Linamar Corporation (LNR) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Linamar announcement of the Bourgault acquisition conference call. [Operator Instructions] We'd like to remind everyone that this call is being recorded today, Wednesday, December 20, 2023. I would now like to turn the conference over to Linamar's Executive Chair and CEO, Linda Hasenfratz. Please go ahead.

Thanks very much. Good afternoon, everyone, and welcome to the call to review our latest exciting acquisition here at Linamar. I feel like our team has really hit it out of the park this year, finalizing 3 excellent acquisitions, all 3 businesses accretive immediately, all bringing excellent technology to the table and significant strategic value and all without creating excess leverage for us at Linamar. Our balance sheet after 3 acquisitions will see net debt peak at just under 1.4x EBITDA and return under 1x in less than 12 months. Before we get started, I will draw your attention to the disclaimer that we are currently broadcasting. Okay. I'm going to go ahead and get started. We'll talk a little bit about Bourgault and the strategy behind the deal. So we are very excited to introduce you to Bourgault. They are another technology leader in the agricultural short-line equipment space. Bourgault is a specialist in seeding systems, such as air seeders and air carts, and Jim's going to describe all that for you in a little more detail in a few minutes. Bourgault has an excellent reputation and a very strong brand name in the industry for very high quality and advanced technology and a real focus on constant innovation and improvement. We see excellent growth potential with the business. It is not dissimilar in size to what MacDon was when we acquired it 5 years ago, and we have doubled MacDon sales in that time frame. We certainly hope to do the same with Bourgault. So just as a bit of a reminder, as most of you know, Linamar's long-term vision is to focus on these 6 markets where we see significant technology and market evolution over the coming decades as a result of the key global trends that are underway. And food and agriculture is a key market in this long-term vision, and we are rapidly enhancing our footprint in that market. Turning to our agricultural strategy. As you know, our strategy is feed the world with a product strategy across a spectrum of types of crop farming. Our focus is on short-line equipment, which, simply put, are specialized products in the agricultural space that are not typically dominated by big players. So we now have 3 well-respected short-line OEM agricultural brands. We have more than 400 patents for unique technology across our entire portfolio. We are selling now in more than 30 countries with nearly 2,500 dealers and distributors around the world. So we've really created quite a broad strategy around our agricultural products. This next slide, I think, really illustrates well how we are now completing the full span of agricultural products with our 4 agricultural brands, from field preparation to now seeding and planting with the Bourgault team, crop nutrition that our Salford team plays an important role on, harvest and post-harvest, which, of course, our MacDon brand as well as our long-existing OROS brand out of Hungary also play an important role in. If I look at our strategy in the agricultural space, it is pretty simple. Again, all of our agricultural businesses are short-line OEMs with complementary distribution channels, which is really helping to enhance their future growth opportunities. Our products are differentiated with a bias towards unique technology based on strong intellectual property in each one of those businesses. And finally, we really prioritize customer connections with very strong aftermarket and service relationships. We have a great brand recognition with our customers who really value our product for its technology, for its reliability and for its ease of use. Our agricultural businesses will come together under an ag group that we are creating within our Industrial segment. You can see it illustrated here. So the ag group will still report up under the Industrial segment from a financial reporting perspective. The agricultural group has led this deal opportunity and will be fully responsible for the integration of Bourgault into Linamar. I think this slide does a great job of summarizing the strategic rationale for this deal, which, as I say, is strategically quite beneficial. So again, another world-class short-line agricultural equipment manufacturer, which really complements the existing lineup of products that we have, as I just showed you. We are at the forefront of industry technology advancement and R&D. They have a great team at Bourgault with excellent industry knowledge and a real passion for innovation and design, which is outstanding. As noted, significant growth opportunities. As I mentioned earlier, we doubled MacDon's business in 5 years. We hope to do the same with Bourgault. I think it helps to expand our Industrial segment further and further -- provide further diversification for us. I'm going to talk a little bit more about that at the end. We see substantial synergy opportunities, both in terms of sales growth and revenue growth, through levering our distribution channels as well as cost synergies from being part of a much larger organization. And again, the deal is immediately accretive and generating cash, which is excellent. So with that, I'm going to hand it over to Jim to talk to you in a little more detail about the business. Over to you, Jim.

Great. Thanks, Linda, and welcome, everybody and great to be here today and taking a couple of minutes as well. I just have a few slides that I'll hit upon here, but really to give more of a overview of this really exciting transaction. I mean, first of all, for you guys to know, we're calling this our third down project. Basically, this is the third acquisition that we have done to build our short line sort of powerhouse company to really hit the strategy of feeding the world and serving customers in the different ag implements in market. So great to have this as well. If you hit the next slide here, really, Bourgault is really a well-known agricultural brand who Linamar, quite frankly, has admired for some time. If you go back to the day when we bought MacDon and did our first growth off-site regarding agriculture with them, this was a clear target and discussion point we really thought were complementary. And the company, as you can see here, has been in business for about 50 years. Clear market leadership in the seeding segment with their innovative air carts and air seeders. I mean they have been consistently ranked as a top for the short-line ag equipment in North America. In fact, top in the 3 of the last 6 years from the dealer associations. They're in St. Brieux, Saskatchewan, headquartered there; about 1,000 employees; very experienced senior management team that we're excited to have part of the company. They are around $500 million in sales, a huge, strong order book out of the gate here and another company that has sort of lower capital expenditures. And you can see as well, about 1 million square feet in St. Brieux with other manufacturing support around the world. So really, a clear global type company as well that's fantastic to see. And if we flip to the next slide, these are the products, right? And this is the core business of the Bourgault branded portfolio, which we mentioned already includes the air carts, both the hoe and drill seeders, as well as the combined Frame Mounted Seeders. And also part of this transaction, we're acquiring the divisions of Freeform Plastics, it's a roto-molding business; and the Highline Manufacturing line. And Highline, which you see here, includes the feed handling, hay bale processors and feeding equipment for farm livestock operations. So great to have those in our portfolio as well. And if we move to the next slide here, okay, innovation, technology. Linda hit that pretty well, and this is a company all about innovation and technology. And you saw earlier that seeding was one of the areas that Linamar agricultural portfolio, we didn't really address, right? And so with Bourgault, we now have that leading range of products really enabling our market participation in the full crop production cycle. And if you see Bourgault's expertise, it's really in leading edge in terms of specialization in soil science and agronomics. And you can see here on the screen, TriMax, AccuSet and the Hi-Flotation are 3 of their key trademark innovations. And this, again, about the product and technology that Bourgault delivers a precision ag-based prescription of the seed accompanied with the fertilizer to soil the bed, which maximizes the initial seed growth. So really innovative portfolio. Going to the next slide, you're going to see, we're going to really use our global operating systems, which we've talked about, and the integration approach to achieve our synergies across these businesses. And that's both in terms of, on the left, the growth synergies through international expansion, greater distribution reach, our collective R&D for like technologies across our Industrial segments and then really focusing on enhancing aftermarket spare parts and product support. And Linda, I think, will show a little bit of this later. In terms of efficiencies, on the right, we have the ability to link and leverage our combined purchasing efforts, of course, utilize the broader Linamar Industrial segment operations for manufacturing best practices and then really be able to employ the best available back-end operational systems and software. So really looking for that link and leverage which we've used in several of our acquisitions before. If you go to the next slide, I mean, Bourgault acquisition, as I said when I started, it's the third strategic acquisition of 2023. It's not impacting from the Battery Enclosures or Mobex integrations. These are separate resources and leadership groups. So they are all independent. And I think as well, just it's important to note, our '22/'23 integration of Salford was ahead of expected plan. So that's really good to see. This will maintain our momentum with an ag-led integration. So again, separate than the mobility side. And really, the management side, we have the capacity and the ability to execute this on the industrial side. So that's everything from my side, and I'm going to hand it over to Dale now to look at it from the financial side.

Thank you, Jim. Good afternoon, everyone. I just have a couple of slides to go through. So if we go to the first one. From a transaction point of view, we are acquiring 100% of the equity of Bourgault. We are looking to finance this through a committed financing deal that would close with the closing of the deal, which is expected in Q1 of next year. As Linda commented, even with the increased debt that we're raising, leverage will still remain low and continue our trend of a strong balance sheet with net debt-to-EBITDA at close of around 1.4x. You want to go to the next slide, please. So how does this impact the overall Linamar and the segments? I think this is a very interesting historical look at it. If you look prior to buying MacDon, Linamar represented about 80% of our earnings in mobility with industrial represented really by Skyjack and our long-term [ OROS ] agricultural division. With the addition of MacDon in 2016/2017 time frame, Salford last year and now Bourgault, we will see the segment now representing 55% of our total operating earnings and mobility at 45%. So it further strengthens our diversification plan, as Linda talked about, in our 2100-year plan. And we've seen the benefit of that diversification this year with the strong earnings year-to-date Q3. Next slide, please. So as we talked about, we always maintain a strong balance sheet. Even going back to when we bought MacDon, we peaked at that time period of 1.8x. Still relatively conservative balance sheet at that time even with it, but we have a trend of quickly delevering. The slide doesn't go back quite far enough because we did buy Montupet in 2016. So that's part of the reason why the leverage stayed high, but we quickly came back in 2020 to the point [ we became ] actually negative in 2021. And even still at 1.4x, we're under our target range of max of 1.5x on a normal operating basis. So still very conservative, and we have a horizon of being back under 1x within the next 12 months. So we'll quickly delever with the free cash flow generated by the acquisition and the underlying Linamar business. And with that, I'll turn it over to Linda for concluding comments.

Thanks very much, Dale. I want to wrap up by talking a little bit more about Linamar's overall strategy and concept around building a diversified business at Linamar. I think this is possibly not well understood. And I have to say that this model is a very powerful model that drives consistent, sustainable performance at Linamar, and I think it's important that it's well understood. So 20 years ago, we started down the road of building a diversified business model at Linamar with our first major acquisition outside of the mobility space, which was Skyjack. The goal was always to build a strong business with consistent, sustainable top and bottom line growth with good free cash flow, with strong margins and a strong, stable balance sheet. And I want to just explain a little bit about how this works. So our mobility business is a strong global business. It's got a deep talent pool. It's got strong expertise around lean manufacturing and supply chain management. Volumes are high, and purchasing power is strong, right? It's a big business. It's got lots of great purchasing power. They have excellent growth potential, probably more than we ever have seen with the technology evolution that we're seeing in the mobility business today. But they are a very capital-intensive business. Industrial businesses, on the other hand, have excellent brands. They have market-leading technologies. They are very profitable and strong cash generators, thanks in large part to their relatively low-capital intensity. They have tended to be a little more North American-centric when we acquired them but with great global growth potential. And they do run at lower volumes, which, as a result, means a limited purchasing leverage as a result. So here's how it works. Mobility segment, huge asset for the industrial business by bringing supply chain leverage and lean manufacturing system capabilities to these businesses. It is why the industrial businesses have such strong profitability because the mobility business supports them in terms of that supply chain leverage and lean manufacturing. Mobility also helps the industrial businesses grow globally by tapping into that global business, right, that global network that we have, as well as by supplying much-needed talent. In turn, the industrial businesses provide valuable brand management knowledge to the mobility business and importantly, much needed cash for continued investment. As well, the businesses run on a little bit different cycles. They don't all peak and dip at the same time. In addition, mobility dips are lower than industrial dips, which helps to kind of temper the impact of a down cycle in these various markets. So the net result is consistently strong profits, consistent free cash flow, consistent top and bottom line growth, all while maintaining a strong balance sheet. This is our powerful, synergistic diversification model, and it is one we're very committed to maintaining; hence, our investment this year, as you saw, in both sides of the business. So I said it's consistent, sustainable growth. You don't need to just take my word for it that this model drives consistent, sustainable results. You only have to look at our track record, and this slide does a great job of illustrating that. Year in and year out, with very few exceptions, we are delivering top and bottom line growth. The strong majority of those years, we are delivering double-digit top and bottom line growth. We are delivering free cash flow. We are also delivering double-digit return on capital. If I look at return on capital, we have been in double digits 93% of the last 14 years, every single year but one. That exception being 2020, the peak year of the pandemic when we were shut down for a couple of months. We have generated free cash flow 11 out of the last 14 years and every single year for the last 10 years, and we expect to do so again in 2023. That is more than $4.2 billion of free cash flow over the last 14 years. This model works exceptionally well, and it's one we remain very committed to, to continue to drive our prosperity into the future and one, I think, that from an investment perspective, makes Linamar a very attractive investment. So a couple of concluding thoughts before we turn to questions. We believe this is a fantastic way to end off the year with the third excellent, accretive acquisition completed. As we've illustrated, Bourgault is another technically superior short-line company that really complements our existing agricultural portfolio. The deal is immediately accretive. We see significant growth opportunities for the business. And the deal further advances this powerful, synergistic diversification strategy that we've developed here at Linamar. So with that, we are happy to turn to your questions.

[Operator Instructions] Your first question comes from Michael Glen from Raymond James.

So I guess what I -- can you just help me in terms of understanding? If I think about the 3 brands, so MacDon, Salford and Bourgault, if I'm thinking about how those different products are sold now through the dealers and how that might evolve, I'm just trying to get a sense as to are the dealers are going to be selling all 3 brands? Or is that something -- I'm just trying to understand how the sales channel for the products work.

Yes, absolutely. I mean the way that we sell in all the businesses is through dealers often affiliated with one of the larger brand manufacturers like Case New Holland, for instance. So some of these dealers are already carrying more than one of these products. Like some will be already carrying both MacDon and Bourgault or even all 3 products. So what it is, is an opportunity to expand our product line distribution channel on a more global basis for all 3 products. Jim, did you want to comment a little more on that?

Yes. I would say, Michael, it's exactly as Linda said. So the dealers overlay we have for all 3 are excellent because there's complementary ways to help grow each one of these product lines. But all of them go through a dealer network. And secondly, a lot of them do carry these brands already. So the idea of the synergies of growth in different regions where, let's say, MacDon wasn't strong or Bourgault isn't strong can really drive further revenue growth. And then also, what we can provide, too, back to our customers is more synergies on backroom, things like I had mentioned on the service parts and product development and software stuff that can really create some of the synergies on the short line side. So really, it's really a great way of looking at the growth side to further the brand in the marketplace.

Okay. And the comment made about the doubling of sales at MacDon since you acquired it, can you just work through like what were the big levers there to actually doubling sales? Because I wasn't aware that it was of that degree of magnitude, the sales lift that you've seen. I'm just trying to get a better idea of what you did there specifically to -- like what were the big buckets of sales increase there?

Yes. I mean when we acquired MacDon, they were roughly $0.5 billion in sales, and they're over $1 billion in sales now. So we've done a great job of doubling this business. And we've talked about the strategies to grow the agricultural business as being a combination of international growth. So taking these products that were largely sold in North America and really expanding the global reach of those products, whether it be in Australia, in South America, in Europe. So growing on a global basis has been a big part of what they've done, as has continued product innovation. So MacDon has done an amazing job of continuing to develop great innovative products that our customers are looking for. So that has been a big part of the growth as well.

Okay. And are you able -- go ahead.

Yes, I was just going to add in, certainly, just volume -- [ peer ] volume has helped in the globalization, as Linda said, but also partnering with some of the key customers in regards to innovative products that they no longer are going to manufacture, right? So we've been able to gain that through, what Linda said, our innovation and, say, rather than doing some of them on their own, they come to us.

Okay. And then I think you touched on it, but we should be along the lines of thinking that the management team here is largely going to stay in place. Will there be -- is there any anticipated turnover with management at the acquired company?

I mean the company is today led by Gerry Bourgault, who is, in a way, is, of course, selling the business and will be exiting. But he has an excellent team in place there. So a natural succession that was already put in place, and we're really excited to have that team joining us at Linamar and continuing to drive the business forward.

Your next question comes from Tamy Chen from BMO Capital.

First, Linda, could you just talk a bit more about how this transaction came about? I think you mentioned in your opening remarks, it's a company you've admired for some time. Just wondering why now during what some investors worry may be potentially peak ag cycle.

Yes. So I mean, Bourgault is a company that we've sort of long had our eye on. We really like the technology. We like how the business is run. We like how it complemented our existing lineup of products. So we've been talking to them on and off, and the timing was right at this juncture that the family was looking to make an exit. So the timing came about -- and as I say, after some time of developing this relationship. I think that the transaction was completed at a good valuation when we consider the growth potential that we see in the market. I think that the timing was actually good in the sense that it comes at a time when all of our businesses can really complement and create growth. So I mean, we obviously took into consideration where we are in the ag cycle and other variables that might impact the future earnings of the business. But we believe that we've got great opportunity to grow this business just as we did MacDon and think that the timing is good for that.

Tamy, it's Mark. If I could also add. Also, yes, we're seeing the mainliners, the OEMs, kind of looking somewhat negative towards 2024. But we're kind of not seeing that in regards to our business on the short-line side. It seems, yes, maybe there's slowdown on some of the big-ticket items like the combines, large tractors. But we're seeing indications that for our product, whether it's on the MacDon on the harvesting for the header units or with Salford and Bourgault, seems to be seeing things fairly strong. So we're not that negative about it. We do see that there is some good things in regards. And the farmers, I mean, they're still -- they want innovation. They want product that produces better yield, that reduces their overall costs. And obviously, a $100,000 or $150,000 header unit or seeder, that's significantly less than a $1 million combine. So we're not seeing sort of the negative stuff that the OEMs are talking about.

Oh, interesting. Okay. And my other question is -- you gave some financial numbers already, which is helpful. I'm just wondering, can you comment on some of the other areas I'm wondering about, which would be just recent years of growth of this business, what the geographic mix is? I assume it's skewed heavily to North America. And if you could talk a little bit more on the competitive landscape for these types of products that the business is involved in.

Yes. Sure. So as noted, sales are in the sort of $450 million to $500 million range. The business has been sort of slowly growing. We expect to be able to see more meaningful growth for the business going forward. I'm going to turn it over to Jim and Mark to talk a little bit on the competition side. But last comment on the sales side is, yes, they are a little more North American-centric, which is exactly where we see growth potential is to grow within North America further, of course, but also, again, to look to the global stage just as we did with our other businesses.

Yes. I think just from the technology and the competitor side, that's where -- and Mark hit this as well. I mean that's the leading thing that Bourgault is able to grow with, right, based off their technology. And their competitors are not too distant like MacDon where some of the OEMs have product lines that we would compete with. But then, again, going back to the innovation, technology piece, if you're doing that, then you're going to be able to get it through the dealer network. And to the point of where North America is really centric of where Bourgault is, so as Linda stated, there's a ton of opportunity to look for global expansion.

And Tamy, if I could add, if you look at Bourgault like in regards to their air carts and seeders, precision ag, which is really the largest part of their sales, Bourgault is by far the industry leader like in cereal crops. So they do -- they've got a very, very impressive innovative portfolio already established. And as Linda and Jim talked about, we see this as a great platform to be able to grow them in regards to expanding their product but also geographically.

Yes. And then just another comment that I don't think we've said yet, but air carts and the seeders are really like the main Bourgault products. Of course, the Highline feed handling and processing products are really well-established brands, too; and then that Freeform Plastics that we talked about, which is an interesting tank manufacturing company that Bourgault owns, which is roto-molding, which is basically a hollow mode filled with resin and stuff like that. And so they've got a lot of adjacent products that we can pursue in the market, too.

[Operator Instructions] The next question comes from Michael Glen from Raymond James.

Okay. I guess me again. Can you just give us some indication? It looks like a high single-digit EBITDA multiple that you're paying. Maybe just provide some clarity on that. Is it like in and around 8x EBITDA? Or is it something different than that?

Yes. I mean we don't typically disclose a specific multiple, but it is in the same kind of range as what we have paid in the past for businesses like MacDon or Salford, probably a little less than Salford and in line with what you might expect for an agricultural business. I can tell you that the business is profitable. It performs in line with our normal Industrial segment operating margin of 14% to 18% of sales. So it's going to fit right in with the other businesses there. And we do expect, as Jim was outlining, to see synergies from a cost perspective as we gain some purchasing leverage with both the other agricultural businesses and the overall Linamar business. So we do expect to see them grow through that range over time.

Okay. And the financing rate on this, I guess it's going to be on a revolver. So it would be like a 7% type financing rate to think about?

Dale, did you want to...

[ I can handle that question ]. Yes, no, it's not a revolver. It's a 3-year term loan. The terms and conditions of it is similar to our revolver. Pricing is basically similar as well. So you won't see a significant difference in our financing costs than you would under existing debt facilities.

Okay. And that rate would be about 7% right now. Is that a safe assumption? Or is it something different than that?

Yes, we wouldn't be paying that high of a rate, no. But we haven't disclosed our actual borrowing rate. But you know what our effective interest rates are from our quarterly announcements.

Okay. And just to go back, I'm just trying to get a better sense. When you look across the various dealer networks, like can you give an idea of -- like is there a lot of opportunity here for you to put this product where you have MacDon product and vice versa? I'm just trying to get a better sense of that, the overlap within the dealer network that you see.

Yes, there's absolutely opportunity to get the product into dealers that they're not in today. So that's exactly what we're talking about when we say that there are synergistic opportunities in terms of distribution.

And when I look on the dealer network right now, does it skew into Canada where the product is sold right now?

What do you mean by skewed?

[indiscernible] Canada. We're in the U.S. We're in Europe. We're in South America. We're in Australia. I mean we have a global distribution [ network for our businesses ]...

Does the sales skew for Bourgault into Canada? Or is it like...

Yes, [ they do ]. Yes.

Yes, Michael -- Western Canada is a major market for Bourgault, for sure.

Yes. Manitoba, Alberta, Saskatchewan are the key markets.

There are no further questions at this time. Linda, please proceed with your closing remarks.

Okay. Thanks very much. Well, I'm just going to flip back up that key message slide and recap what we see as the key message for this acquisition, which is basically another excellent, technically superior short-line company. It completes our agricultural portfolio right from field prep through to harvest. The deal is immediately accretive. We see significant growth opportunities. Again, just it's around the same size as MacDon was when we acquired them, and we have doubled that business in 5, 6 years. And finally, the deal further advances that powerful synergistic diversification strategy that I was describing to you. So we're very excited to finish off 2023 on a super strong note. So thanks very much. Have a great evening, everybody. And on behalf of the Linamar team, we want to wish you all a wonderful, safe holiday season with your family and friends. Thanks so much, everybody.

Ladies and gentlemen, that does conclude today's conference call. Thank you for joining. You may now disconnect.