Q4 2022 Linamar Corp Earnings Call
Speaker 1: There is there there.
Speaker 2: Good afternoon ladies and gentlemen and welcome to the LinaMark U4 2022 earnings conference call.
Speaker 2: At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star-zero for the operator. This call is being recorded on Wednesday, the 8th of March, 2023. I would now like to turn the conference over to Linda Hasenpraft.
Speaker 2: Executive Chair and CEO . Please go ahead.
Speaker 3: Thank you. Good afternoon everyone and welcome to our fourth quarter conference call. Joining me this afternoon are members of my executive team, Jim Jarrell, Gail Schneider, Roger Fulton, Mark Stoddard, as well as members of our corporate IRR marketing, finance and legal team.
Speaker 3: Before I begin, I'll draw your attention to the disclaimer that is currently being broadcast.
Speaker 3: I'm going to start off as usual with a review of sales, earnings and content. Sales for the quarter were $2.1 billion up 34% last year on recovering markets and market share growth. That trick sales for the full year to a new record of $7.92 billion.
Speaker 3: more than recovered from the pandemic, which is fantastic to see.
Speaker 3: Normalized net earnings for the quarter were $99.5 million. Earnings are up 69% over last year on stronger sales despite massively higher costs, a lack of subsidies in comparison to prior year and higher SG&A fixed costs supporting our growth strategies. We hope you found this resume helpful.
Speaker 3: Normalized EPS of the year was $6.26, reasonably flat to last year with a strong back half basically offsetting a first half in terms of earnings growth. Not bad for a very tough environment in terms of cost increases.
Speaker 3: Our industrial segment had a great quarter with sales significantly up at both MacDon and Skyjack on stronger markets, market share growth or better pricing or in some cases all of the above. Strong sales growth drove strong earnings growth compared to a tough quarter last year despite significantly higher costs.
Speaker 3: related to material and labor challenges. And of course, results were enhanced by our Salford acquisition, which is performing really well.
Speaker 3: The mobility business had a strong quarter on the top line thanks to a very strong launch performance and market growth as well as increased pricing related to cost recovery partially offsetting associated increases in material, labor, and utility costs.
Speaker 3: We continue to work with our customers globally to try to recover some of these massive cost increases which are really dampening our earnings growth. We also felt the impact of our Mills River Foundry acquisition from our JV partner moving this loss-making facility into operations versus it being below the line last year.
Speaker 3: We have a plan in place we are steadily executing on to bring the facility to profitability inside in the next 12 to 18 months.
Speaker 3: The industrial segment had an excellent quarter on both the top and bottom line with both our access and agricultural businesses seeing strong sales and earnings growth on stronger markets enhanced by market share growth. The inclusion of Salsa this year also enhanced results. These businesses saw strong performance despite significant cost issues.
Speaker 3: related to higher labor and material costs.
Speaker 3: We saw growth in content per vehicle in every region this quarter, which was excellent to see. In fact, we hit a new annual record for content per vehicle in both North America and Europe at more than $230 and nearly $100 respectively. Longes are a big part of that, as was our Mills River acquisition.
Speaker 3: for the North American figure and vehicles we have high content on being selectively prioritized for build by our customers. customer cost recovery played a role as well more so in Europe than in North America.
Speaker 3: Commercial and industrial sales were up 60% with growth at both Skyjack and MacDon on market growth and market share growth in key products. Salford also played a role in Roy's sales in this area.
Speaker 3: CapEx continues to scale up supporting our global launches. We have a significant book of business to launch and we'll need to continue to invest at higher levels to support that, particularly given we've had subnormal levels of spending during the pandemic years.
Speaker 3: 2022 was up significantly from 2021, though just under our normal range as a percent of sales. 2023 will see another increase from 2022 levels taking us back into our normal range of 6 to 8 percent to drive double digit growth.
Speaker 3: Free cash flow was up $68 million in the quarter on strong earnings despite heavier CapEx. That takes us to $94 million in free cash flow for the year. Another year of positive free cash flow, our 10th consecutive year as such. 2020-2023 will also see solidly positive free cash flow.
Speaker 3: We have $1.3 billion of liquidity available to us, which is also excellent.
Speaker 3: Net deposition improved in comparison to last quarter thanks to that good crash flow despite continued activity in our NCIB.
Speaker 3: Leverage remains very strong at just 0.42 times net debt to EBITDA.
Speaker 3: We purchased 700,000 shares back under the NCIB in the fourth quarter for a final total of 3.97 million bought back under the program. We do not currently have plans to renew the NCIB, although of course if our share price starts to get under pressure we won't hesitate to do so. In the interim you will note we have increased our dividend by 10%.
Speaker 3: Our strong balance sheet and liquidity means we have the ability to continue to pursue acquisition opportunities as they arise in the dynamic market and drive even more growth. Let's turn to a quick update on some of the headwinds we're facing at the moment around supply chain issues, energy costs, logistics costs, and labor shortages.
Speaker 3: This slide, I think, gives a really good high-level summary of the issues and their current status. We're seeing improvements in several areas. For instance, chip shortage shutdowns are becoming less frequent. Shipping costs are decreasing and even normalized in some regions. Quality prices are declining, supply chain availability improving.
Speaker 3: In some areas, that's still a challenge in others. Energy costs have also improved compared to last year, but do remain above normal levels in Europe . Labor availability continues to be a challenge primarily in North America and Europe , and most acutely in the U.S.
Speaker 3: regarding chip shortages than was planned at the beginning of the quarter, that compared to much higher figures in earlier quarters and a significant impact that we saw in Q4 of 2021. That doesn't mean everyone has the chips they want. It just means they're planning left-bills and getting...
Speaker 3: with additional capacity that's come online, more meaningful capacity comes online throughout this year and next which will further augment vehicle build levels and satisfy the deep backlog needed to refill the pipeline of inventory on dealer lots. You can see here trends for the commodities that most impact us at Lindemar. We're seeing good improvement.
Speaker 3: market. It's also very disruptive on the productivity side, which is part of what is driving the labor class up. The issues are starting to improve at MacDon as illustrated by this chart showing completed header production picking up, but we aren't fully out of the woods yet. Skyjack is also seeing in general a positive trend.
Speaker 3: The problem is for each of MacDon, Skyjack and Sulfur, even with overall less issues, we continue to see some chronic issues repeat. And the bottom line is if you're missing anything, you don't have a product you can ship, which is frustrating to the team. Ocean freight costs are a good news story, with Asia lanes basically back down to pre-COVID levels and Europe finally trending down.
Speaker 3: historical levels. We're seeing a mixed level of impact in our plants on the energy side, given some plants in some regions have locked in some energy contracts before levels really escalated, which have now expired. Other plants and regions were on the spot last year and therefore are seeing an improvement to energy costs.
Speaker 3: Overall, despite improvements, we do expect to see energy prices higher in Q1 of this year than we saw in 2022, which will put a bit of extra pressure on mobility performance until we can negotiate pass-throughs with our customers. Finally, we're continuing to see a real shortage in availability.
Speaker 3: This puts pressure on costs, of course, both in terms of wage inflation, but also in terms of higher recruitment and retraining costs.
Speaker 3: Unfortunately, wage inflation is not something that would be considered transitory. So to summarize on the challenge side, higher labor costs, likely here to stay, energy definitely still weighing on results, shipping costs and commodities tapering back and better supply of chips continuing to build. Obviously, the fact that some of these higher costs are not transitory means we must seek cost recovery. For more information, visit www.fema.gov
Speaker 3: from our customers and we continue to diligently pursue such. We've had some success in recent months to offset at least a portion of the cost and we continue to pursue added relief.
Speaker 3: I'll now turn to market outlook. Market demand is continuing to look good with growth in most regions and businesses expected. Supply chain issues do continue to constrain industry's ability to deliver on that demand, but it does feel a little less volatile than last year.
Speaker 3: Turning to the specific markets, industry experts are predicting growing light vehicle volumes globally this year to 15.1 million, 16.6 million, and 48.1 million vehicles in North America, Europe , and Asia respectively.
Speaker 3: This represents mid to low single digit growth in each region. Semiconductor chip supply, other supply chain issues and sporadic China pandemic related disruptions continue to create volatility in customer schedules putting predicted volumes at risk. Industry experts are predicting on high...
Speaker 3: digit growth. Lastly, the agricultural industry is predicting growth in the Columbine Draper header market this year in mid single digits in North America, but reasonably flat in other parts of the world. The wind grower market will also see single digit growth globally this year, driving mainly out of Europe and Australia.
Speaker 3: North American high horsepower tractor retails are expected to be up 5 to 10% in 2023, flat in the rest of the world and EU versus last year.
Speaker 3: Looking at a little more detail on the auto side, you can see inventory levels in North America have settled in around 36 or 37 days over the last few months, but are still well below historical levels. Refilling the pipeline with vehicles will still be a major priority for the automakers and will take some time to get done. In looking at production levels compared to what was forecast at our last conference call,
Speaker 3: units largely on declines in China that are COVID-related post their reopening.
Speaker 3: Looking at the access market, you can see first that all three regions showed good double-digit growth over prior year in Q4 and for the full year. Rental demand is strong as companies look to counter fleet aging experience during COVID. In addition, North America flowed a little during Q4 tracking a little...
Speaker 3: We are at nearly 40% improvement thanks to continued solid market demand. Delivery of orders is being impacted by supply chain challenges. However, as we work through these issues, we feel confident we can again grow Skyjack in double digits this year. We are of course keeping a close eye on potentially shifting markets.
Speaker 3: conditions in the event of an economic slowdown. In the agricultural business, Q4 combine retails in North America were up 43% over prior year, a huge pickup versus earlier in the year. The order book is up over last year, but meeting demand is a continued challenge from act on regarding supply chain and logistics.
Speaker 3: for Salford's market segment. Salford is seeing a strong backlog in all products well up over prior year and is also predicting double digit growth in 2023.
Speaker 3: Turning to an update on Growth and Outlook, youíll be pleased to know that we had another outstanding quarter in new business wins and once again a very strong quarter for wins in the electrified space. I will highlight a couple of our more strategic wins in a moment. Electrified vehicles continue to provide great opportunities for us.
Speaker 3: sales. Momentum is clearly building in our portfolio of these important vehicles of the future. At this point, 51% of booked sales in 2027 in our mobility business is for non-ICE power train, a huge shift from less than 25% in that category in 2021. With prospective mobility launches, we are seeing ramping volumes on launching power
Speaker 3: in sales. We saw a big shift of nearly $1.5 billion of programs moving from launch to production last quarter, partially offset by very strong business wins in the quarter. As usual, weíre summarizing all of these expectations on our outlook slide now being displayed. Wonít drawings stand Meanwhile. Credits discovery of advances in user experience and hence meaningfulanky.com Open View Than o l
Speaker 3: With strong markets and market share growth, we are expecting to see double digit growth on the top and bottom line in 2023. This drives from double digit growth at both Skyjack and Macton this year, coupled with solid launches and a growing market on the mobility side. Market margins will expand in 2023 on growing sales.
Speaker 3: future growth. Looking specifically at Q1, you should expect sales modestly up from Q4 2022, but meaningfully up from Q1 of last year. The mobility segment will see again sales modestly up from Q4, but well up from Q1 last year with growth.
Speaker 3: in North America and Europe from Q4 being partially offset by COVID-related declines in Asia.
Speaker 3: Normalized OE will be at best flat to Q4-22 based on those lower Asian sales as well as higher material costs in Europe in addition to the higher energy costs that I mentioned earlier.
Speaker 3: The industrial segment will see sales seasonally up from Q4 of last year and significantly up from Q1 of last year. OE will be meaningfully up from Q4 22 levels on stronger sales and cost controls as well as normal annual pricing reset.
Speaker 3: As a result, on the overall earnings side, you can expect modest to good normalized OE and EPS growth from Q4 2022 with flat to modestly improved margins, but notably significant EPS growth to Q1 of last year.
Speaker 3: Roger would like me to remind you that the situation is very dynamic and impacts are not fully determinable in terms of their impact at this time. Notable risk areas are supply chain, labor shortages, lockdowns in China, and geopolitical problems.
Speaker 3: Moving on to new business wins on the mobility side, I will highlight a few of our more interesting wins this quarter. First, we were awarded a variety of gears for a hybrid electric vehicle transmission program. These will be produced in India with an average annual volume of 600,000 units per year, launching within 30 years.
Speaker 3: Secondly, we were awarded a component to be used in industrial electrolyzers which are used to produce hydrogen using renewable electricity and water. We'll produce 37,000 of these units per year at one of our German entities starting next year. Lastly, we won a significant uplift in program expansion for an E-
Speaker 3: We recently announced our naming conventions for our off-the-shelf product family of e-axle solutions. In addition to the products that are designed to OEM specific applications, this portfolio offers standardized propulsion systems that can easily integrate into existing architectures.
Speaker 3: all pre-developed by Linnimar. This is of particular importance in the commercial vehicle fleet segment where OEMs and appletters want ready-to-go, full system solutions that are fully validated and available now. The E-Winn family of e-axles offers designs for both independent and beam axle applications.
Speaker 3: The Skyjack team continues to evolve their product with practical and useful customer-focused technologies. The Skyjack accessories catalog of custom features now adds perimeter lighting to the lineup. New LED lighting at the base of a DC scissor creates a no-go zone around an active machine.
Speaker 3: This improves safety on and around the machine. A visual lighting indicator is added to the existing audible alarm to let workers know that a machine is working nearby. This is another example of continually enhancing safety, user-friendly, or customer-focused features.
Speaker 3: This thoughtful engineering is what makes Skyjack a highly sought after brand on construction sites. Lastly, weíre proud to share that we have won not one but two industry product innovation awards in the agricultural space. Both MacDon and Salford were 2023 AE50 award recipients.
Speaker 3: Proving both of Linda Meyers agricultural business lines are industry leaders in their respective product categories. The 8050 is an annual award ceremony by the American Society of Agricultural and Biological Engineers. It's given for new products that represent the best innovation in engineering and technology for agriculture, food, and biological systems.
Speaker 3: Salford One for their Halo VRT, which stands for variable rate tillage, and MacDon for the TM-100 tractor mount header adapter. Both are great examples of delivering new product innovation to growers and to farmers.
Speaker 3: Finally, we continue to exceed on our global digitization journey with more and more connected machines, data connections, and robots being commissioned in our global plants every day. With that, I'm going to turn it over to our CFO , Dale Schnatter, to lead us to a more in-depth financial review. Over to you, Dale. Thank you, Linda, and good afternoon, everyone.
Speaker 4: net of any customer recoveries that we achieved.
Speaker 4: Q4 was another positive quarter for cash generation and as a result we were able to maintain strong levels of liquidity at 1.3 billion.
Speaker 4: For the quarter, sales increased 34.3% or $2.1 billion.
Speaker 4: Earnings are normalized for any FX gains or losses related to the revaluation of the balance sheet and any potential other items that may have occurred in the quarter.
Speaker 4: In Q4, earnings were normalized for FX losses related to the revaluation of the balance sheet which impacted EPS by 22 cents per share.
Speaker 4: Earnings were further normalized for the net gain recognized in the quarter as we continue to finalize the purchase price accounting for the acquisition of our Mills River facility. Having this net gain impacted EPS by 10 cents per share.
Speaker 4: The total of these two issues impacted EPS by 12 cents per share and as a result normalized EPS for the quarter was $1.61.
Speaker 4: Normalized operating earnings for the quarter were $140.9 million. This compares to $81.1 million in Q4 of 2021, an increase of $59.8 million or 73.7%.
Speaker 4: Normalized net earnings increased 40.5 million, or 68.6 percent in the quarter, to 99.5 million.
Speaker 4: Fully diluted normalized EPS increased $0.71, or 78.9% to $1.61.
Speaker 4: Included in earnings for the quarter was a foreign exchange loss of $17.4 million, which resulted from a $17.1 million loss related to the revaluation in the operating balances and a $300,000 loss related to the revaluation of financing balances.
Speaker 4: As I mentioned, the NetFX loss impacted the quarter by 22 cents per share.
Speaker 4: From a business segment's perspective, the Q4 loss of $17.1 million related to the revaluation of operating balances was the result of a $200,000 gain in industrial and a $17.3 million loss in mobility.
Speaker 4: Further looking at the segments, industrial sales increased 73.1% or 214.1 million to 507.1 million in Q4.
Speaker 4: The sales increase for the quarter is primarily due to the higher agricultural sales driven by both growth in the global market and in our global market shares for our products. It also grew due to the acquisition of Salford.
Speaker 4: The higher access equipment sales driven also by higher growth in our markets and market share gain in certain targeted markets and products.
Speaker 4: Higher sales prices were also achieved in the quarter to help relieve some of our supply chain cost issues.
Speaker 4: And lastly, we had a positive impact from the changes in FX rates since last year.
Speaker 4: Normalized industrial operating earnings for Q4 increased $59.7 million over last year to $55.5 million.
Speaker 4: The primary drivers of the industrial earnings were the increased contribution from the strong agricultural equipment volumes, the increased contribution from the higher access equipment volumes, the positive impact from changes in FX rates since last year, and the increased margins from the acquisition of sulfur.
Speaker 4: These were partially offset by the ongoing supply chain issues impacting labor and raw materials and the fact that we had no government support related to COVID-19 and Q4 of 2022.
Speaker 4: Turning to mobility, sales increased 311.5 million or 25.1% over Q4 last year to 1.6 billion. The sales increase in the fourth quarter was driven by the increasing volumes of launching programs but also on certain other high demand programs.
Speaker 4: The sales impact of fully consolidating our Mills River location now that it's 100% owned.
Speaker 4: The cost recovers we received in the quarter from our customer negotiations and the positive impact from changes in FX rates since last year.
Speaker 4: Q4 normalized operating earnings from mobility were flat over last year at $85.4 million.
Speaker 4: In the quarter, the mobility earnings were impacted by the increased contribution on launching programs and certain mature programs, the positive impact from the changes in FX rates since last year, and these were partially offset by the impact of fully consolidating Mills River.
Speaker 4: and the increased raw and utility costs net of any customer recoveries in a quarter, and also due to increased travel costs that are supporting our growth.
Speaker 4: Returning to the overall Linnemar results, the company's gross margin was $248.8 million and an increase of $87.9 million compared to last year due to the same factors that drove the segments that I just discussed.
Speaker 4: Cost of goods sold amortization expense for the fourth quarter did increase slightly to $112.7 million compared to Q4 2021, but COGS amortization as a percent of sales decreased to 5.5 percent. For more information on COGS
Speaker 4: Selling general administration costs increased in the quarter to $110.1 million from $96.1 million last year. This is primarily the result of the incremental SG&A cost from both the Sulfur and Mills River acquisitions and the increased travel costs that are supporting our growth.
Speaker 4: Finance expenses increased by $10.9 million since last year, primarily due to the additional interest expense as a result of the Bank of Canada and the U.S. Fed rates increasing.
Speaker 4: We also had increased debt levels due to the acquisitions and the activity on the Share by Broc program that was completed last year. Finally we had a negative impact on changes of FX rates on debt since last year.
Speaker 4: The consolidated effective interest rate for Q4 2022 was 3.2%. The effective tax rate for the fourth quarter was 23.3% compared to last year.
Speaker 4: This increase is mainly due to an increase in non-deductible expenses compared to last year. They will mix the foreign tax rates. These are partially offset by the decrease in tax expense now that Mills River is fully owned. We are expecting the 2023 full year effective tax rate.
Speaker 4: a decrease of $67.9 million compared to December 21.
Speaker 4: The fourth quarter did generate $221 million in cash from operating activities, which is used mainly to fund CapEx and our shared buyback program.
Speaker 4: As a result, net debt to EBITDA did increase to 0.42 times in the quarter from a year ago, mainly due to the acquisitions completed in Q2 and the activity on the Shared Buyback Program. Based on our current estimates, we are expecting 2023 to remain strong.
Speaker 4: and leverage is expected to remain low. The amount available credit on our credit facilities was $462.5 million at the end of the quarter. Our available liquidity at the end of Q4 also remained strong at $1.3 billion. As a result, we do believe we have sufficient liquidity to satisfy our obligations in 2023. To recap, sales and earnings for the quarter was a steady increase in the
Speaker 4: increases in cost recovery and is achieved in both segments.
Speaker 4: Despite these challenges, in the quarter we still remain very strong liquidity levels at 1.3 billion. That concludes my commentary and I'd now like to open up the call for questions.
Speaker 2: Thank you. Ladies and gentlemen, we will now begin the question and answer session.
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Speaker 2: Your first question comes from the line of Michael Glenn from Raymond James. Your line is now open.
Speaker 4: Hey, good evening. So just a couple of questions. So based on the guidance, it looks like capex next year.
Speaker 4: is going to be somewhere in the $650 to $700 million range. So can you just break that down a little more? Like where do you need to spend the capital exactly? Like what are some of the big buckets of spending?
Speaker 3: Yeah, you're right. CapEx is going to be up quite a bit this year. Really the issue is we've really been skinny on CapEx the last couple of years, well under the level of spending that would normally result in double digit growth. So what's happening is we've got a lot of catch-up happening this year.
Speaker 3: Weíre still driving that double-digit top-line growth, but we didnít have the capital spending to really make it happen. Weíve got a big book of business that weíre launching and we need to spend the capital. The level of spending is going to be in line with our normal.
Speaker 3: level of spending, we like to see sort of 6 to 8% to drive that double digit growth. So this is a normal level to drive that kind of growth but is up from prior years. So how it breaks down is into a whole variety of different types of spending.
Speaker 5: Yeah, I think as well, just to add maybe some perspective, and it's across the board too, right? Like, we've got a lot of great launching in regards to very electrified wind that are very agnostic to the powertrain side. In fact, in the industrial side, the powertrain is very electrified.
Speaker 5: regional growth as well to increase capacities. You know, like we talked about backlogs and things like that to really increase capacities in the industrial side too. So all positive and as Linda said, some catch up, but a lot of great things matching our electrified winds.
Speaker 4: Okay. Working capital, if I look back historically, typically there had been a recovery that would take place in Q4 on working capital. It didn't happen this year. Is there some timing there? Should we expect something different in Q1 for working capital? I'm just trying to get some clarity there.
Speaker 4: Yeah, I would say the biggest impact of working capital over prior years is the economic hardships that we've negotiated so we have
Speaker 4: negotiate some good recoveries and some of those are still in receivables for this year. And obviously as we negotiate recoveries for 2023, that will also impact non-cash working capital depending on timing of payments. When the $4 billion backlog and
Speaker 4: it's nice to see that skewing to electric. One of the issues we've seen though is that some of these electrified programs have started to have margin profiles that are perhaps somewhat underwhelming at the beginning. Like, can you just...
Speaker 4: give us some degree of expectation like how we should think about the margin profile for these electrified business wins and how they'll impact Linnemar's margin profile as you wrap those.
Speaker 3: Yeah, I mean when we are quoting business for electrified vehicles, we use the same return targets as we do for more traditional internal combustion business. The margins are always something that ramp up. So when you're starting out obviously...
Speaker 3: business, it's obviously going to be reliant on volumes. So if volumes are slower to ramp, then margins are going to be slower to ramp as well. We have faced the exact same scenarios with internal combustion business launches if volumes were lower. This is not the single Internet analysis that you need to start on.
Speaker 3: I don't really see a big difference other than is there potentially more volume ramp risk with Electrify because we're relying on market adoption of new technology. So that certainly would potentially be the case.
Speaker 3: But I will remind you as well that when weíre tooling up new programs, we try to always use flexible CNC equipment. We have it kind of modular in nature in the sense that we donít have to put necessarily 100% of the capital in place upfront. We can add ñ
Speaker 3: Some elements of the capital end over time obviously depends on the process and how many machines you have at every operation, but that does help us to manage the volume risk and is how we have traditionally managed volume risk and ramp volume risk with our internal combustion engine business. That's all for today, thanks for watching, and we'll see you next time.
Speaker 5: we would do the same on the electrified side. There's a lot of capital as well that is sort of, you could do it on both, right? An internal combustion engine as well as an electrified, so a gear is a gear. And so as long as we have the ability to pivot fast, you know, during a launch, if a launch isn't ramping up, then we could take those pieces of equipment and redeploy them. It's very useful for us.
Speaker 6: segment in the fourth quarter. So it was the lowest
Speaker 6: margin quarter for the year 2022. So for example, in your mobility segment, the operating margin was 6.4% and in Q4 it came in at.
Speaker 6: 5.5%, so down almost 100 basis points. So I'm just wondering like.
Speaker 6: What happened in the fourth quarter that you got the depressed margin? Like, I understand there's the die casting facility, the Mills River facility that's losing money, that you're fully consolidating that now. But is that enough to drive down the margin by that much relative to Q3? So maybe you can elaborate a little bit on what's going on with the margin in the quarter.
Speaker 3: Yeah, sure. I mean, itís not unusual for Q4 to be softer than Q3. It depends on what happens with Christmas shutdowns compared to summer shutdowns. And in fact, what we saw in the fourth quarter were production sales.
Speaker 3: actually down a fair bit compared to the third quarter. You're not seeing that in the overall sales because sales were bumped up, the top line was bumped up by two things. One was the customer price release that is offsetting.
Speaker 3: the cost increases, right? So you get this bump on the top line, it's offsetting some big cost increases, but it's not contributing its own margin, as you might expect if it was a production program. And secondly, the top line was bumped up.
Speaker 3: by a favorable exchange rate which, thanks to our natural and formal hedging program, also doesnít have much impact on the bottom line. That also has a negative impact on margins. Really, a couple of things going on there in the fourth quarter, FX, diluting margins and then the customer price relief diluting margins.
Speaker 3: favorable exchange rate which, thanks to our natural informal hedging program, also doesn't have much impact on the bottom line. That also has a negative impact on margins. Really a couple of things going on there in the fourth quarter, FX, diluting margins and then the customer price relief diluting margins.
Speaker 6: On the customer relief and these net input costs, how is this going to play out? Do you anticipate that you're going to recover all of these costs through relief and these commercial discussions? Or is there going to be like a certain amount of this net input cost that you just can't get back from your customer and
Speaker 6: You're just going to have to absorb that in your business structure and wait till these programs roll off and then incorporate the new cost levels into like your, I guess, your pricing process for new contracts. How is all this going to play out in your opinion? Yeah, I mean it really depends customer to customer and program to program.
Speaker 3: your cost structure. So I wouldn't say that this is a permanent negative impact to margins because many of these cost issues will with time recover. Will we get all the costs increased back? Like probably not. I mean it's a negotiation.
Speaker 5: The key is you can get things on indices that scale up and down based off where we are. That's always the best thing to do just because you're protected 100 percent. But that's difficult with some of the customers so you do try and push for indices.
Speaker 5: But you can't put everything on an indice. And as Linda said, we're going after every dollar, every cent of cost we go after. And we basically sit down with each customer, negotiate. And we say, here's the cost. And we want to get 100% relief and in
Speaker 5: every case we're not getting 100%. I mean, some we have, but I would say most not, and you are negotiating to get new business, offsetting businesses and things like that. But also I would say when we're negotiating, if we have the ability, you know, like an engineering change or, you know, an uplift or something else, we will negotiate as well, because if you're, you know, sucking up costs and you have something, you know, new to come, you are...
Speaker 3: impacting future business that hasn't been won yet, that's obviously going to be quoted at a level that is reflective of the current level of cost. Okay, okay, that was good backdrop on that. And then just lastly, I wanted to ask you, the $1 billion of electrified business awards.
Speaker 6: that you've received. Can you give us a rough split? How much is that related to hybrid vehicles and how much would be related to pure battery electric vehicles?
Speaker 3: Yes, it is a blend of both, but we are heavier on the battery electric side generally. If I look over time at all the wins that we've had, I'd say it's...
Speaker 3: more battery electric than hybrid, but in any one year you might see more hybrid than electric. It kind of depends on what's happening in the market at that time.
Speaker 2: Okay, that's all I have. Thank you. Your next question comes from the line of Krista Friesen from CIBC. Your line is now open.
Speaker 7: you're guiding for expansion in the margins in 2023, and now you're guiding for those margins to be flat. What's changed?
Speaker 3: for you since November when you reported Q3 versus now to call for flat margins? Yes, I mean I would say continued escalation in costs on specifically the energy and material side is......
Speaker 3: than we'd expected it would be. So that's impacting Q1 margins, which obviously impacts the overall.
Speaker 7: Okay, great. And then obviously your balance sheet is in a great position right now. Can you speak to the M&A pipeline and if you're seeing any opportunities out there right now?
Speaker 3: Yes, I mean I think there is always a lot of opportunities out there and of course we are interested in looking at opportunities like for instance on the mobility side anything that is going to continue to drive our electrification strategy, our strategy to reduce...
Speaker 3: our reliance on ICE powertrain, which we've done a fantastic job of actually just in terms of new business wins as noted, you know, more than half of our business not reliant now on those products, but anything we can do to add to that is going to be of priority.
Perfect. Thanks so much. I'll jump back in the queue.
Your next question comes from the line of Brian Morrison from TD Securities. Your line is now open.
Thanks very much. Good evening everybody. Thanks for all the color on the mobility margin. I want to come out a little bit of a different way, but you provided a lot of color, which is great. So if I do my math right, I think you should get maybe a hundred basis points of margin improvement from volumes and incremental margins.
increments from Boeing, excuse me. So I guess when I take a look at energy and materials, is that sort of what's baked into your guidance for 2023 that we should have some in the neighborhood of 100 basis points of margin degradation from that when you say that's been the key change.
Yes, I mean I can't be that specific for you on exactly the exact dollar level or percentage level that it is impacting.
But energy and material cost, I can tell you, are up. And again, I'll point out the softness in the first quarter for Asia, which is impacting on the margin side. I'll remind you as well that the mobility segment is going to grow in double digits on the top line. So stay tuned and I'll see you soon. Take care.
With flat margins, that obviously suggests we are going to be growing in double digits or close to it on the bottom line as well. So, we are expecting some pretty significant earnings growth in the mobility segment this year even as margins remain flat. Understood, and that is a good performance. But if I look at in terms of the margins,
you might be able to give me in terms of annual price resets. What's the magnitude, I guess just on a consolidated basis of the increase in pricing, I realize it's what the market will accept, but when you have performed this, is that aimed at targeting margins that are in the middle of the target range or should we be thinking somewhat towards the lower indicators of improvement.
I think it's fantastic that we're getting margin improvement back into a 14 to 18 percent margin range when we've been down in the 10 to 12 range. I can't be any more specific for you of where in the range, but...
I think the fact that we're going to be back in that 14 to 18 is fantastic. Okay, more importantly though, I just wondered what you might be able to share in terms of the pricing resets that happened at the beginning of the year. Well, they happened at the beginning of the year, I guess is what we can tell you. We really wouldn't want to say what we do with each customer.
But yeah, we sit down with each customer, Brian , and work out a deal and we factor in the cost that we've seen over the last year and specifically put out that to the customer base. Yeah, okay. No, the performance, the guidance looks in line with consensus, so it's all very good. Last question I want to ask though is in terms of your balance sheet, which is in great shape and the free cash flow, how are you approaching the MCIB as we get into 2023? You're right THERE.
Yes, so the NCIB expired and we purchased about 4 million shares under it. I think it was a very successful program. We have not as yet renewed the NCIB. If the share price softens, then obviously that is something that we can do quite quickly. In the meantime, I will just remind you we did increase our dividend.
by 10% this quarter. We're continuing to return cash to shareholders in a slightly different way. Thanks very much.
So, we are continuing to return cash to shareholders in a slightly different way. Okay. Now, it is well done to capitalize on the market weakness. Thanks very much.
There are no further questions at this time. I will turn the call over. We do have another question from Michael Glenn from Raymond James. Your line is now open. Hey, just to follow up on the mobility margins, what's the level of losses from the Mills River that you're expecting in 23 versus 22? How do you see that improving?
lower losses this year than last year. I'd point out, as Linda mentioned in her commentary, we're expecting it to get to break even above the 18 months. So that will tell you the distinct improvement.
Okay, thank you. Okay, great.
To conclude this evening, I would like as usual to leave you with three key messages. First, we are thrilled to deliver exceptionally strong double-digit top bottom line growth in the fourth quarter. Second, we continue to execute very successfully on our strategy to grow our electrified vehicle content.
and transform our mobility business with over a billion dollars in new business wins secured, more than triple any other year in our history, and more than half of our book sales in 2027 already not internal combustion engine powertrain. Finally, we're really proud of the multiple records logged in 2022, record sales, record new business wins, record market share in our mobility business as well as targeted.