Q3 2023 Linamar Corporation Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the <unk> 2023 earnings call. At this time all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session.
At any time during this call required immediate assistance. Please press star zero for operator.
This call is being recorded on Wednesday November eight 2023.
I would now like to turn the conference over to Linda Hudson Fracs Executive Chair and CEO. Please go ahead.
Thank you very much good afternoon, everyone and welcome to our third quarter Conference call. Joining me. This afternoon are members of our senior team.
Jim Jarrell, Dale Schneider, Roger Kevin Callaghan, and some members of our corporate IR marketing finance and legal teams.
Before I begin I'll draw your attention to the disclaimer currently being broadcast.
I'll start off with a review of sales earnings and content.
Sales for the quarter were two part question 1 billion up 16% over last year on solid launches market share growth, our recent battery closure acquisition and better pricing.
Normalized net earnings for the quarter was $136 3 million and normalized EPS was $2 21, EPS is also up 16% over last year on stronger sales performance offset by FX headwinds and higher costs.
Our industrial segment had another strong quarter with sales and significantly at the Skyjack in particular, primarily thanks to your market share growth in targeted product.
Don in Salford also saw both sales and earnings growth.
Higher sales helped to offset higher costs that we're seeing in these businesses.
The mobility business had a strong quarter on the top line. Thanks to strong launch performance the acquisition done in the segment and some market growth FX rates were unfavorable in comparison to Q3 of last year or mobility hitting earnings hard this quarter higher costs also continued to drag on results.
Although customer pricing really is helping to offset at least part of those costs. We felt a negative FX impact in comparison to Q2 of this year as well this quarter without which we would have seen some OE growth compared to Q2 as we had forecast.
We expect to see improvement sequentially in Q4 for this segment with a full quarter instead of two months for the battery business and two months for our recently announced <unk> acquisition.
Yeah.
This quarter represents another solid quarter of earnings growth and margin growth in what is a very tough environment, which we're very proud of our business is diversified and allows us to drive consistent sustainable growth on an ongoing basis as you can see by this chart, which is exactly what we are delivering.
We saw another quarter of solid market share growth in our mobility business with global content per vehicle up over last year, both Europe, and North America content per vehicle growth on launching business to new record levels.
Commercial and industrial sales were up 25% with strong growth of Skyjack and both agricultural business is also growing market share growth has been a big driver this quarter for all of our industrial businesses.
Capex continues to run at more normal levels as seen in recent years to support global launches and growth Capex as a percent of sales was eight 2%. So in line with the level of spending of 6% to 8% that will support targeted double digit growth capex will be up significantly this year.
Over last year and at the high end of our normal range next year Capex will stay in our normal range of 6% to 8%, but decreased in absolute terms during 2023 levels promoting stronger free cash flow.
Free cash flow.
Was negative for the first quarter in a while down $124 million was a big draw on working capital alongside another quarter, a stronger capex, we do expect to see positive free cash flow in the fourth quarter to end the year on the positive side overall, we continue.
Chad ample cash available for growth with $1 4 billion of liquidity available to us.
Our net debt position is solid at just <unk> seven nine times EBITDA I believe our strong balance sheet is an important factor in that timeframe at some economic uncertainty.
I'll turn now to our market outlook market demand is continuing to look positive for 2023 with growth in most regions and businesses expected. This year next year is seeing a mix depending on the market, although notably North American light vehicle still forecasting growth as is the access market.
Turning to the specific markets industry experts are predicting growing light vehicle volumes globally. This year to $15 to $17 seven and $50 4 million vehicles in North America, Europe, and Asia, respectively. This represents 612 and 7% growth respectively 2024.
Further growth in North America up 5% to 10%, but flat volumes in Europe and Asia.
Industry experts are predicting on highway medium heavy truck volumes to grow in Europe, and North America. This year with double digit growth in Asia. After a couple of tough years next year, we will see continued growth in Asia that decline in Europe, and North America industry.
Industry experts predict double digit growth in the access market globally. This year with North America, and Europe expecting high single digit and Asia low double digit growth.
Next year, we'll see further growth of another 5% to 10% globally and in each region.
Lastly, the AG industry is predicting growth in the combined ratio market. This year in North America, but reasonably flat in other parts of the world. The winter market will also see single digit growth globally. This year, driving mainly out of Europe and Australia.
Theres a positive outlook for market growth in both <unk> and crop nutrition equipment for this year as well, we'll have a better picture of the agricultural market for next year in the next month or so but early indicators are for the market to be fairly flat globally next year, depending on the outcome of this year's harvest and general economic outlet.
So not dissimilar to this year.
Looking at the access market in more detail, we saw solid growth in North America in the third quarter with Asia and Europe dialing back all three regions are expecting solid market growth this year and more moderate growth in 2024 as already noted rental company demand remains positive as companies continue to look.
To counter fleet aging that was experienced during the colder.
Equipment utilization in North America, as well ahead at 2022 year to date levels in line with or at times exceeding peak 2019 levels utilization levels. In Europe are also above 2022 levels and well ahead of 2019 peaks.
Our backlog at Skyjack is solid and with some relief on the supply chain side, we're increasingly enabled to deliver on such as we saw demonstrated so strongly in the third quarter.
With market and market share growth, we feel confident we can again grow skyjack in double digits. This year and next we're of course, keeping a close eye on potentially shifting market conditions and the event of any economic slowdown.
The agricultural business Q3 combine retailers in North America were down a little but high horsepower tractors up 6%. So overall fairly flat both markets are up for the year.
As noted we expect to see market growth, primarily in North America for our AG markets. This year.
Inventory at AG equipment retailers has normalized to some degree, but it's still low in historical terms, which will continue to drive demand.
The order book and demand is still strong for marked on our current forecast is for double digit sales growth. This year again for <unk> with continued growth in 2024, as we continue to grow our market share.
Salford is seeing a strong order book as well and is also predicting double digit sales growth in 2023 and continued growth in 2024.
Looking at the mobility side, you can see vehicle inventory levels in North America are sitting at about 40 days still well below historic levels.
And looking at production levels compared to what was forecast at our last conference call you could see a stronger Q3, all driving out of Asia, which ended at $22 3 million vehicles up 4% from last year, which was $21 5 million Q4 is forecast to be $22 7 million.
<unk> again up 4% from last year.
And in line with what we forecast back in August the full year as noted is predicting overall growth now at seven 7% over prior year.
Looking at launches for the mobility business, you'll be pleased to know we had another strong quarter in new business wins and once again, a very strong quarter for wins in the electrified propulsion agnostic space, which is dramatically shifting landscape of our mobility business.
We had a solid first three quarters of the year in terms of business wins for both battery electric and hybrid electric vehicles as well as propulsion agnostic areas of the vehicle year to date wins are now 74% for a combination of electrified vehicles and propulsion agnostic work, which is.
Outstanding.
Nearly 60% of our books light vehicle sales as soon as 2027 are now for a combination of electrified vehicles or propulsion agnostic products and this figure is growing every quarter. Our strategy is to continue to grow this percentage should minimize the concentration of our business at risk.
Vehicles ramp down over the next decade.
We are seeing ramping volumes on launching programs, which are predicted to reach 20% to 30% of mature levels. This year generating incremental sales of 700 to 800 million. We will see further growth of another incremental 800 to 900 million next year. These programs will peak at nearly $3 7 billion.
In sales nearly $900 million of programs that moved from launch to production in the last quarter, partially offset by business wins in the quarter.
Launching business in conjunction with acquisitions and growing markets will result in double digit sales growth for mobility segment. This year and next year.
Let's turn to a summary of our top line outlook and also looked at the bottom line margins and next quarter and a little more detail with strong markets and market share growth, we are expecting to see double digit growth on the top line in 2023 and 2024 for <unk> overall this drives from double digit.
Top line growth in both our industrial and mobility businesses.
Net margins will expand this year on growing scale, we expect significant growth in margins in the industrial segment, where margins have expanded back into their normal range mobility margins well contracted the year, noting stronger margins are expected in the back half of the year than the first half.
This will mean significant double digit growth in industrial segment.
Offset by a lower OE performance in the mobility segment, combining two nevertheless drive significant double digit growth in EPS in 2023 and 2024, we expect continued expansion in overall margin driving out of expansion in margins in the mobility side.
Matt and continued strong margin performance in the industrial segment.
This will mean double digit growth in earnings in both segments and another year of double digit EPS growth in 2024.
We will also see continued positive free cash flow this year and strongly positive free cash flow next year, leaving us in an excellent position from which to drive further growth.
Looking specifically at Q4, you should expect double digit growth from prior year, but seasonally down of course for Q3 of this year. The mobility segment will see earnings up sequentially over Q3 of this year, despite normal seasonal slowdown thanks to a full quarter for our new battery.
Our enclosure plants as well as two months of our <unk> acquisition and continued expected improvements in terms of cost and recovery.
Fact modest growth over Q4 of last year.
I will note this outlook excludes any knock on impact not yet known to the fourth quarter from the recently resolved UAW strikes at Ford GM and Toyota, Although we did feel some impact from the strike in October which I have considered in our outlook. It is not clear up call ups might be increased.
Or potentially pack in November and December as a result of inventory levels post strike.
Thanks for the pre strike schedules can be cat, if not schedules may be increase to catch up and rebuild the pipeline. What we know now is in our outlook, which again is for growth both sequentially and over prior year.
The industrial segment will see OE down sequentially in comparison to Q3 of course due to normal seasonality of all businesses, but up in double digits compared to last year.
Moving on to an operational update we were very excited to announce during the quarter a second acquisition for our mobility business for 2023 for another propulsion agnostic business <unk>.
<unk> is a vertically integrated casting machining and assembly business <unk>.
<unk> has a patented vacuum rigel is tasking, our DRC added pressure riser list passing PRC technology that is very well suited to large hollow body parts, such as knuckles or control arms and other structures. It can't cats lightweight parts with superior strength.
As an example, the <unk> process is able to cast the large knuckles required on pickup trucks and Suvs, we already cashed in machine knuckles, but our core processes more suited to smaller vehicles, mostly passenger car. The mobile capabilities are a great complement to our existing macro casting capabilities to allow us to offer.
We're a full spectrum of products to our customers.
<unk> casting capabilities also complement our existing light light metal casting technology, which now ranges from static and tilted gravity to three types of low pressure casting to high pressure die casting as well having this flexibility is critical to be able to offer our customers customers' full rate.
Inge capability and caching to produce the specific technical mechanical and performance requirements that they might have for the casting.
The business generates approximately 450 million Canadian dollars in sale.
Annually, the purchase price of $64 million U S dollars, we expect operating earnings levels to be a little under our normal target range.
7% to 10% of sales for our mobility business, but we anticipate to see them reach that level within 12 months. The financial results will be consolidated into our existing mobility segment results. We welcome the <unk> team to the Lennar multifamily.
The business will join our new Giga casting facility announced earlier this year as well as our existing mills drove our high pressure die cast facility and our new battery and closure business.
As a key anchor in our fully electrified vehicles and propulsion agnostic grid, the lindmark structures group.
With this latest addition, the structures group has already become a global powerhouse at about $1 $5 billion in sales with additional opportunities under per seat.
Moving on to new business wins on the mobility side I'll highlight a few of our more interesting wins this quarter first I'd like to highlight nearly $40 million worth of wins in various differential assemblies that will be used in battery electric vehicles for a couple of different customers production of these.
<unk> will start next year in facilities in France and in China.
Secondly, we saw several wins for structural components that will launch in the U S and Germany, the UK and France.
Structural components are a huge growth area for us at <unk> and have.
Benefit of being propulsion agnostic building a strong business in this area is an important strategy to stay flexible in a changing market environment.
Third we won a few important programs for hybrid electric vehicle components and assemblies again is for a variety of locations and customers throughout Europe and Asia and.
And finally, we already have already secured an additional business win for one of our brand new plants acquired last quarter from Doris Shiloh for a structural component for us.
Electric vehicles to be produced in the U S. The program starts production next year and will ramp to a volume of 240000 per year at peak.
Turning to an innovation update I'd like to highlight Skyjack latest telematics update known as elevate live to point out building on the initial elevated telematics package like to point out provides skyjack rental customers with even greater machine usage and fleet status insights now.
Putting reset overloaded safety warnings battery Dallas machine control.
Conditions fuel condition, and Amgen diagnostic detail intelligence that enables fleet operators to run their business more efficiently.
Another example of our customer focused technologies that Skyjack provides owners with better return on investment.
Next Matt Don has just released its latest self propelled windrower. The M. Two model that does market leadership and swapping goes back decades, the <unk> builds on that reputation with a new engine that provides more horsepower and features intuitive new touch screen operator controls while.
Gaining all the other are familiar features as marked on soft footfalls windrower products. The new M. Two proof that EBIT marked on the longest running product line is still among the most advanced and innovative in the market and lastly, Salford has introduced the 56th and series cover crop Cedar.
Application for usage on its line of narrow tillage implementers like the Halo VRT. The market is seeing increased demand for cover crops and agricultural practice that helps protect the environment by reducing the risk of soil erosion sulphur its expertise and precise air delivery systems enabled them to do.
Find it very.
Very well suited for limited faced installations, while still delivering accurately to achieve maximum ergonomic agronomic economy and environmental benefit.
Finally, we continue to execute on our global Digitization journey with more and more connected machines data connections and robots being commissioned in our plants every day with that I now turn it over to our CFO, Jeff started to lead us through a more in depth financial review of EDF.
Thank you Linda and good afternoon, everyone.
As Linda noted Q3 was an exceptional quarter as we achieved double digit sales and double digit earnings growth. Despite the challenges of the strikes the Oems the continuation of the site supply chain cost issues.
It has further impacted our earnings in the quarter.
Q3 was also another positive quarter for cash generation with strong liquidity hitting $1 4 billion.
For the quarter sales increased 16% to $2 4 billion.
Earnings were normalized for FX gains or losses related to the revaluation of the balance sheet and potentially other items that have occurred.
In the quarter earnings were normalized for FX gains related to the revaluation of the balance sheet, which impacted EPS by <unk> 17 per share.
Normalized operating earnings for the quarter were $200 million.
This compares to $168 4 million in Q3 22 and.
An increase of $32 million or 19%.
Okay.
Normalized net earnings increased by $15 3 million or 12, 6% in the quarter to $136 3 million.
Further fully diluted normalized EPS increased by 30 or 15, 7% to $2 in 'twenty one.
Included in the earnings for the quarter was foreign exchange gain of $14 million, which resulted from a $13 9 million gain from the revaluation of operating balances and a $100000 gain from the revaluation of financing balances.
As I mentioned the FX, the net FX gain impacted the quarter by 17 cents in EPS.
From a business segment perspective, the Q3 FX gain of $13 $9 million related to the revaluation of the operating balances was a result of an $8 $5 million gain in industrial and a $5 $4 million gain and mobility.
Yes.
Okay.
Further looking at the segments industrial sales increased by 26, 8% or $143 2 million to reach $676 6 million in Q3.
The sales increase for the quarter was due to the higher access equipment sales driven by global market share growth.
The positive impact from FX rates since last quarter and higher agricultural sales driven also by global market share growth.
Normalized industrial operating earnings in Q3 increased $47 6 million or 64, 1% over last year to reach 121 now.
$9 million.
The primary drivers impacting industrial earnings for the increased contribution from the higher access equipment sales the increased contribution from strong agricultural equipment volumes and the positive impact from FX rates since last year, which these are partially offset by increased SG&A costs that are supporting the growth.
Yeah.
Turning to mobility sales increased $192 9 million or 12, 3% over Q3 last year to $1 8 billion sales.
The sales increase in the third quarter was driven by the positive impact from changes in FX rates.
Increased volumes on launching programs the increasing volumes in certain mature programs the acquisition battery enclosure business and cost recoveries achieved in the quarter from our customers was partially offset.
Increased supply chain costs.
These are partially offset further by lower volumes in certain programs that are winding down to end of life.
Q3 normalized operating earnings for mobility were down over last year at $78 5 million in the quarter more ability earnings were impacted by the increased contribution on the higher launch immature program volumes.
Sales related to the acquisition of the battery How's your businesses, but these were offset by lower volumes on <unk> programs.
Favorable impact from exchange rates at the operating level.
The increased SG&A costs that are supporting the growth and also the net increase costs.
Have supply chain issues and that is the customer Jefferies.
I would note that the strikes at the Oems that started in Q3 2023 had no material impact to <unk>.
<unk> in the quarter.
Returning to the overall <unk> results. The company's gross margin was $343 million, an increase of $62 4 million compared to last year due to the same factors that drove the segment results.
Cost of goods sold amortization expense for the third quarter increased to $121 3 million compared to Q3 2022. This is mainly due to the launching programs. In addition to the acquisition of the battery and closures business.
<unk> amortization as a percentage of sales decreased to 5%.
Yes.
Selling general administration costs increased in the quarter to $139 4 million from $108 seven from last year. The increase was primarily the result of increased management and sales cost supporting the growth the.
The increased SG&A costs from the acquisition of the batteries closure businesses.
And finally, the increased travel costs that are also supporting the group.
Finance expenses increased $8 9 million since last year.
Mainly due to the additional interest expense due to the bank of Canada, and the U S federal rate increases since last year.
Increased debt due to the acquisitions completed last year in 'twenty, two and the share buyback program from last year.
Additionally, we also have the new private placement notes that were issued in June 2023, which was used to fund the battery enclosure business acquisitions. These were partially offset by increased interest earned that was driven by the interest rate swap from last year as well.
The consolidated effective interest rate for Q3 2023 was four 6%.
Effective tax rate for the third quarter increased to 25, 3% compared to last year, mainly due to the increase in non deductible expenses compared to last year.
We are expecting the 2023 full year tax rate, excluding the withholding tax issues in Q1, and Q2 to be in the range of 24% to 26% and higher than the 2022 full year tax rate.
<unk> cash position was $694 6 million on September 30th.
Decrease of $165 million compared to December 2022, mainly to fund the capex and the acquisitions.
In the quarter net of any cash generated from operations and the net proceeds from long term debt.
Third quarter generated $174 6 million in cash from operating activities.
Which is used to support those capex and debt repayments.
As a result net debt to EBITDA increased to 0.7 to nine times in the quarter from a year ago, mainly due to the acquisition of the battery enclosure plants in the quarter.
Based on our current estimates we are expecting 2020 threes remain.
To maintain our strong balance sheet and leverage is expected to remain low.
The amount of available credit on our credit facilities with $675 million at the end of the quarter, our avail available liquidity at the quarter remained strong at $1 4 billion. As a result, we currently believe we have sufficient liquidity to satisfy our financial obligations throughout 2023.
To recap sales and earnings for the quarter was a story of improving markets and increasing market shares in both segments, which drove double digit sales growth and EPS growth.
Supply shortages have been hampering the OEM productions have continued to improve adding additional sales to mobility.
The supply chain related cost issues continue to impact both segments, but Lamar has continued our discussions with their customers for sales price increases and cost recoveries. These negotiations remain ongoing for certain customers.
Despite these challenges in the quarter, we still maintain our liquidity levels at one 4 billion.
That concludes my commentary and I'd like to open up for questions.
Thank you, ladies and gentlemen, we will now conduct a question and answer session.
Question. Please press star followed by the number one on your Touchtone phone.
Zero three building knowledge in your request.
Your first question comes from the line of Chris <unk> from CIBC. Your line is now open.
Hi, Thanks for taking my question and congrats on the quarter I was wondering maybe we can just start with Skyjack. We've heard a few a few industry participants talk about a little bit of.
Softening in kind of in this area of industrials and I'm, just wondering if you're seeing that as well or what youre hearing from your customers.
I mean, we had very strong quarter for Skyjack and SaaS, we are seeing the market growing this year and next year. So.
We have actually a very positive outlet for our Skyjack business, partially based on continued market growth.
But also continued market share growth. So our forecast for next year is for double digit growth at Skyjack.
Okay, Great and then maybe just on the on the mobility side can you just give us an update on how the negotiations are going with your with your OEM.
OEM partners in terms of kind of compensation for some of these inflationary items.
Yes.
We sit down with them.
Very frequently.
We saw our costs and we look for ways.
<unk>.
Together to offset those costs with new business or things like that but we.
We certainly sort of take it one by one but we are definitely on the table and making deals to satisfy both.
And the customer.
And maybe just lastly kind of a broader question.
<unk> been very topical the past few weeks the slowdown in EV.
Sales and demand just wondering how youre thinking about that obviously there is a there is a longer term trend towards evs, but just what sort of near term implications.
Implications, you're seeing or you think you might see.
Yeah, I mean, you're absolutely absolutely right, we're seeing at several customers.
Dialing back in terms of their EV volume expectations.
So obviously, we are reacting to that quick.
Quickly in terms of any.
<unk> programs and capital that are that we're putting in place.
I believe the.
The other side to that is if they're not selling EV vehicles, there theyre selling ice vehicles. So.
As you know our strategy is one.
Around flexibility so our target is and has been for some time, ensuring we have a similar level of content per vehicle up potential in every type of vehicle propulsion. So.
Yes, things will slow down on the EBIT side that would be on the other side. They increase on the <unk> side, and we've got plenty of content and IP platforms as well. So the key is really to be flexible and I think for us.
Our strategy is flexible equipment that we can use for ice programs, our EV programs and we just need to be able to to shift between them as required. So if TV slowed down it means the ice is going to increase.
And we just need to be vigilant about where we're putting the capital on how we're managing those that commercial discussions with our customers.
I think just to reiterate I think really our competency is manufactured.
I think you can sort of see over the last few months our strategy playing out on the investing into vehicles as well that are agnostic right. So you see that with <unk>.
So, we just announced and as Linda mentioned flexible capital.
Inside with Nomura.
<unk> ability to redeploy if we need to.
Flexible equipment that could go across.
A nice vehicle or EV to think about a year.
Vaccine doses.
Moving to <unk>, So I think again.
Pushed out.
Okay.
We'll be there and certainly sitting available to customers is something we do to ensure the right capacity is in place.
Great. Thanks, I'll jump back in the queue.
Thanks.
Your next question comes from the line of Jonathan Goldman from Scotiabank. Your line is now open.
Hi, good evening and thanks for taking my questions I wanted to start off with mobility I believe the guidance last quarter was that you expected operating earnings to be flat or test in Q3.
It was down 17% I just wanted to note was that in line with your expectation not what changed throughout the quarter. Besides the UAW strike.
Yeah, I mean, the answer is pretty simple and it is FX. So if I look at constant currency. The last year, we actually would have been pretty close to prior year levels that earnings in our mobility segment. So unfortunately in something that's a little less easy to predict.
That that.
That was the impact this quarter, which normally is a little higher than the impact we normally see from FX, but.
It was really related to your probably more meaningful changes to the exchange rate than we would normally see in a quarter.
Okay that makes sense and just to clarify on the UAW impact the outlook considers everything up until the end of October.
Yes, so as Joe mentioned very little impact for us in the third quarter. We did feel some impact in October but I did consider that in my outlet for you for the fourth quarter from mobility.
Okay, perfect and then one more on the mobility outlook for next year calls for margin expansion. I was wondering if you can just dive into a bit of the drivers underlying that guidance.
Yeah, I mean, it's obviously linked to continued sales growth in launches, we've got a big uptick as I mentioned in launches next year $800 million to $900 million of incremental sales growth from launches that obviously has a big impact in terms of.
Equipment and teams that are in place launching those programs. So.
Sales growth is.
Certainly a part of that.
Continued cost improvement and price recoveries would would be a.
A factor as well.
Okay perfect. Thank you for taking my questions.
Sure.
Your next question comes from the line of Tami Chen from BMO capital markets. Your line is now open.
Good evening, Thanks for the question.
Wanted to go back to the cost inflation headwinds and recovery.
Did you like in Q3 would you say you did make progress overall with our with the customers and.
Just kind of seems like the cost inflation issue has.
It's impacted us more than some of your competitors I'm not sure exactly why that may be the case, but just wanted to get an update on that I know for example, Europe energy has continued to be a bit of a headwind and some of the other items too. So if he can just give a bit of an update on that that'd be helpful. Thanks.
Europe energy.
Come down through the year right. So it's not as big of a deal now than it was at the beginning of the year, but again I would say we deal with each.
Customer separately.
Lay out all the costs, so you're 100% of the cost.
That's what we try and achieve but of course, you're sitting down and negotiating with new business to offset.
Versus.
The cost impact great.
Regarding the competitors.
C.
We would I would be surprised if we're not at the same level of other competitors.
I don't know where that would actually come from so.
We are definitely focused on that.
Got it okay and.
I'm trying to understand the you're guiding to mobility margin expansion next year.
The key drivers.
The tool I know you are incurring a lot of launch costs right now from the big bulk of wins and then also the cost inflation headwind I'm just trying to get a sense of are you like between the two I mean, what is the larger headwind in one really should we start to expect to see that.
Full improvement in the mobility segment margin.
Yes.
Yeah, I mean I.
As noted we do expect to see mobility margins improving.
Next year.
I expect to see it happening really right out of the gate I as we get into next year and again it is really driving out of increased sales.
And on on all of these launching programs are pretty big incremental increase of $800 million to $900 million in sales on programs that are launching at the moment and so obviously that means assets that are in place people that are in place that are underutilized or going to be much better utilize next year.
Sure so.
Clearly that is going to have to make an improvement I would say again on the inflationary costs I have to say I think we've done an excellent job of offsetting inflationary costs with customer recoveries is there more to do of course. There is you know that that's always been moving that more.
Moving target, but I think we've done a pretty good job of offsetting a good chunk of those costs. So the recovery next year is more about better utilization of assets and teams as we launch these programs.
And Linda did I hear you correctly for the third quarter.
Did you say you were at with constant currency in the mobility segment. The OE dollars would essentially be fairly close to flat year over year, just wanted to make sure I heard that right.
They would be close to what last year was.
Which is exactly what we were expecting frankly.
If you recall last quarter, we said at best flat. So I in the absence of the FX impact that's exactly what we would have delivered.
Right. Okay. Thank you.
Yes.
Your next question comes from the line of Michael Glen from Raymond James Your line is now open.
Hey, good evening so.
Just to go over like the slide 23 in the deck are when.
When you have everything going on in the structures group it does.
I can't recall there being this much activity like you have the mills River.
Integration is still going on the well and get good casting now you're integrating the dura Shiloh and with the <unk> assets coming on I'm just curious.
Curious Linda how you're managing through all of this because it does seem like a substantial amount of change coming out of the company and are in a pretty short period of time.
Yeah, I mean I.
Yes, there's a lot happening in the structures group. This is a brand new group that we put in place with seasons Lynam, our people to focus on exactly that so we did create an entire new structure.
She is focused just on these are these areas of opportunity.
And I would say I think it's going extremely well I mean don't forget the battery enclosure business is.
Just three plants.
So.
It's.
A business that is of a size that we can manage that integration. It is a profitable business <unk>.
Similar sized two two.
To the battery enclosure business in terms of.
In terms of sales.
And also.
Profitable business out of the gate.
So that's quite helpful. It's not like these guys have.
A whole bunch of start ups and.
Problems that they need to to work through.
Is it.
Work for the integration team of course, but.
But we have a lot of confidence in the team that we've put in place. Yes. I would also just say so both the <unk> silo and depot box.
Duration teams on top of that we have the structures group, which as Linda said brand new.
And people and then we also have deep functional leads inside of Lindmark too that support that.
And so all of them have the integration plans. They all have standalone plants and managers in those plants. So yes for sure. There is a lot of activity, it's really getting them integrated to the system a little more on understanding how we do things right.
I think we've got really good capability.
Capability there.
Or are these are the dura Shiloh and the mall backs are those acquisitions accretive.
To the like a year to date margin in mobility is about four 5% call it plus or minus on a normalized EBIT.
Are these two acquisitions accretive to that margin.
I mean, there I.
Yeah.
A small smaller in size so they'd have to have some pretty hefty margins to move the dial on such a big desk.
Business right so.
I think that.
Both businesses are profitable.
And margins are are better than the overall, but they're probably not going to move the dial on the overall win that mobility business is.
$7 billion in sales in these two businesses are less than $1 billion.
And on the Mills River can you give an update are you making progress in terms of.
Where do you want to be in that operation.
Yes.
Few things won't change.
Change the product mix in the facility, meaning we've exited a couple of programs that were under water.
So those are done now and we have capacity that we can now fill we've streamlined the operation by reducing head count quite a bit over the last six months.
Leveraged our purchasing so definitely making progress.
Still more to go but.
Really good progress.
Okay. Thanks for taking the questions.
Your next question comes from the line of Brian Morrison from BB Securities. Your line is now open.
Good evening can we go back to the pro.
Cause mobility margin, please and specifically looking at normalized earnings and margin so.
I understand the FX impact on operating earnings does it also impact your operating margins as well is it transactional or just translational.
It's both.
You just have to keep in mind, depending on on the.
Currency pair that Youre looking at you could have a situation where.
You are naturally hedged.
So you have a sales impact, but it nets out at the OE is basically zero. So we have a number of currency pairs like that but then there is we have all the payers, where you may have little or no sales and you only have the expenses. So it does fluctuate from from.
Currency pair to currency pair, but in this specific case, yes, it was driven by.
Our net purchased exposure.
And changing rates from last year.
Okay. So deal just the four 5% versus the 6% are you able to give me a bridge just walk me through FX.
Launch costs inflation cost recovery and then the acquisition from Bureau, Shiloh in the notes it looks like it was actually quite positive contributor to the quarter. So can you just go through the buckets of what gets you to four 9% from 6% I realized sequentially it's flat.
Yes, like we said the big the Big change is really the FX as Linda noted.
On the operating margin percentage.
Well.
We had we took hits at the operating level.
The change in rates, so, yes, it impacts the margins.
So the margins go down if we're taking a loss on translation and transactional from last year.
I'm not going to clarify how much of that change.
Yes, I mean, we don't normally disclose specific details around transactional and translational exchange really for competitive reasons.
They often offset over time and we find our customers are way more interested in discussing pricing when they see us posting gains and not very interested in discussions when theres a lot. So we don't disclose the specific detail around it I'm, telling you directionally that it was an issue in the quarter, we're not going to give you the specific number.
And walk you.
From last year's margin to this year's margin and specific buckets, but I can tell you that if we had the same currency as last year, we would have been similar in terms of earnings level.
Two last year.
That's not the same as the same margin that's not the same as the same margin because the sales changed right.
I'm just trying to get an understanding because it's a pretty big delta as to what the buckets are that are really driving that since it's all FX on the operating margin percentage, that's fine, but it seems like a big movement.
Yeah, I didn't say that the margin would have been the same I said the dollars of earnings would have been the same and obviously sales were higher this year. So that would not have met the same margins.
Hello, Andrew your line, obviously underlying issues around costs that we're trying to offset with pricing as well.
And a big work.
Can you quantify the launch percentage so how much that's impacting because obviously that's going to be a tailwind as we get into 'twenty four and 'twenty five.
I don't have all those specific buckets for you now.
Okay.
When I take a look at changing gears to industrial.
You're obviously doing extremely well here when I look at the China, and Mexico facilities coming online at Skyjack are you able to give us a day.
A degree of capacity, how much capacity increases with those facilities online.
Yes.
We're able to come up about I'm trying to think of the best for the user.
<unk>, but I would say.
Unit sizes, probably 20% to 30%.
Unit output.
Okay, and then I guess in terms of the order book no.
Very comfortable with respect to growth despite the softening of commodity prices.
Yes, I mean, our book next year excellent right now.
For you guys.
Okay. Okay last question Linda I know I know this gets asked every several years, so I feel with how strong your industrial operations are performing how strong your balance sheet is your free cash flow positive.
The outlook for both segments is very good and yet you trade at four times EBITDA or maybe even lower at this stage, but I guess the question to surface value with these two businesses need to be.
Is there any reason that they can't see standalone, because it didn't need to be combined.
We feel strongly that they perform much better as one unit combined under Linda Mara then they would individually I, we've often talked about the deep interconnections between our businesses in terms of shared resources in terms of.
Linking and levering from a purchasing perspective from a systems perspective from a talent perspective, all of which becomes much more difficult if they become independent businesses. I think we have an excellent balance of independent independently run businesses.
That Ah you know getting.
Getting a lot more value from their deep interconnection and I will also say that we have done the analysis to look at whether it makes sense to do this or not and our conclusion was absolutely clearly that it is not yet Brian a couple of good examples.
Or relevant.
We see and we share amongst the group.
You guys know, we have <unk>, which is electrification palynivore, which a lot of people say, that's just auto focus it's not I mean, they are helping on the E drive system to controlling the actuation.
Mac Dawn.
Skyjack as well as Salford.
Just recently.
<unk> ended up with a supplier issue they needed machines help our centers jumped in we'll be able to help them immediately.
Relieve that which actually helped the sales continue and as Linda said, the the supply chain purchasing side to leverage when supply chain has been a big problem to be able to share that.
Back and forth has been incredibly helpful and to ensure that sales are there right. So.
For sure there is those synergies as you probably can see sitting.
Sitting inside.
It's not an easy question, but I think you've answered that very well. So I appreciate that very much. Thank you.
Pleasure.
There are no further questions at this time I will now hand, the call back to Linda <unk> for closing remarks.
Thanks, so much well to conclude this evening I'd like to as always leave you with three key messages first we are as well to deliver another quarter of double digit top and bottom line earnings growth, 16% growth in this environment I think it's something to be very proud of secondly, it's great to see continued market share growth in all of our businesses.
Content per vehicle hitting new highs in North America, and Europe, and access and AG King break gains as well and finally, we're excited to welcome another acquisition to the limit of our family with mobile apps and its solid casting technology combined with our existing strong product portfolio and our earlier acquisition this year of the battery.
<unk> business, we're rapidly and meaningfully transforming our mobility business to align to the future of mobility, while maintaining flexibility. Thanks, so much and have a great evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.