 years.
The idea of C battery electric as the bridging technology to fuel cell electric and because the technologies and in a sense are quite similar as I was describing.
My formal comments there both electric vehicles, the bolts run off of an electric motor with.
With the gearbox and the controller all of that is the same.
It's really just the source of power so switching out from a big battery pack to instead of fuel cell system and and tank.
That is actually a.
<unk>.
The Sag and so I I think the move to battery electric is great because it gets at the close of cap closer to the fuel cell electric and it is <unk>.
Cleaner and in some countries depends on the country on the price of electricity. So it's starting to help.
And then fuel cell will make a much bigger difference once we can get to that point, so I am not suggesting that fuel cell electric vehicles are going to lead bond for the athene in a dramatic way in the next year or two.
Absolutely it will take.
A few years for that to start to play out, but I will say that there is a lot of interest a lot of discussion a lot of auto makers are in active discussion on development.
Now on fuel cell. So this is clearly where the next generation is going to this is a really important building block for us.
As well.
This is not the lenders short term.
This is a bit more on the longer term plan.
We think that will be developed.
I think it's really already works right.
It doesn't work and buses and commercial vehicles.
You also have to look at it all.
Environmental side long term and regional jurisdictions and governments, we are really starting to endorse type of.
Plays and then when you look at this.
The correct right away in the strategic alliance, the startup, which net investment will become.
And really what we're now doing is hormone on making a statement of work on.
The sort of described when you saw on the pictures, we setup of the commercial team for the sort of work together on our expertise and then what we're going to do is define the technology now facing the customers to show them on this.
The county.
It is true plug and play interchangeability and so to me.
Really the on other impacts that we got to wait sort of of the cost factor right. Because there is a cost impact and then think of it.
The companies are going to work because of long term putting the data.
Automotive vehicle that we can drive around has to be cost effective so.
<unk> is really good the momentum is very good.
And really the government support is very critical weakness.
Kevin you need to keep focused too on what we're looking at which is mainly around the class II. So that's your sort of.
<unk> into the heavy duty pickup truck right. The up $2 50 is the 2500 series.
And to put pure electric vehicle and those of you in the pickup trucks.
You start to take away from payload on tolling capacity and those trucks are typically used in the.
The trades contractors.
They are towing equipment around trailers around or look for.
For the personal person how do you use.
Got it for recreational product around so filling the both the truck up full of batteries.
The limits the amount of.
The tolling capacity and Thats why I feel so we think is a better option for.
For the.
Thanks for that for that answered my other question as to whether you saw the bleeding into.
For your commercial.
The vehicle off I guess it sounds like that's the case.
Talk about maybe.
Maybe.
The other high level question with the potential JV is the kind of think of it longer term.
I get the sense.
Correct me if I'm on I think on the Asia Pacific Region is where I think the view fuel cell all of.
Vehicles.
Solution, maybe more so than we think of the North American and Europe. Just wondering do you also view this as potentially.
If this JV entity.
The successful as you hope it will be.
Does that accelerate your growth in Asia.
The Asia Pacific market just given.
I think for maybe the more readiness for Bob.
This form of technology.
Yes, I mean, absolutely we think the Asia market is very interesting, it's not specifically part of the scope right now, but we have discussed the idea of expanding the scope into the into that region. So that's already something that's on the table under discussion for today.
Q1.
Take on what we know today here.
On the customer side.
The market can understand what it is and then apply that to.
Our model of Asia as well.
Excellent that's it for me congrats on a good quarter.
Thank you.
Presenters, we don't have any further questions at this time I would now like to turn the call over back to lean the heighten front.
Of late of Martin for any closing remarks.
Thanks very much.
To conclude this evening I'd like to leave you with three key messages for.
First we are thrilled with the solid start for the year financially with earnings more than double last year of sales up in double digits and continued free cash flow.
Secondly, I feel like we're making exciting new inroads towards a green mobility future with our new partnership with Ballard and continued strong winds on the electrified the factor and finally, it's great to see all three of our core markets of auto AG and access expecting significant double digit growth top.
And bottom line in 2021 after a tough year last year that coupled with solid market share gains means we are seeing all businesses intersect of paint a picture of solid growth for the full year 2021. After a strong first quarter. So thanks, very much and have a great evening.
Ladies and gentlemen, this concludes today's conference call. Thank you all for participating you may now disconnect.
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