Linamar Corporation (LNR) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Edison Yu from the DB auto's team, and we're pleased to welcome Linamar to the conference. Just a brief overview. Linamar is a Canadian-based advanced manufacturing company with focus on the vehicle powertrain and also growing exposure to industrial end markets through its Skyjack and MacDon businesses. The format of this session will be a presentation with slides that should be visible on your webcast window. Then we will turn to Q&A using some of my prepared questions as well as questions from all of you on the call. [Operator Instructions] With us today from the company, we have Linda Hasenfratz, CEO; Mark Stoddart, the Chief Technology Officer and Executive Vice President of Sales and Marketing; and Kevin Hallahan, Global VP of Strategy, Corporate Development and Investor Relations. With that, I'll hand it off to the Linamar team.

Thanks very much, and good afternoon. So I am going to ask you to go right ahead to Slide 4 to get us started. So a few sort of introductory comments first about Linamar and who we are for those of you not familiar with our company. As Edison mentioned, we are a global advanced manufacturing company. What does that mean? It means we are taking the very latest in terms of leading-edge technology, much of it enabled by artificial intelligence and machine learning that is allowing us to do things quite differently today than we did even 4 or 5 years ago. And intersecting that with our deep manufacturing expertise built over 50-plus years in the manufacturing business to develop solutions for our customers. Going forward to the next slide. You can see the markets that we're focused on, which drives directly out of key global trends that we see happening in the world around us. The markets are transportation, infrastructure, food and agriculture, power, water and age, the latter 3 being markets that we are slightly invested in today and strategizing around expansion into. The first 3 are the markets we are primarily focused on today. If you go to the next slide, you can see our 3 core businesses focused in these 3 markets. On the infrastructure side, it's Skyjack; in food and agriculture, it is MacDon; and in the transportation and automotive, commercial vehicle world, it is our core Linamar brand, where -- in all of these businesses, we are focused on metallic component manufacturing, assembly, some casting, some forging, primarily machining, metalworking and assembly. If you go to Slide 7, I think you can see illustrated what we think is a unique value creation model that we've developed at Linamar. So what we have is these 3 quite independent businesses but -- which operate rather independently. But we have endeavored to sort of deeply interconnect them across a whole bunch of different areas in order to drive more value out of these businesses by virtue of their connection than they may have independently on their own, whether it be around areas like lean manufacturing, supply chain management, purchasing, obviously, sharing people, talent, global IT systems, and of course, global expansion, which is a key strategy for both MacDon and Skyjack that the core Linamar business is helping to enable. So I think we've done actually a great job of creating this balance of independent businesses that are value connected, that we're linking and leveraging, we're sharing best of practices, and we're supporting each other around the world. Going to Slide 8, you can see the key drivers of growth in each of these businesses. In the Transportation segment, the key driver of growth for us, we see, is electrification as well as increased outsourcing more broadly around metallic components and subsystems in the vehicle. For our access and agricultural businesses, we see product expansion. So product line expansion, doing more of similar types of products and global growth as being the key growth drivers in those businesses. So lots of exciting growth opportunities. Going to Slide 9. Clearly, innovation is at the heart of everything that we are doing. It was at the heart of that last slide that I just popped up for you, whether that be around product development, process development, material development to lighter, stronger, or potentially around manufacturing partnerships with tech start-ups. Digitization, obviously, is a major driver of innovation for us, and other kinds of tangential innovation is absolutely at the core of who we are. Slide 10 shows you some of our products. Our industrial products at Skyjack: scissor lift, boom lift, telehandlers; at MacDon, it's all about harvesting equipment as well as self-propelled windrowers. So you can see the fully autonomous equipment there that is operating in the field. On the Transportation side, really, 5 key areas of focus. First, around new energy powertrain systems. So lots of exciting opportunities here in terms of electronic axle components, gearboxes, for instance, battery tray assemblies, housing for electric motors, fuel tank for hydrogen, electric vehicles as well are all really exciting growth areas for us where we've been winning a lot of business. Body and chassis are growing areas for us as well, driving primarily out of our Light Metal Casting business, in both aluminum and magnesium. And then some of our more traditional products, you can see along the bottom there in the engine, driveline and transmission areas. Some of the most complex and tight tolerance-type products in each of those systems, whether it be gears or clutch modules, cylinder heads, cylinder blocks, camshafts, connection rods, to give you a few examples. So key growth strategies are on Slide 11. As noted, electrification is a huge opportunity. So growing market share in electrified vehicles is clearly a key goal for us, and then levering that outsourcing that's going on to grow our overall global content per vehicle. Our goal is to see a balance in terms of content per vehicle, global content per vehicle or market share in both electrified vehicles, whether they be hybrid, fuel cell electric or battery electric, and our more traditional internal combustion-driven vehicles. And we are making fantastic progress in that regard. I'll show you in a moment. In terms of our access business and our agricultural business, again, it's really about growing our international market share as well as expanding our product lineup, using innovation as the key. Slide 12 shows you a few different things that we're working on at Skyjack in terms of innovation, whether it be in terms of tracking equipment through mobile apps and giving our customers just better visibility in terms of what's happening with their products out in the field, to better ways of functioning and working equipment to give better efficiency, better fuel efficiency as well as safer operations for the folks using them. MacDon, on Slide 13, you can see, is a technology and innovation leader as well. They have over 100 unique patents. They are constantly refining, developing and innovating brand new ideas around their key products and are by far the market leader in the combined draper market, which is very exciting. In the transportation sector, again, technology leadership is very much key to growth in this sector. Here, we're focused clearly on light-weighting solutions. So we're seeing a lot of opportunity, particularly in our forging or in our Light Metal Casting business to try to remove weight. Innovation, obviously, in design, development of our products, particularly our e-axle gearboxes, as well as finding other ways to improve the fuel efficiency and the connected nature of our vehicles, that's primarily in terms of our driveline products. Slide 15 shows you that the global content per vehicle I mentioned a moment ago, you can see it split up here by type of vehicle architecture. So propulsion, you can see the bluey-green line, is internal combustion vehicles, the orange is hybrid and the gray, electric. I think the key point to see -- a couple of key points here. One, the lines are converging, which is exactly the strategy that we have, the same level of global content per vehicle in all these types of vehicles so that we are agnostic as to what happens when or how quickly. We have a strong business in every one of these types of vehicle architectures, which is excellent. I'll also highlight the rapid growth of the content per vehicle in electrified vehicles. Look at the hybrid, as an example. After only a few years, it is already at the same level that we were with internal combustion vehicles only a few years ago, a level that we built to over -- almost 50 years at Linamar. Slide 16 outlines some of the work that Linamar is doing around ESG. The environment, social and governance have all been absolute priorities for Linamar since our inception. Green technology is absolutely a key growth strategy in every one of our businesses, both in terms of product design and also in terms of processing and how we run our facilities. We have a whole series of initiatives on the social side, of course, charitable giving, but also doing quite a lot in terms of diversity, both within the company, where we have our Diversity Drives Results Initiative, which has been extremely successful. And in fact, we're recognized here in Canada by the Globe and Mail in their inaugural Women Lead Here list of companies. We're very proud of that. We're also doing a lot in the way of external promotion of women in leadership as well as more broadly in science, technology, engineering, math and trades. On the governance side, we have implemented a series of new policies over the last couple of years to ensure that our shareholders have better access to our Board, direct access to our Board through our Contact your Board process that they can directly connect with our independent directors, and also key shareholders have the opportunity to meet with directors on an annual basis. We've also done quite a bit of work around enhancing our disclosure and compensation and governance policies, which I think was very helpful. We also underwent a Board renewal process over the last year. We have a dynamic new Board member who has just joined the Board, Lisa Forwell, that we're very excited about getting to work with. Okay. Let's go ahead now to Slide 18 to talk a little bit about our approach to the current pandemic. So obviously, crisis management 101 clicks in, which, for us, is basically a 4-step process. Number 1, we get our team put in place. We put our COVID-19 task force in place early March, made up of senior executives, operational folks from around the world, HR folks in order to make rapid decisions as required and build a plan. Next step, gathering data, which we do on a regular basis to make sure we're making good fact-based decisions. Number 3, build a plan that looks at not just our shareholders, which, of course, are critical, but also our employees, our customers, our community, as we always do at Linamar, trying to balance out the needs of each of those stakeholders. We call it our Linamar Health First program because it's about the health of our employees, but also about our health financially and health of our communities and customers. And then, finally, really accelerating on the communications side, of course, with employees, but also with customers and with shareholders. So Slide 19, our current focus is very much on recovery. So creating a work environment where people feel and are as safe or safer coming to work than not coming to work. That has been our focus, and we have been extremely successful at implementing new safety protocols that do indeed make people feel safe coming to work. We are surveying our employee base in that regard every single week. And I'm proud to say that our workforce does feel safe coming to work and feels that the protocols that we have in place are what are needed in order to keep them safe. We're taking lessons learned from other countries ahead of us on the curve, obviously, in terms of the safety protocols, but also in terms of what we might expect economically coming down the pipe. And then very much focusing on rebuilding confidence in our workforce that, of course, they can come back to work safely, but also more broadly in the economy and our governments and that these lockdowns and isolations will end. Turning to a look at how markets are faring. You can see on Slide 20 what we're seeing in terms of light vehicle sales. So this is looking independently at China, Europe and the U.S. Of course, China is much farther down this curve than anyone else. They went through a significant dip back in February in terms of retail vehicle sales in the market, dropping 80%; recovering about half of that in March; and then by April, were showing a positive comparison to last year; and by May, a double-digit improvement over 2019 in terms of retail vehicle sales. So great to see that sharp recovery in China. Europe, a good month behind China. So you can see they're -- or probably 6 weeks behind. You can see their big decline was in April, recovering a portion of that in May. We do expect to see further recovery in June. The recovery in Europe has definitely been negatively impacted by France and Germany not having finalized their incentive plans for vehicles. They've been talking about launching incentives. It took them quite some time to actually come out with what they were going to do. Germany just announced theirs recently; France, not yet. So obviously, people are not choosing to buy vehicles until they know what these incentives might be. So that's negatively impacting the market. I think that the fact that Germany has announced their incentive and, hopefully, France will soon follow suit, should bode well for June retail sales. And then, very interestingly, you can see in the U.S. that light vehicle sales, retail sales did not decline nearly as much as either of the other regions. The impact was basically half of what we saw in terms of a dip in China and in Europe. The decline was 38% in March, 47% in April and back up to under 30% drop in May, so not nearly as negatively impacted as either Europe or China. What that has meant is the consumer has been surprisingly resilient. They are continuing to buy vehicles. And after 2 months of no production, the pipeline is pretty empty. So what that has meant is a more rapid recovery in North America than I think most people had expected. We're seeing stronger returns of volumes and a more rapid resumption of production than we've seen in the other regions, which, of course, is very positive for all of us in the industry. If you take a look at Slide 21, you can see an illustration of what this decline looks like. Obviously, in comparison to 2007 to '09, the peak to trough decline is much bigger. It was a decline of 11.1 million vehicles globally in the recession of '08, '09, whereas this is almost a $20 million drop -- sorry, almost a 20 million unit drop. But don't forget, we didn't see a decline in Asia at that time frame. So you're not really comparing an apple to an apple here, so you shouldn't be overly alarmed by this. Also, I will point out that the 10 long years leading up to 2009 has saw year after year of production decline, certainly in North America, notably -- most notably, whereas the decade ahead of this situation has not been characterized in the same way. It's actually been, as you can see, a period of growth, and it only started to tail down and it peaked out around 2017. So we were starting to see some declines in the last year or two. But nothing like the situation that we came into 2009 was -- which, to me, is a positive for the overall supply base that is in a healthier place. Looking at Slide 22. You can see a bit of a look back in history at what does the North American auto production cycle typically look like in terms of growth periods and decline periods. You can see that the decline that we've seen from peak in 2017 of 32% is not atypical. It looks pretty average to what we've seen in other cycle downs, which, to me, is a positive that we have fully flushed out the downturn in the market, and we should indeed see the growth that is currently forecast coming down the pipe. Quick look on Slide 23 at the access and ag markets. Access has been hard hit. It was expected to be down this year, which is the orange bars that you can see for North America, Europe and the rest of the world, which is basically China. So they were -- it was expected to be down in North America and Europe. The gray bar is the Q1 forecast, so the post-COVID forecast for those regions, which you can see is now down much more dramatically. The green-blue bar is showing you Q1 for each region, which is -- all of which are down sort of 30%, 35%. So that market is definitely feeling the impact. The agricultural market, interestingly, down from last year but not really related to COVID. That decline in the first quarter was actually anticipated already last year based on a poor harvest and also the trade issues between primarily the U.S. and China. We did not see any further decline in the markets related to COVID, so it is a much more resilient market. And you can see also April sales comparison to last year actually closing the gap. So looking a little bit more positive. Taking a look back, again, at our recovery and how are things looking in terms of our current plant status. You can see we resumed production in China more than 3 months ago. We started back into production on February 10. We are basically back to 100% of where we thought we would be by this point in China. Notably, we have not had 1 single case of positive COVID in China since our restart after 3 months of operation. So good evidence that the safety protocols are working. Europe has been back since the beginning of May, and North America back since the middle of May. So we're sort of 3 -- so we're in our fourth week of production in North America and basically sixth week in Europe, and it is all going extremely smoothly. So what's our action plan? Well, obviously, a quick focus on cash reduction and cash conservation, I should say, and cost reduction are absolutely top of mind. We rapidly cut capital spending in our first quarter by 25%. We're targeting to be down at about 1/3 for the full year this year compared to last year. So we have moved very quickly on the cash conservation front. Obviously, we've made workforce adjustments and spending cutbacks in a whole variety of areas. As well, we've put a global cost team in place to pursue additional cost and waste reduction ideas and have seen some great success in that regard. We are utilizing our highest level of cash payment controls so that we can very carefully manage our cash situation. And we also have an excellent system in place by which, on a weekly basis, we can see out the next couple of quarters on a very detailed basis to give us kind of up-to-the-minute visibility on what's happening in terms of sales, earnings and cash. On Slide 26, you can see the cost reduction -- the cost reductions that have been implemented to date, almost $24 million of cost reductions that have been implemented. And another 20 -- more than 20 initiatives that are still in process that have not yet been fully implemented. So that, that global cost team is doing an excellent job. Slide 27. Obviously, the balance sheet is a key focus. Happily, the balance sheet is strong. We came into 2020 with a very strong balance sheet, over $1 billion of liquidity. We grew that to $1.2 billion by the end of March. So we are very well positioned to manage the next couple of quarters in terms of liquidity and cash. We are clearly carefully stress testing as well to understand our limits. And we remain confident that our focus, our responsiveness is absolutely going to see us through this situation. We have no debt maturing this year. We do not anticipate breaching covenants even when we apply those stress scenarios. So I mean, obviously, it's tough to predict the outcome of this situation. But what I do know is we react quick at Linamar, and we're keeping a close eye on all expected impacts to make sure that things go extremely smoothly. Just to give you a sense for the kind of stress forecast that we're trying to put through, compared to pre-COVID, we are conservatively estimating trimming at least half of those earnings. And then we're cutting it in half again for the stress test to just make sure that we are comfortably in line. As noted, liquidity is absolutely not an issue. We have $1.2 billion of liquidity available to us at the end of March. You can see here the cash flow. We have been cash flow positive in terms of free cash flow every year for the last 5 years. We will be this year again. Our free cash flow yield is extremely strong and has been for the last couple of years. And we feel that our solid liquidity and strong balance sheet positions us really well for takeover opportunities for suppliers who may not be in as strong a position. Just flipping ahead to community support. There's all kinds of things that we have been doing to support our communities. Slide 31 details all the work that we're doing around ventilators, for instance. We have 5 different contracts for either fully assembled ventilators, subassemblies or components of ventilators as well as the full assembly of a UV-based disinfection unit for utilization in hospitals and businesses to make sure mobile equipment is being kept clean. We moved extremely rapidly in this regard. The parts -- the contracts where we are making parts, we had tooled up and were in production within 2 weeks of the order. We were assembly-ready for our UV disinfection unit in 4 weeks and made our first 50 units, in fact, last week. And we were assembly-ready for our fully assembled ventilator, which is actually much more complex than just a ventilator. It's basically an ICU in a box, which we -- which -- it includes 1,700 different components. And we were production-ready with the supply base set up and ready to roll in 6 weeks. And I attribute that 100% to our organizational culture and the manufacturing and technical expertise and agility of our team. We reacted extremely quickly, but we do react quickly. That's who we are as a company. Our equipment is flexible. And that means we can make a variety of types of parts, that's why we can pivot so easily. And our team is responsive. It is technically excellent and can adapt to make new products very quickly but very capably as well. Slide 32 shows you all the other things we're doing in terms of supporting our communities, whether it be around donating personal protective equipment, managing PPE inventories for local hospitals, donating and -- producing and donating other types of protective equipment for our local health care workers. And all kinds of interesting innovative things we're doing, 3D printing, touchless door openers or ear savers to help out health care workers as well. So just a quick glimpse of what we have been doing at Linamar. And with that, we are happy to turn to your questions.

Great. Thanks a lot for all the color. Yes, so just starting off with the questions in the near term. You provided quite a bit of commentary on the recovery. Just curious more on the supply chain. How is that sort of looking? Do you see any bottlenecks in North America? How is that trending?

No. So when the shutdown started in Asia Pacific, our purchasing teams were in contact with our supply base. And throughout this process, as the shutdowns happened in Europe and North America, we continued to communicate and talk with our supply base to just see how they're weathering it. And then, obviously, once the auto industry and our access and ag business started to come back, talking to them about ramp-ups and getting back into delivering product. Today, we have not had any significant issues with our supply base. During the process, we had a couple that actually went into bankruptcy. We've -- we're able to move that product to other suppliers. And in some cases, we actually were able to absorb some of the product because it was a casting and put that into our own casting facilities. So to date, we really haven't had any issues. There's a few that we're monitoring that are sort of touch-and-go but no disruption to our production.

Great. And kind of along those lines, in terms of the customer launch activity, have you been seeing any delays, any major delays? I think there's some programs out there that happened. But just curious what were you kind of seeing in terms of just the schedules?

Yes. I mean we definitely saw some programs being delayed. But at the same time, I think that the OEMs are sort of reacting quite quickly to what's going on in the market and trying to balance the market needs and what they need to ramp up when, and some of these new product changeovers that they've got going on. So it's a bit of a moving target right now. But we are in lockstep with our customers. So if something's going to get pushed out a month or 2, then we can react quickly to that.

And just to add to it, on the stuff that has been announced, say, in regards to like Ford with the F-150 pickup truck that is -- pushed it out about 3 months. We have a program for the new axle shaft that goes into that -- the new pick-up truck, but we're also the current manufacturer of the current axle shaft. So no big issue. And then in regards to the powertrain side, on any of the products that have been announced that are -- been delayed, the engine or transmission are a carryover into that new product. So it's not -- even though there's been a delay for a few months, it's not impacting us because of the carryover of the powertrain.

That's good color. And then shifting a little bit longer term to the electrification opportunity. Could you maybe discuss what you think are the most untapped potential in EVs for you? And I believe you have a couple committed wins lately for some of e-axle components. Maybe go over that, and maybe what we can expect going forward.

Yes, absolutely. I mean we have a strong portfolio of products for electrified vehicles. And as you've noted, we've seen some exciting wins over the last 12 months, in particular, but over the last 2 to 3 years as well. So obviously, on the gearbox side, that's been a big area of focus for us. So the actual electric powertrain includes the gearbox, which is an important element in the propulsion of the electrified vehicle. It is an area where we have exceptional expertise in terms of gear manufacturing and design. And we have, thus far, been awarded 3 programs for e-axle gearboxes or -- and in some cases, I think, additional componentry within the e-axle. Another exciting product for us is the battery tray, which, at first glance, sounds like not a very technical product. But in fact, it's highly technical and complex because it has a lot of internal passageways designed to help manage the cooling of the battery system. So we recently picked up a program that we were really thrilled to win for a battery tray assembly, which we think is an exciting product there as well. Mark, do you have something to add to that?

Yes. I -- as Linda said, there are a lot of activity around electrification. A lot of our programs that we've been working on have been in and around Asia Pacific, China, more specifically, and in Europe. On the North American side, there's, of late, been some recent activity. So it's really great to see. I'd say one of the unique areas in North America that we've been participating a lot has been around the commercial vehicle, sort of the Class 5, Class 6 delivery-type vehicles. We have 2 programs that are under development with United States government, through the DOE, in regards to electrified vehicles. One's a pure electric vehicle, and another one is a fuel cell-powered electric vehicle. So we're seeing lots of neat opportunities, not just on the passenger car, but also in the commercial vehicle.

And just -- I know we're running out of time, just one last one. In terms of the competitive environment, on the electrification side, are you seeing that it is more competitive? Are you seeing the same players? Are there new entrants? How are the dynamics shaping up there?

No. I mean it's pretty much the same players that we've seen, mainly in our Driveline area, right? So Magna, GKN, BorgWarner, American Axle, companies that we've competed on driveline product, especially the RDUs, the FDUs that were used in internal combustion-powered vehicles. It's kind of the same gearboxes that are being utilized for the electric vehicles. In some cases, they're smaller. In most cases, their -- the tolerances are much more tighter because of the NVH. Now with no engine, the gearbox is sort of the leading driver of noise and vibration. So it's pretty much the same. I mean we -- you definitely have seen some new entrants and some may be more within the country. So there's been a lot of companies that have popped up in China, but we continue to see them struggle just because these are difficult systems to design and engineer and manufacture. So we've been fortunate to be able to continue to win new products.

Fantastic. I think we're running over a little bit of time already. But I just want to say thank you again for joining us. And I don't know if you have any concluding remarks but, from the presentation, very insightful. I'm sure everyone on the line did as well.

Okay. Great. Yes. I mean just in conclusion, I think Linamar is in an excellent position right now despite the environment that we're in. Culturally, I think we are perfectly suited to handle this kind of crisis, and have absolutely delivered in terms of cash generation and cost reduction to manage this situation. We're finding new business opportunities. And we're managing this ramp back up, which is going better than expected in North America. So we're feeling very good about where we are and how we're getting through these challenging times. Thanks very much.

Thank you.