Q3 2021 Linamar Corp Earnings Call
Thank you for standing by welcome to lead in March 3rd quarter, 2021, or any skull at this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you would need to press star one on your telephone please be advised that to these countries.
<unk> is being recorded and if you require any further assistance this spread Sars zero.
Would now like to hand, the conference over it to your first speaker today need them or a chief Executive Officer, Linda has in France Ma'am. Please go ahead.
Thank you very much and good afternoon, everyone and welcome to our third quarter Conference call Jeremy.
Is there any me this afternoon or members of my second of change and Gerald Bill Schneider, Roger Fulton, Mark slaughtered as well as members of our corporate IR marketing finance and legal team.
Before I begin I'll draw your attention to the disclaimer that is currently being broadcast.
Okay, I'll start off with a short update on I'll focus and try to set the COVID-19 prices.
So our focus at the moment is really in three key areas continuing to keep people safe of work of course is the top of my continuing to encourage faction vaccinations, which looking bird song at more than 80% of a global population at least partially vaccinated and easy to transition.
Back to the office.
Global organization is 98% back on site and have been for some time given we are at manufacturing organization that most jobs cannot be done remotely of our office staff, who could work remotely we have a very small percentage working fully remote and another 17% in hybrid mode, 81% back on site.
Which is great to see we are trying to be supportive and flexible as everyone's needs are different as we encourage the return to work. We do believe we are better together and turned 15 alignment culture innovation of talent development of unity, but we also do you understand the challenges that even the tail end of the pandemic can bring to working with.
Okay with that let's jump there to send the specifics about the quarter, starting with sales earnings and content.
Sales for the quarter with 1.65 billion up slightly from last year or industrial segment had very strong order with sales at Mcdonalds Skyjack, both up substantially from prior year, thanks to recovery markets as well as market share growth the.
The auto sector had a tough quarter, thanks to supply chain issues, notably the shortage in semiconductor chips, which has triggered continued shutdowns for our customers.
Global vehicle markets were down 20% over Q3 2020.
Exchange rate changes versus last year have also not been in our favor impacting our top line and the mobility. Good launching sale did help to offset these market conditions as did our content and vehicles being preferentially built in the market, but was not enough to fully recover.
Normalised net earnings are down thanks to declining mobility sales much lower subsidy level significant cost issues experienced by those segments with regards to supply chain challenges as well as logistics energy and labour availability challenges and a less favorable exchange rate.
Eight then we had last year.
We saw double digit growth in every region globally on content per vehicle, which is great to see losses are a big part of that as as vehicles that we have high content on being selectively prioritize for bills by our customers. In addition, we're seeing some customers partially build a vehicle which.
Does include a product, but which is not included in the total <unk> vehicles built for the border given they're not complete this is helping ourselves outpace reported vehicle bill.
Commercial and industrial sales were up 42% on the quarter due to strong growth at Bell smacked on and Skyjack mapped on as being excellent market share gains in both poor product globally, which coupled with a market up in double digits is translated into some great sales book Skyjack is also see.
Market share growth and targeted products and regions globally, and a very strong market growth, leaving two excellent sales growth there as well.
Carefully managing <unk> continued to be a key theme for us in the third quarter. We are down from last year, which if you have a call with a bit of a catch up quarter. After ideally minimal Q2 2020.
Let him out as utilization of flexible programmable equipment is the key factor in allowing us flexibility in terms of market softness to continue to tool up new business without requiring significant capex.
This is a massive advantage butlin tomorrow has in comparison with competitors, who may invested more dedicated equipment, which although cheaper and often requiring less labor is not easy to reallocate to new program.
Do expect an uptick for Q4 in Capex as they play a little catch up on Capex for a full year ahead of last year in total dollars spent but still below our normal range at 6% to 8% of sales and.
Sure, we'll be up from 2021 and in our normal range as a percent of staff.
We've continued our track record of generating free cash flow with $224 million generated Justice order. This marks are 14th consecutive quarter of positive free cash flow, which I think is excellent we expect to see solidly positive free cash flow for the full year.
Year this year as well as 2022, we have $1.8 billion of liquidity available to US which is also outstanding are strong balance sheet and liquidity mean, we have the ability to take on take over work or acquisitions as they arise and what is an opportunistic market.
The solid cash flow has allowed us to further reduce our net debt levels. In fact, we are now in a net positive cash position, meaning we have brought <unk> down by nearly $2.2 billion since our peak in early 2018.
Are strong cash position an outlet has prompted us to increase our dividends by 25% to 20 cents per share as of this corner. We have also approved a share buyback, which we will begin executing on as soon as the paperwork is completed and the TX sex approved yet.
And of course, a blackout Mendes.
I thought it would be a good idea to talk a little more in depth around some of the headwinds that we're facing at the moment around supply chain issues energy costs logistics costs and labor shortage yet.
Now certainly as we have emerged from the low points that we saw economically last year and markets have come back we're feeling the impact of these issues in a variety of areas semiconductor chip shortages spiking logistics and commodity costs and labor challenges are certainly being experienced.
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The good news is although of course it difficult to manage these issues are not new we've seen him in the past and like that most will resolve as additional capacity is put in place which is underway.
Here's the latest update around the shortage of semiconductor chips, which has hit the automotive industry quite hard as you know Q3 ended up seeing a much more significant impact in queue too and the latest <unk> forecasts are for an even bigger impact in two four and although forecasts show little impact in 2022.
At this point I personally don't see much improvement until at least the back half of 2022.
H one next year may be somewhat improved but we aren't seeing additional chip capacity, you really coming online until H 220 22.
Total estimated loss of vehicles built for the year is currently 11.5 million units you can see how that splits out over the year in the top left quadrant of the slide with queue for now expect it to be the peak impact.
The industry has not been great at forecasting what the last vehicle bills will be quarter to quarter Q3 is a great example of that with very little impact forecast and in fact, three and a half million units loft and keyboards is similar fixture again I would suggest is unlikely Q1, and Q2 of next year going to see much improvement on the chip.
Side are.
And our customers are forecasting improvement in our forecasts reflect that with some conservatism already built in but you should know that the situation is fluid, it's unpredictable and therefore at risk.
On the plus side some of the capacity constraints in the back half of this year have been COVID-19 related chip plant shutdowns in southeast Asia, which with lap would repeat in 2022, giving us a little bit more capacity in the first half.
In terms of the impact of lost vehicles by receiving you can see the impact regionally is relatively balance between Europe, and North America with Asia, taking the biggest hit this makes sense given the Asia is by far the largest market.
In terms of Oem's Ford and GM took the biggest hit as a percent of plan production at around 20% followed by both wagon Atlanta's at around 15% of planned volume loss and finally, the Asian producers at 10% of plant production loss.
I'll note that the impact of chip shortages, that's certainly been the biggest impact this year, but it is not the only one we are keeping an eye on other potential risks in the supply chain as well.
Commodity prices are continuing to present, a challenge as well you can see here some of the more important commodities at two as in the trust displayed now we are seeing a little leveling off on some commodity costs and are hopeful that that trend is going to continue and of course on the <unk> ability five the vast majority of contract do allow for.
Pass through on metal market price changes based on a predetermined metal market index. Although I will note there is a bit of a lag effect on that.
On the industrial side. However, there is no such mechanism for making adjustments for commodity cost, making those commodity cough changes more challenging.
At the same time, we are seeing a leg in the ability of suppliers to meet demand, notably again on the industrial side, which impacts not just cost, but our ability to meet production needs for a rebounding market. It's also disruptive on the productivity side, which is part of what is driving labor caught that.
And of course, the cost of shipping has dramatically increased as well also disruptive just the delay in receipt of products related to the shortages of containers as well as backlogs in the court to unload ships.
We saw a bit of a dial back just last month and some container costs from Asia, It's not clear if that started a a normalizing trend or just temporary relief clearly the key issue lives was shifting to Asia, although European freight prices are up as well invitations or we're going to start to see some relief in sort of February March.
Next year when additional container inventory is due to come online.
Another input costs that have popped up is that of energy natural gas prices in Europe are up nearly fivefold over the last year at prices in the U S have devils.
I'm a little worried about this plan as it feels like energy costs and availability might just be an ongoing issue given the investment in fossil fuel energy has declined by 40% in recent years and there is not that an offsetting increase in investment in alternative energy, we seem to set the scene for an ongoing issue with energy.
We're trying to get a better understanding of this issue going forward.
On the positive five for US energy costs are typically only 1% to 2% of sales so not a massive waiting in our cost structure, but certainly one that we wanted to keep an eye on.
We're at the same time actively engaging our plants and energy conservation then off grid energy projects to reduce our dependence as well as costs.
Finally, we're seeing a real shortage in the availability of labor at the moment. The issue is two fold higher than normal turnover in North America, not not just that let him out of that overall and just a lack of of the availability of people I will say this is more of a north American issue that a global one in art.
Area and I will also say that the issue is particularly bad in the U S where the workforce has shrunk by four and a half million people compared to pre COVID-19.
That said Labour availability in Canada is definitely an issue as well this puts pressure on cost of course of course, both in terms of wage inflation, but also in terms of higher recruiting.
And retraining costs. Unfortunately wage inflation is not something that would be considered transitory, but we are hopeful as more people will come back to the labor market now that subsidies of wrapped up in a more normal cadences resumed with schools in childcare that they're recruiting and retraining costs will taper off.
So to summarize on the challenges five higher labor in energy costs likely here to stay but shipping costs and commodities due to start tapering off back peg Tipperary back off in the first half of next year and better supply of chips in the back half of next year.
So turning now to our market outlook market demand is strong which is great news. Unfortunately supply chain issues are constraining industry's ability to deliver that demand as a result, you'll notice the strong growth in light vehicle volumes predicted last quarter has fallen away AD that said growth is now expected to be stronger for next year.
And with strong underlying consumer demand for vehicles, we will be looking at a sustained period of strong performance for some time after these issues get resolved.
<unk>, our industrial market growth looks particularly strong.
Turning to the specific figures industry experts are predicting flat light vehicle volumes globally. This year at 13 million $16 million and 41.3 million vehicles in North America, Europe and Asia, respectively.
Down substantially from earlier estimate to reflect those lost vehicle Bill vehicle bills.
From the supply can issues.
2022 will see strong growth in North America, and Europe to $15 to an 18.6 million units, respectively, and then growth in Asia as well to 43.9 million units.
Industry experts are predicting on highly medium truck volumes to be solidly up in North America and Europe. This yoga down in Asia next year I will see continued moderate growth in North America, and Europe that again down in Asia.
And just to experts predict strong double digit growth in the access market in North America, and Europe. This year and next year coming off the very top 2020 as construction projects start to ramp back up and consumer confidence builds both pandemic.
Asia will see solid growth this year as well with more modest growth forecast for next year backlog is meaningfully up for <unk> from prior year at nearly five times. The level. We were at in Q3 2020. The challenge is meeting the demand will supply chain issues hampering production level.
Lastly, the agricultural industry is predicting solid growth in the combine three for having a market. This year in double digits globally, but strongest in North America. We're also seeing solid pick up in the wind grow our market. This year. After a few years of decline notably in Europe.
And North America.
The order book is that significantly over the last year with farmers feeling more confident thanks to persistently strong commodity prices.
Meeting demand is also a challenge for math done regarding supply chain and logistics issues and appear to be the limiting factor to growth as opposed to demand.
Looking at a little more detail on the other side you can see inventory levels in North America have continued their trend down with average days inventory sitting at only 26 days overall, what this means is regardless of consumer demand. We're in for a period of sustained strong production level jobs to replenish inventory.
Once supply chain issues are resolved the industry is predicting at least two years just to rebuild the pipeline regardless of demands.
And looking at production levels compared to what was forecast at our last conference call. You can see we obviously had a much softer Q3 than forecast driving out of those chipped issues and Q4 is also currently four has to be a lot faster than we thought last order.
James Joyce with a full year now expect it to be 7.2 million units less unexpected last order for the same reason that means global automotive volumes and that basically flat to last year in 2021.
Looking at the access market in more detail you can see first of all three market showed exceptional growth over prior year in the second quarter with double digit increases across the board that's the Orange bar on the grass.
The Blue bar and support cast of full year, which again is showing double or triple digit grill across the board equipment utilization level continued to look positive.
On average within 3% of utilization level back in 2019.
Our customers are telling us they have a shortage of machines in their depots and fleet utilization rates are up above 80, or even 90% market growth and the strong backlog should drive double digit sales growth to skyjack this year and next year.
And the agricultural business, we're seeing a very optimistic outlook in North America in particular this year. After a soft 2022, three combine retails in North America with 29% after prior year with a strong showing in Canada up 42% and also that you Act up 25%.
The estimate is for 20% growth this year in North America inter.
International markets are also predicting double digit growth across the board between 10, and 15% well is expected masan is continuing to do a fantastic job of building market share in international markets, notably with our grape or have a product with market share growth in both of our combat.
Rapers ads are windrower product globally over the last 12 months.
We're seeing growth in our Windrower business globally as the market shifts back to wind rowing from straight cutting in reaction to regulatory regulatory changes, notably in Europe.
Order intake is strong supporting double digit sales growth from act on this year as well and an expectation of continued growth next year.
Turning to an update our growth in outlook, you'll be pleased to know that we had another solid quarter in new business swim.
Will highlight a couple of a more strategic wins in a moment.
Electrified vehicles continued to provide great opportunities for us almost at order of business wins year to date, where for electrified vehicles, which likewise make up a substantial share of the book of business currently being pursued or.
Percent of our book of Lambs Federer electrified vehicles has been steadily growing every year as you might expect given the expected growth in this market.
You can see here a steady build in our global content per vehicle for battery electric vehicles as as a result of those wins.
The lines internal combustion engine and battery electric vehicles global content per vehicle are converging, which of course is the goal.
Our concept per vehicle and electric vehicles is predicted to surpass side of hybrids within a couple of years as we see more and more battery electric vehicle wins.
You will have seen that reported the announcement of the formation of our evil in the product solutions group, which is focused on developing electrified product in four key areas power generation energy storage propulsion systems, and structural and chassis system.
England is focused on developing new electrified product solutions for all of <unk> businesses globally, as well as developing strategies and winning new business.
Elaine is an important asset to supporting all of our existing groups and plants and will utilize and leverage resources and our existing R&D organizations globally.
Our strategy for pursuing electrified vehicles as diverse in many aspects, which allows us to really maximize opportunities for growth. We are a diverse lineup of products in various areas of the vehicle from the electrified products under the England umbrella that I just described to non propulsion systems as well at which is near.
Yeah, we are actively expanding we're targeting passenger cars as well as commercial vehicles attractive every class as well as off road vehicle, we're pursuing battery electric hybrid and fuel cell electric vehicle, we're targeting traditional and new entrants Oems and doing so very successfully and finally, we are open to a verse.
Scalable solutions for our customers from individual components subassemblies to pull system and the strategies, obviously paying off as we continue to win business and all these different areas.
Our addressable market across a range of vehicle propulsion Tech continued to look excellent with the total addressable market for us today around $80 billion, Greg to more than $300 billion in the future an increase of more than three times.
As you can see our addressable market potential for electrified vehicles is really growing as he get out into the late 20th which is really exciting or potential content for battery electric hybrid electric and fuel cell electric vehicles is equivalent to our content potential for internal combustion vehicles at around $3200 per vehicle.
With respect to launches, we're seeing ramping volumes on launching transmission engine and drive my platform, which are predicted to reach 35% to 45% of mature levels. This year, which should generate incremental sales of 350 to 415 million. These programs will peak at more than $2.
7 billion in sales, we saw <expletive> just more than $50 million a foot programs that moved from last production last quarter, which was more than offset by strong business wins in the quarter next year, we should see growth of 35% to 45% for launches to generate additional incremental sales of six.
600 to 700 million.
As usual with summarized all of these expectations on our outlook Clyde now being displayed despite.
Despite the challenges we're facing we're still expecting to see double digit growth on the top line and in earnings per share in both 2021 and 20 twenty-two.
The stripes from double digit growth at both Skyjack and knocked on this year, coupled with launches in and now flat market on the mobility side next year should see continued growth of all three businesses based again on Brian markets across the board as well as growing market share and launching business <unk>.
Net margins will do better than last year in 2021, Throbbing added margin expansion in the mobility business back into the low end of our normal margin range net margins will not quite get back into our normal range of 7% to 9%. Thanks to the pressures that we're experiencing next year will see a similar level of March.
<unk> performance as this year, depending on timing of resolution of the supply chain or logistics issues.
Both you should also see solidly positive free cash flow, leaving us in a very strong position from our leverage perspective looking specifically at Q4 as suggested you should be prepared for a dial back in sales on the mobility business in comparison to the third quarter of this year.
Which could be as much of 5% based on increasing chip related vehicle bill losses that are being predicted we could be overly cautious here, but we are concerned by the pattern of underestimation that we have seen.
Agriculture, and access businesses will see their normal seasonal slowdowns in queue for which is typically around 20% to 25% decline the third quarter levels.
That means you should expect a meaningful decline in O E operating earnings for Q4 in comparison to vote Q3, 2021, and Q4 of last year based on three key factors sales declines as I, just described no subsidies and potentially escalating supply chain energy labor and logistics cough cough.
Net margins in Q4 will be low single digit as a result.
Roger would like me to remind you that the situation is very dynamic and impacts not fully determinable in terms of their impact at this point.
I'll highlight a few of our more interesting new business wins. This quarter first we picked up several of programs for commercial vehicle applications in the last quarter total revenue is nearly 150 million per year in the aggregate, it's great to see the commercial vehicle market picking up again in terms of opportunities after a few light years.
Secondly, we picked up a meaningful balance shaft program for one of our Mexican plants, a success and balance shafts assemblies is as much about our gear capabilities as a as a strength of machining of suddenly in the shop Allan shaft play a key role in enabling effective smaller engine to create better fuel efficiency and low.
All of the mission.
Third we're seeing continued success in China, winning business with local Chinese base OEM, such as the products that you can see picture here.
Finally, we saw several wins for Comcast for next generation fuel efficient engines to see it through the last phase of the internal combustion engine over the next 15 years.
Turning to an innovation review I would like to highlight a few great technology developments launched this quarter.
First in the quarter, we are we finalized a new technology partnership, which adds a lithium ion battery packs to our product portfolio. Another exciting example of our expanding content potential for an E b future.
The matrix energy systems as an early stage designer an integrator a custom battery pack solutions to various mobility market.
Let them I signed an agreement with the <unk> a matrix to license their proprietary technology and to become their preferred manufacturing partner. The agreement also included a minority equity investment by Lindmark Belinda My England team is already actively promoting the energy George offering to potential customers with.
Thomas sink feedback. This is another collaboration in our technology outreach strategy that helps early stage companies accelerate their commercialization plans and bring new innovations to market.
The system is flexible it's modular it's lower costs and we're excited about it.
At Skyjack innovation continues to be centered around a a viable access solutions that make working at height, both safer and easier. The <unk> is a new feature on the conventional scissor lift platform that provides extra height safely, particularly unconfined workspaces, where the worker can access.
We're worker access points are limited the ex step is a modular system option on new machines or it can also be sold as a kit to be retrofitted. Some machines are ready in the field. It's another example of Skyjack, providing simple reliable solutions to the area where platform market then enhance the overall value proposition for our customers.
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And lastly, mapped on his reputation as a technology leader in the market has been recognized once again each year.
Be the American Society of agricultural and biological engineers named it a 50 awards for products ranked highest in innovation engineering advancement an impact on the markets. They serve this time Mac Tom at Mac Dawn had not one but two of the latest product introductions received this honor.
First the M.
11, 70 M T, which is a narrow transport stage five.
Propelled windrower was modified Apple, which hydraulically adjust outward for field operation and then in word to navigate tight roadways in Europe, where royal streets are much narrower than they are in North America.
Precision on the road and precision in the field. So it's another great example of how mapped on is providing tailored solutions for farmers and their unique regionally needs.
Secondly, the F D to flex Draper also received the a 50 award the flip strikers Mapquest flagship product and as we talked about last order. The introduction of the F. D. Two series will prove to be a significant advancement and harvesting technology for farmers it gives them 20% more capacity.
L L, 30% higher Columbine speed and 70% more brown following flat.
This is the ninth time Mcdonalds receives M 850 awards since 2004 and is further proof of Knockdowns leadership and agricultural harvesting innovation.
Finally, we continue to execute on our global Digitization journey with more and more connected machines data connections and robotics being commissioned in our global plants everyday with that I'm going to turn it over to our CFO deal Schneider to be just do a more in depth financial review Yep.
Thank you Linda good afternoon, everyone.
Cause I know in order to Q3 was a tough quarter for sales and earnings with the continuation semiconductor supply issues with impacted sales and other costs of supply chain issues further impacting earnings. Despite these challenges we do see significant increases in the two industrial for both sales and earnings.
Can you'd market recovery of both Skyjack and not gone in addition to market share gains.
He was also a great quarter for cash generation as of January $223.9 million of free cash flow in the quarter.
Additionally, we are able to grow our strong logo liquidity to $1.8 billion.
For the quarter sales were 1.6 billion.
Some point $6 million from last year.
Earnings are normalized for any effects gains or losses related reevaluation of the balance sheet in any unusual items with ma'am occurred in the quarter.
And the quarter earnings were normalized for F X games related to revaluation of the balance sheet, which aims to vps five six cents for sure.
Yeah.
Normalized operating earnings for the quarter or $150.7 million. This compares to $197.4 million in Q3 2020.
Decrease of 46.7 million or 23.7%.
Normalize than earnings decreased $35.7 million or 25.4% in the quarter to $104.8 million.
Fully diluted Normalised EPS decreased by 55 cents or 25, 6% $2 60.
Included in earnings for the quarter was a foreign exchange game $5.5 million, which is fully associated with the reevaluation of operating balances as I mentioned the FX impact.
Order for on EPS was six cents.
From a business segment perspective, the Q3 of <unk> $5.5 million was a result of the 2.9 million dollar loss in industrial and an $8.4 million gain and mobility.
For if you're looking at the segments industrial sales increased by 45.4% or $135.5 million to $433.9 million in the quarter.
Sales increase was due to the additional access sales do recovery from COVID-19 ambition do market share game.
Gains in certain targeted products and regions around right.
And likewise strong demand and Mark sure gains also drove the agricultural equipment sales. These are partially offset by a negative impact on sales related to changes in F X rated since last year.
Normalized industrial operating earnings for Q3.
Was increased to $24 2 million or 49.7% over last year to $72.9 million. The primary drivers impacting industrial where the increase contribution from strong access and equipment.
[noise] urbiculture equipment volumes.
Which was partially offset by the ongoing shortage in supply chain issues impacting labor raw material and free.
The negative impact from the changes in the effects rates and also the reduced governments work programs related to COVID-19.
During two mobility sales decreased by 127.9 million over Q3 last year to $1.2 billion.
Sales decrease in the third quarter was driven by the market impact of the semiconductor chip shortage, which is impacting our customers and the impact of the negative exchange rates since last year.
These two factors were partially offset by the increasing volumes are launching programs and other certain Richard programs that are in high demand.
And an increase in sales related to material pass through to our customers that don't necessarily impact earnings.
Q3, normalize operating earnings for mobility, where lower by $70.9 million or 47.7% over last year.
And the quarter mile real with these earnings are impacted by the ongoing semiconductor issues. The reduced government support programs the negative changes in that Fracs rates last year and the increased costs from other supply chain issues, such as energy and logistics.
Which were partially offset by the increased volumes on launch programs.
Sure programs.
Returning to the overall one of our results for companies gross margin was $235.5 million, a decrease of $38 million compared to last year due to the same factors would really drove the quarter.
For both segments.
Cogs amortization expense for the third quarter was $107.9 million as a percentage of sales it remained relatively flat 6.6%.
Following general and administration costs improved in the quarter to $85 million from $89.8 million last year. The decrease is primarily due to the reduction of ER provisions over 2020, which would partially offset by the reduction of governments for both programs.
Finance expensive.
Increased by $400000 since last year.
This is due to the lower interest earned on declining longterm receivable balance, which was partially offset by lower interest as a result of the lower debt levels since Q3 2020.
The consolidated effective interest rate for Q3 was 2%.
Effective tax rate for the third quarter decreased to 25.8% compared to last year, mainly due to a more favorable mixed with foreign countries.
As a result, we are expecting the 2021 full year tax rate to still be in the range of 24% to 26% and consistent with last year's for you right.
Minimize cash position was $806 million on September 30th an increase of $235.9 million compared to September 2020.
Third quarter to generate $281.2 million in cash from operating activities, which was used mainly to fund capex in debt repayments. This awful results are you free cash flow generation of $223.9 million in the quarter.
As a result.
He would have decreased significantly to effectively zero at the end of the quarter as we've come cash positive from 111 times, a year ago or 0.17 times at the end of Q2.
Based on our current estimates we are expecting 2021.
To continue to improve over 2020 levels.
The amount of available credit on a credit facilities was 957 $5 million at the end of the quarter.
Are available liquidity at the end of Q3 remains strong and grew to $1.8 billion.
And as a result, we currently believe we have sufficient liquidity to satisfy our financial obligations through 2021.
To recap sales and earnings for the quarters of stories supply chain and cost issues. So.
Semiconductors shortages continue to hand for the OEM production requirements were significantly impacted mobility sales and earnings.
Their supply chain logistics energy and labor issues also continue to impact both segments.
Wait these challenges industrial sales to grow with over 45% and earnings Bye Bye.
By 50% when.
When we did have a great cash generation quarters of January $223.9 million in free cash flow in the quarter, while growing or liquidity to $1.8 billion.
That concludes my commentary and then I'd like to open up the call for questions.
Thank you as a reminder to ask your question distress Star and then the number one on your telephone keypad and do we do on your question just press the pound key please standby will be compiled <unk> roster.
Your first question comes from the line of Martin <unk> with Scotiabank. Please proceed with your question.
Good afternoon.
Resolving the quarter.
Maybe just starting on your <unk>.
I appreciate it I'll be.
Cost pressures.
Raw materials, but I guess I'm.
I'm, just curious as goodness going to demand.
You were able to replace some of this.
No.
Yeah, adding demand this fishers strong and there's definitely a different approach from a pricing perspective in the industrial markets and there is and the automotive for instance, so it is not.
It's not.
Normal or it is normal for folks in the industry to do some price adjustments on an annual basis. So obviously, we would be looking at looking at that.
You have to go and what's your could do do without.
Basically did come home.
Typically we set up our annual bonds.
Our customers so we would probably.
Probably to Julie.
And then you can play on the discount factors as well.
Commodity prices read.
A lot of that discussion so for sure.
Scott.
You go through.
The prices are a little bit.
More.
Liberalism mobility.
Mobility.
When your when your business working with industrial do for work and some of those commodities.
Mhm.
<unk> Yep.
A little bit of both.
Not a formal hedging program, we could deal with both.
But we will.
Walk.
Level than others.
We're very much looking at the trove mobile steel.
Industrial sorry for Mark Dawson's Garza too that's a major major factor in our.
Prices and going forward with our customers, but also on the supply chain.
Yep.
Let me just little ability.
Yeah.
The books would you actually expanded margin quarter over quarter.
I guess coworker better word man.
<unk>, how did you do that.
Pretty pretty impressive before to just sort of curious.
Okay, two more than more balls each quarter overboard.
Yeah, I mean, certainly we're experiencing.
Some of the very same supply chain.
<unk> and Labour challenges.
In term says.
In terms of the mobility business that the normalized margin is down from last year.
Yeah, and then quarter report.
Oh, you mean compared.
Compared to add you.
You mean compared to the second quarter.
I mean, you're either with almost what.
That's.
<unk>.
Yeah no.
Yeah, that's true.
Sure, we're seeing higher cost, but we also have launches that are coming in so that helping us to to offset as well. So I mean, even on the overall picture, we're expecting growth from sales.
In.
In our mobility from launch in southern I'm ability segment, even and flat market. So those those losses go.
Oh, a long way to helping to improve the situation.
The the one last one for today, just I'll be eating the 22% or you said was.
For some few which you do this year.
Uhm I, just I'm, just curious sort of the wind right.
That would compare to your traditional drill compulsion business.
How the winds I'm sorry, I didn't understand your question can you just say I'd go with.
That'd be when right when you're bidding on EDI versus.
<unk> sitting on the clinical mustard.
That would be very similar to comes on.
What we're after.
System level I mean typically.
Percentage typical perform would be about the same level.
Right.
Okay Alright.
Alright. Thanks.
Thanks for telling me to get a good job.
Thank you.
Thank you. The next question comes from the line of Brian Morrison with the C. V. Securities. These proceed with your question.
Thanks, very much good evening Echo Mark's comments. This is very impressive specifically the cash flow first question. If I look at the mobility documents. The C. E. W. So it looks like they're about 40% relative to I think you guys about 20 per cent and then you you do outline the factors in Q3, but this is largely the new line will be the flu.
Lex labor with the short production lead times or was energy and logistics released similar contributors.
Are you talking about in comparison to Q2 of this year no limit to be correct all year over year, yes year over year. Please.
Yeah, So I mean.
A couple of things first of all costs are higher for sure.
Deceptions to productions.
<unk> are affecting efficiency.
But also our subsidy was way last this year than last year. So that's part of the year over year comparison.
Yeah, no just extra subsidies I guess that I just want to know if you were to rank labor energy logistics <unk> was the inefficiencies caused by the inability to flex flavor was that really the major contributor here or there all three.
It's a big factor reliever site and look just to give a very good example of what happened.
Rhythm.
We received for next week.
Or something.
On Friday, we will give you a call that note, we don't need those who want 2000. So you can't really diverse that labour you've got to keep them.
Because if you do turn believer overly them off they'll go somewhere else to really just almost to global petroleum fixed costs.
Variable on the labor side, because she'll be fluctuations due to semiconductor or.
Container ship them through whatever those are the cause baqouba delivers almost.
Constant in North America.
No.
And yet similar issues on the industrial side too.
Trying to run their production as efficiently as possible they have to schedule. It around available parks. So as a result.
They're not necessarily running their production lines as efficiently as we would like to if they have a part shortage from a vendor that forces them to semi complete something.
Alright, Thank you both.
Turning to the 2022 industrial outlook.
Strong top line, but you did lower E O M. Oh look from last quarter to slightly beyond your normal range I would've thought that there would be a price reset there and you don't have to go through the the inflationary pressures I get that but do these price reset through your does your pricing offset them or is or actually margin.
Prudent because you have a reduction of subsidies relative to 2021.
Yeah.
We're trying to be cautious in terms of our expectations around margins because of fees continued supply chain issues. So it's not clear how can.
Quickly that resolved next year, and it's definitely weighing on the industrial Sag segment.
More so than mobility and although as you've noted there.
Reising offset to that I think they're still still some pressure there.
So we're just being cautious in terms of what to expect on the on the margin side and yes of course, you're not going to see subsidies next year will be good for three quarters of this year.
Right and then I guess the last question dealing with it is on the substance you've obviously done a very impressive job with free cash flow the balance sheet completely justifies between capital to shareholders, but we've seen a number of companies be hesitant to do so while they're collecting C. E. W. S. So I'm just wondering why the time is appropriate now the balance is good very strong for a couple of quarters now but is it.
Because the benefits will end in queue for and and why was there such a large amount of C. E. W. S. This quarter relative to Q1, and Q2 was or ketchup that took place there.
No cancel that will last question first.
When we did the earnings announcement in August at that time, the industry forecasters and our customers were not expecting Q4.
Okay introductory issues to be nearly as big so we didn't expect to qualify.
Four wait for a fee.
Linda commented their accuracy forecasts wasn't very good as a result, we haven't seen a drop in revenue and were suddenly able to be.
Be eligible for free in Q3 that we didn't plan for.
And in turn says.
Timing I agree we didn't wanted to you.
Buyback or.
Anything more meaningful on the dividend <unk>, while we were taking subsidies, but that is complete as of October so that is behind us and they are far we felt.
The time was appropriate to move forward.
Okay understood well done in a challenging environment.
Thank you.
Thank you once again, if you wish to ask a question does sprint star one on your telephone keypad. Your next question comes from the line of Peter Sklar with BMO capital. Please go ahead.
Okay. Thank you.
I haven't come across the number yet in your detail what was the amount of government subsidy received in third quarter.
It was around.
$25 million 24.8.
$18 5 million after tax.
Okay and was in both segments.
Remote here yet.
Okay.
And both but it's obviously going to be more weighted towards mobility, just given it's a bigger.
Business.
Right, Okay, and Linden Daily you did touch on this.
Topic, but I just want you to go back is that.
If you look at your revenues and the mobility segment versus Q too I mean, you did much better.
Then what.
What we saw in terms of industry production like Detroit, three production with kind of flattish versus Q3, but you made some good revenue game. So can you talk to them about like why you outperformed the industry in terms of revenue was it where their programs ramping or mix or all of the above.
It was at programs ramping as well as Ned service.
North America is where we saw growth in comparison to the second order. It's also a little bit what I was describing when I was trying to punch him for vehicles that.
Some of our customers are sort of semi building vehicles. So it's not counting at the vehicle built in the quarter, but they pulled our product into it so it's a sales for us.
Right Okay.
The next thing I wanted to ask about is on the industrial side of the business like in your guidance for the fourth quarter, you provided like the normal historical trend quarter over quarter expect it to be down 2025%. Because Q4 is the seasonal week quarter, but I was surprised to hear you say that because.
I presume that and both Skyjack come back Dawn you a big backlogs that are stretched out beyond six months. So I would think you would just be producing and shipping as much as you can so why do you see why are we seeing the normal like I would talk we would not see the normal seasonal decor.
Line, except to the extent that I know you have to shut down for Christmas vacation.
Yeah, I mean, we are shipping as much as we can it's more of a supply chain issue that is constraining our ability to produce.
Yes.
The same thing.
We have to look through the discharge.
We're probably at an all time high.
Clogged through our daily.
Two degrees is probably 50%.
More of a it was a year ago.
Order books for milestone for 2022 looks good but there is also a time to get.
Supply chain up to snuff on the higher volumes and show.
So it really comes back to giving the product almost at parties.
Primarily.
Deliveries.
But is it really deteriorated that much that you expect shipments to be down 2025% versus Q3, but that's that's a real deterioration.
Supply chain at work.
Yes, we're doing offer.
We're jumping off our order book will supply changes functions.
You have to do.
Okay.
Lastly, just on your balance sheet now with this.
No you're basically.
No not that now just can you just.
Elaborate a little bit on your thinking on the NCI be when when.
You think you'll be able to be in the market and I forget to be honest with you I haven't looked.
I assume it's a 5%.
Authorization and.
So do you plan to utilize at all or.
Looking for moments when your stock is weak or you just want to be in the market consistently what's your thinking around the NCI b.
It usually takes a few weeks to get process. So it needs to be approved by the <unk> and that's just a whole process you have to go through so it'll take a little bit assignments will that all gets done and we would be able to be in the market.
It is our intent to be buying in the market on share price weakness. So that is certainly the intent.
And a normal tissue that is normally 10% of its loads of a public the public flow.
So that works out to lap obviously, when you take out that.
Our block.
Right. So the quote would be.
What's owned by the house of perhaps family the rest of the flow does that does that correct. So it's closer to 6% of the overall than than 10%.
Right and the inside of this yet good Clinton Roger.
Yeah Okay.
And I'm trying to remember I mean, I could look but.
Have you bought back shares before in recent past I'm just trying to remember.
And a large program ended March 29th.
Alright, Yeah. It was that's exactly right.
And I can't remember, where you're very active I'd have to go back and look.
We were after yes, we bought like Gosh, I think a million shares in.
That was January 2019 January 2020.
Oh and my life in mind, we might have launched of March 19, yes and.
We were active in January 2020.
With the attentive continued activity and then.
And we started.
Halfway down on cash.
Right Okay.
Uhm.
Sorry, I just have one last question so.
This book that you're building on.
Content for electrified vehicles can.
Can you talk a little bit about what's in that book of business look I assume it.
What you call I believe you call the electric propulsion system I believe you call the actual.
Are you doing bad to retrace what others.
Structural parts do have it like what is in that book currently.
Of all the above that you mentioned, Peter but the bulk of the business is the actual the actual.
Powertrain.
Funeral on the passenger car side of things, we're launching the two programs the one in Europe and.
Asia.
And then we have components that we're launching here in North America.
For for <unk> systems.
Yes, we have one.
Battery tree.
And we are.
Manufacturing now have one new programs around the like waiting for electric vehicles.
But you know.
So you are looking at.
Actual anywhere room, 12, 1200 bucks versus solid wood wooded casting side of things can be 14, 15 or $20. So so relatively business is on the actual powertrain side of things but.
The battery trees is a good example, lemonade and one was Linda mentioned earlier.
We see our content.
And battery electric vehicles are the same as the internal combustion engine casino battery trees can be anywhere from sort of 600 to $800.
Because they are an integral part of the overall structure of the vehicle developing like the skateboard for the vehicle.
Yeah, and like like on the battery truth like how does Linda are positioned itself say versus someone like magna.
Kind of a natural part for it cause I'm a division because it's always done structures and you've probably noticed that magnet just one announced that program on the G M.
Battery electric pickup truck for how to customers.
Look at <unk> capability say versus a structural.
Traditional structural stamping company like the cause my division of Magna.
It depends on the technology.
40.
Trade with the rolling chassis right. So when we go in there looking.
We will do Microtia digesting, how we will do extrusion.
This is true extrusion Lotta machinery nomadic Scrooge will take place on the battery.
<unk> plea along machining takes place.
Really depends on the technology that the customer deploying on that so I mean, obviously the fee structure.
Structural stems park cause that would be an actual high performance down.
Part of it.
BB extrusion that would be a natural food for your technology. So I think is what technology customers are going to use.
We would look look at is really good assembler.
Costume company that to do them low pressure high pressure gravity.
And then putting assembly machine together.
So everybody from the line Peter our focus with our high pressure died costing you are in North America.
<unk> tonnage machines up to 4400 tonnes. So a lot of large components part of the butter trick we have the capacity of hosts to be able to hospitals and those also to March.
Q do on a battery Facebook distributed across Kirby's can do ability to do stretching back I think there was a lot of different.
First of all do just to get to come.
Is coming out some aluminum some wilson magnesium so it just depends on their engineering.
Policy.
Right and this.
Hi, tonnage dicast the capability to have this is through the George Fisher joint venture correct right.
Yeah.
We are tier one on the battery tray a little more.
Okay. Okay. Thank you for your comments.
Thanks.
Thank you. The next question comes from the line of Christa Frieson from C. I B C. Please proceed with your question.
Hi, Thanks for taking my question.
Congrats on a great quarter I was wondering on the industrial side on the operating margin expectations for 2022, now, but it's below the normal range and I can appreciate that is due to the supply chain issues and commodity prices, but what are your assumption looking out into 2022.
Are you assuming that commodity prices hold at these levels and I guess on the supply chain size. It like a freight costs are you assuming that improves slightly back half of 2022.
Yeah, I mean, we're assuming that.
The supply chain challenges are continuing into next year, a little bit as I described I mean, some of the commodity prices, we're seeing flattening off others are still increasing container koesters container.
Containers supposed to come online in the first quarter and costs come down but.
No I'll wait to see that happen so.
Trying to be realistic in terms of the impact.
Of those costs, but obviously quicker resolution may allow us to make.
Make more improvements and get a little closer into our normal range, where does it would be terribly far off it will just that we will be a bit below normal range.
Okay Perfect and then also on the industrial side.
Are you are you hearing any issues or concerns uhm from your customers just on the deer strike, if that's kind of impacting any command forecast.
Not at this point we've ever been.
Any issues.
One.
Okay, Great and then maybe just lastly on the mobility Division, obviously C. P. P with great this quarter and a new walks through those reasons why could we also expect <unk> to be that strong in Q4.
Well it does depend a little I mean.
As I was describing.
Part of our bombs from contact came first because vehicles that we have more content in our being sort of selectively built.
But secondly, because some of our content is going into partially built vehicles, which is a complete being built.
In the in the fourth quarter, we're not getting a corresponding sales bump from that sells.
A little bit that depends on what.
What our customer how our customers are going to approach the fourth quarter.
But I mean, we do have the underlying launches going on which is also a big part of growing our content.
Right that makes sense. Thanks for taking my question.
Thank you there are no further questions. Thank you I will now turn to call back over to our C. O. Linda has in France for any closing remarks. Please go ahead.
Thanks, So much will to conclude this evening I would like to leave you with three key messages.
Yes, it's messy out there, but Linda Myers actually pretty good with messy. Despite challenges, we expect to deliver double digit growth top and bottom line. This year and next year. Secondly, we are leveraging our very strong balance sheet and excellent free cash flow and cash management capability to return cash to our shareholders in the <unk>.
Form of Bolton increased dividend and a buyback and finally, it's great to see continued strong market share growth right across the board with content per vehicle growth in every region and continued market share growth in key product and weekends on the industrial side in both businesses. Thanks, So much and have a great evening.
This concludes cities conference call. Thank you for participating you may now disconnect.
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