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Good day, and thank you for standing by. Welcome to the Linamar Corporation Second Quarter 2021 Earnings Call. [Operator Instructions] I would now like to hand the conference over to Linamar CEO, Linda Hasenfratz. Please go ahead.
Thanks very much, and good afternoon, everybody. Welcome to our second quarter conference call. Joining me this afternoon are members of my executive team, Jim Jarrell, Dale Schneider, Roger Fulton, Mark Stoddart as well as members of our corporate IR, marketing, finance and legal team. So before I begin, I will draw your attention to the disclaimer that is currently being broadcast. Okay. Let's start off with a short update on the COVID-19 crisis on Linamar's current focus. So our approach to this last leg of the pandemic is the same as the first. As we continue to focus on our employees, shareholders, communities and customers in our Linamar Healthcare plants. In this case of a pandemic, our focus is really in 3 key areas: first, ensuring that we will continue to have a safe workplace, where we remain vigilant, of course, about following protocols and adjusting such as conditions permit, continuing our regular testing to ensure we are avoiding in other ways and continuing to encourage and enable high levels of vaccination rates. We'll be believers that regular testing is key to controlling community spread and avoiding another wave. Vaccination alone is not enough. We've also been very focused on communication with our people and communities about the importance of vaccination, which along with casting, is, again, how we avoid another wave and continue to work towards a more normal existence.We've seen great pick up in our employee base for vaccination with our core Guelph plant more than 81%, at least one shot in. The success of the vaccination program as well, we're actually over 80% of city residents are fully vaccinated and nearly 90% have at least one shot, has meant that we are winding down operations at our mass vaccination clinic. I am so proud of the Linamar team and the army of local volunteers who made the clinic such a success and play such an important role in keeping people in our community healthy and safe. We administered over 57,000 shops in Guelph in the past 5 months with record levels of efficiency. So congratulations go out to the whole project safeguard team. We have here a few great posts from our patients, our volunteers and public health that from the clinic. And here's also some great shots of our amazing volunteers.Okay. With that, let's jump into some of the specifics about the quarter, starting with sales, earnings and content. Sales for the quarter were $1.58 billion, up 71% from last year. The auto sector has strongly rebounded from the lows of 2020 despite the drag of semiconductor chip shortages. Global vehicle markets were up 45% over Q2 last year. At the same time, we are seeing significantly higher sales growth in our mobility business of 78%, thanks to launching business, driving our global market share growth.Growth would have been even higher if not for the offsetting impact of both chip related customer shutdowns and FX headwinds, which were substantial this quarter. Skyjack saw a very strong quarter on the back of a deeply rebounding market. Similarly, MacDon markets were up as is market share in all core products, driving a strong sales performance there as well. In both cases, performance was constrained by supply chain issues and impacted as well by FX headwinds, but demand is clearly back. Normalized net earnings are up significantly over last year's loss to $106.9 million, driven by the strong sales growth, but impacted by FX piping issues and, of course, lower government support programs.So shortages seem to be disproportionately impacting our biggest customers, which is having a negative impact on content per vehicle in each region this quarter. Although our global content per vehicle is up on the back of that launching business. On the plus side, vehicle production levels are up in the double digits across the board, and our sales growth is exceptional as well in comparison to prior year. Commercial and industrial sales were up 48% in the quarter, mainly due to strong Skyjack performance, although MacDon was also significantly up over prior year as well.Carefully managing CapEx, continues to be key theme for us in Q2, although up from last year's low point at $15.8 million spent in the quarter, we are still below our normal run rate. Linamar's utilization of flexible programmable equipment is the key factor in allowing us flexibility in times of market softness to continue to tool up new business without requiring significant CapEx. And I do think this is a big advantage that Linamar has in comparison to our competitors. We do expect CapEx to return to normal levels of between 6% and 8% of sales next year after another conservative year here in 2021.We have continued our track record of generating free cash flow with another $138 million generated this quarter. This marks our 13th consecutive quarter of positive free cash flow, which I think is excellent. We expect to see solidly positive free cash flow for the full year 2021. We have $1.7 billion of liquidity available to us, which is also outstanding. Our strong balance sheet and liquidity means we have the ability to take on takeover work or acquisitions as they arrive in an opportunistic market and drive even more growth. The solid cash flow has allowed us to further reduce net debt levels. Net debt now sits at $199 million, which is down now nearly $2 billion from its peak in early 2018 despite the pressures of the pandemic. Leverage likewise improved dramatically to now 0.17x last 12 months EBITDA.I thought it would be a good idea to talk a little more in-depth around some of the headwinds we're facing at the moment around supply chain issues, logistics costs and labor shortages. Certainly, as we have emerged from the low point seen economically last year and markets have roared back, we are feeling the impact of these issues in a variety of areas. The good news is, although, of course they are difficult to manage, these issues are not new. We've seen it in the past, unlike them, they will resolve as additional capacity is put in place, which is well underway. The big news naturally is around the shortage of semiconductor chips, which has hit the automotive industry quite hard. As often happens in a recession, the capital-intensive chip industry scaled back investment to conserve cash last year, which has restricted supply. Exacerbating the problem is despite in orders for consumer electronics and computer equipment for businesses relocating to remote work last year, which put pressure on demand. When auto industry roared back and demand spiked again, there just wasn't enough chips to go around. And as the last demand auto was short supply chip.But part of the problem is the situation is the unpredictability of the impact and when it will realistically be resolved. Total estimated loss of vehicles built for the year according to IHS is currently 5.3 million units. And you can see how that splits out over the year in the top left quadrant of this slide, with Q2 expected to be the peak impact. That at the bottom right chart shows you the original estimated impact for each quarter compared to the actual or related estimate with respect to Q3.Coming into Q2, as an example, the estimated volume loss of vehicles for the quarter was 160,000 units, and it ended up being 2.6 million units, not a vehicles top line. The current estimate for Q3 is a loss of 1.27 million vehicles, which, by the way, was originally estimated at only 50,000 back in May. We are worried this figure is also underestimated and we'll go closer to the Q2 impact. That's not the current forecast from IHS, but we do see it as a risk. We are suggesting a conservative outlook we used for Q3 in terms of volumes as a result. In terms of the impact of lost vehicles by region, you can see the impact regionally was relatively balanced in that top right-hand chart, although Asia has taken the big hit and Europe the least. In terms of OEMS, now I'm in the bottom left quadrant, if you add up the 3 folks might agree that you can see metrics the biggest hit overall at over 1 million units of impact. They were followed closely by Ford and then selantic MGM.Although we will see improvements in supplier ship each quarter, thanks to capacity coming online in coming months. It's largely expected that the situation won't fully revolve until at least mid-2022. Commodity prices are presenting a challenge as well. You can see here some of the more important commodities to us in the charts that we're displaying. Of course, on the mobility side, the vast majority of contracts do allow for a pass-through on metal price changes based on a predetermined metal market index. Although I will note there is a bit of a lag effect. On the industrial side, however, there is no such mechanism making adjustments for commodity cost changes more challenging. At the same time, we're seeing a lag in the ability of suppliers to meet demand. Notably on the industrial side, which impacts not just cost, but our ability to meet production needs for a rebounding market.And of course, the process shifting has dramatically increased in the last 18 months as well as, again, container companies stops investing in 2020 to conserve cash. Another issue was the imbalance in container availability geographically, that was actually shut down from country to country. Again, the situation will resolve as there is quite a bit of additional capacity being included site for containers, but it will likely be another 6 months before we see the lease.Finally, we're seeing a real shortage in the availability of labor at the moment. Despite unemployment levels being reasonably high, we are struggling to fill open positions. In Guelph, we are looking for more than 1,000 people. And should be able to find them, given unemployment is seasonally adjusted to more than 10%. We believe that the continuation that generates government subsidies for people not working is a key factor in our inability to attract people back to work. Although these subsidies were critical during the toughest months of a pandemic to keep income flowing to people that were unable to work. The opposite is now the case with record levels of job openings across North America and workers just not stepping up to fill them. We really need to wind down these programs to encourage people to get back to work, frankly, both for their own physical and mental health as well as our economic health.Now the good news is we will get through this situation. Just as we have in the past, when these very same challenges were faced. Here's a couple of articles describing the challenges in cost and supply. On the left is that an article from the New York Times describing container prices tripling and another article on the right from an English paper that describes the semiconductor chip shortage that is hitting the industry. Now it may surprise you to know that both of these articles, as we were showing in those little bubbles there, were written in 2010. Supply chain issues are not unusual, coming out of a recession or a similar time of disruption. When the economy slows are soft, companies stop investing to conserve cash. Sometimes they shut down the capacity. They got making shipping containers, they stop adding needed capacity or slow down investments. All of that has a big impact when demand tries rebound. And it just takes time to work through that supply demand equation. Investments have to be made, capacity has to map back out continue to be built and commissioned. Ultimately, it gets done, but it typically takes 12 to 18 months to work through vehicles in the supply chain. So that's what you should expect.Now turning to the market outlook. We have the next really good piece of news, and that is that market demand is exceptionally strong. Consumers are buying and markets are up, notwithstanding the constraints that we've described. What that means is we will be looking at a sustained period of strong performance for some time after these issues get resolved, which will happen over the next couple of quarters. We are seeing markets sharply up across the board this year, which shouldn't be a surprise after a tough 2020. Industry experts predicting strong growth in light vehicle volumes globally this year to $14.6 million, 18 and $44.5 million vehicles in North America, Europe and Asia, respectively. 2022, we'll see continued strong growth in North America to 17 million units and growth in Europe and Asia to 20.3% and $47.8 million.Industry efforts are predicting on-highway medium heavy truck volumes to be solidly up in North America and Europe this year, but down in Asia. Next year, we'll see continued moderate growth in North America and Europe, but again, down in Asia. Industry experts predict strong double-digit growth in the access market in North America and Europe this year and next year, coming off the top 2020 as construction projects start to ramp back up, and consumer confidence continues to build post pandemic. Asia will see solid growth this year as well with more modest growth forecast for next year. Backlog is meaningfully up from prior year at nearly 4x the level we were at in Q2 2020. The challenge is meeting the demand with supply chain issues hampering production levels.Lastly, industry is predicting solid growth in the combined draper header market this year in double digits globally, but strongest in North America. We're also seeing some pickup in the windrower market this year after a few years of declines, notably in Europe, CIS and North America. The order book is up significantly over last year with farmers feeling more confident with persistently strong commodity prices, a good harvest last year and a perception of a more stable international trade environment. Meeting demand is also a challenge for MacDon regarding supply chain and logistics issues. There are a few sensors on the horizon in terms of this year's harvest with a drought in North America and flooding in Europe. The coming months will give us a better idea of the success of the harvest and therefore, Farmers attitude towards buying for 2022.Looking at a little more detail on the auto side, you can see sales are fairly consistently up over prior year at significant growth levels despite the automaker's inability to build vehicles at the rate they would like and the very low inventory level. So great to see that the -- those positive bars of growth at the far right in each region. In fact, inventory levels in North America are at record lows, with average days inventory at only 24 days overall. What this means, and this is really important. Regardless of consumer demand, we will be in a sustained period for at least a couple of years of strong production levels just to replenish inventory. That's regardless of demand, we need to replenish inventory, and it's going to take a couple of years to do that.Strong demand will just lengthen the time period of this strong period of production to be on that 2 years. This is great news for the industry to have a period that's sustained above normal production levels to look forward to. In looking at production levels compared to what was forecast at our last conference call in May, you can see a positive season forecast, again, as mentioned, dropping out of those chip issues. Q3 is currently forecast to be slightly softer than we expected last quarter as well, again regarding shifts and the same story for the full year, which is now trimmed out by 1.5 million units for the same reason.That said, production in Q2 was, of course, dramatically up from last year, which is the blue bar to the far left of each chart that's shown you prior year actuals. Q3 will be slightly softer than Q3 last year, but the full year will still be up in double digits in comparison to 2020 in terms of global light vehicle production. The bottom line is markets are significantly up despite the issues and are poised criteria of strong growth at supply issues resolved. Looking at the access market in more detail, you can see first that all 3 markets showed exceptional growth over prior year in the second quarter, and the triple-digit increases across the board in -- which is the orange bar.Further growth for the full year in core North America and European markets are expected, which is a great point. Equipment utilization levels continue to look positive. In Q2, utilization levels were between 93% and 98% of 2019 levels and well ahead of 2020, which is a really good sign. Double-digit growth is expected in core North American and European markets in 2021 and 2022, as you can see. The strong backlog already noted at Skyjack certainly supports it and should drive double-digit sales growth this project this year and next year. In the agricultural business, we're seeing a very optimistic outlook in North America, in particular, for double-digit growth this year after a soft 2020. Q2 combined retails in North America were 10% up from prior year. With a strong showing in Canada, which was up 22% and the U.S. up 7%.International markets are also predicting double-digit growth across the board. MacDon continues to build market share in international markets, notably with our greater hydro products with strong growth and market share growth in all of Australia, South America, Europe and CIS over the last 12 months. We're also seeing growth in our windrower product market share in both Europe and CIS as the market shifts back to wind growing from straight cutting in reaction to regulatory changes. Order intake is significantly has last year at this time, indicating double-digit sales growth for MacDon this year as well and an expectation of continued growth in 2022, assuming no significant issues with the harvest this fall.Turning to an update on growth and outlook. You will be pleased to know that we had another excellent quarter in new business wins. I want to highlight a few of our more strategic wins in a moment. But just to talk a little bit about the opportunity out there. We are seeing electrified vehicles continue to provide great opportunity for us. Almost a quarter of business wins year-to-date were for electrified vehicles, which likewise makes up a substantial share of the book of business currently being pursued. Our percentage of our book of wins that are for electricity vehicles have been steadily growing every year, as you might expect, given the expected growth in this segment of the market. You can see here a steady build in our global content per vehicle for battery electric vehicles as a result of recent wins. It's quite a steep curve of growth. The lines of internal combustion engine and battery electric vehicle global content vehicle are converging, which, of course, is the goal. Our content per vehicle and electric vehicles is predicted to surpass that of hybrid within a couple of years as we see more and more battery electric wins, which are certainly the majority of what we're seeing on the electrified side.Our strategy for pursuing electrified vehicles is diverse in many aspects, which allows us to really maximize opportunities for growth. We have a diverse line of products in various areas of the vehicle, from propulsion systems to structural and chassis to power generation, and power storage. We're targeting passenger cars as well as commercial vehicles, trials of ever class and off road vehicles, and we're targeting all types of electrified propulsion battery electrics hybrid and fuel cell electric. We're also targeting both traditional OEMs and new entrants to the vehicle fields very successfully. And finally, we're open to a variety of scalable solutions for our customers, from individual components to satisfy multiple system. And I feel like the strategy is really paying off as we win business in all of these different areas and with a variety of different combinations of such.Once again, the flexibility at Linamar strategy is key to our success. Our addressable market across a range of vehicle propulsion types continues to look excellent with the total addressable market for us today, around $80 billion, growing to more than $300 billion in the future, an increase of more than 3x. As you can see, the market potential for each type of vehicle propulsion really starts to even up with most opportunity, of course, in the battery electric and fuel cell electric areas Audi gears. This is driving some of the higher potential content per vehicle that we now have in electrified vehicle thanks to continued product development in areas like assemble battery trade, hydrogen fuel tanks and others.With respect to launches, we are back to seeing ramping volumes on launching transmission engine and driveline platform, which are predicted to reach 40% to 50% of mature levels this year, generating incremental sales of $500 million to $600 million. These programs will peak at more than $3.7 billion in sales. We saw shift of around $30 million of programs moving from launch to production last quarter, which was well offset by more strong business wins in the quarter. Next year, we should see growth at 35% to 45% for launches to generate additional incremental sales of $600 million to $700 million.As usual, we are summarizing all of these expectations of market changes on our outlook side that's now being displayed. But markets recovering, as described, we're expecting to see double-digit growth on the top line and strong double-digit growth on the bottom line this year. We will see continued double-digit growth in 2022. This drives from double-digit growth at both Skyjack and MacDon this year as well as significant market growth in our auto business and continued ramping of launching business there.Next year, should see continued growth of all 3 businesses based again on growing markets, growing market share and launching business. Margins will be back into our normal range of 7% to 9% at the next level this year. Driving from mobility segment margins expanding back into the normal range. It's the sort of mid- normal range, and industrial margin is getting close to being back to normal levels. Next year should see continued margin expansion and normal margin ranges for both segments and overall.Leverage levels will continue to improve based on continued positive free cash flow in both years. Now looking specifically at Q3. As mentioned, you should be prepared for a bigger chip impact in terms of lost vehicle builds than is currently forecast by the industry folks out there. We could be being overly cautious here, but we are concerned by the pattern of underestimation that we have seen. Ag and access will both see solid growth, driving the strong backlogs and again, a much stronger market than last year. The growth in comparison to Q2 will be modest given the strong quarter that we just had. Supply chain and logistics cost impact will continue as will the impact of labor shortages. And importantly, we are not forecasting any additional government subsidies past Q2 continue -- given the continued recovery. All of that means conservatively a fairly similar Q3 to what we just delivered in Q2.I'll highlight a few of our more interesting wins this quarter. First, we picked up several more programs for next-generation battery electric vehicles. In aggregate, they represent nearly $65 million in annual sales and can be -- and will be produced in various plants in both Canada and China. Our customers in this group include a Chinese domestic OEM, which is very positive, as this is a target customer growth for us.Next is a series of our cost programs awarded for variance high-efficiency transmission program with well over $100 million in revenue. These are for our plants in Canada. In a similar way, we won several components for all new next-generation HD transmission, again for our Canadian plants. This one worth more than 80 million a year as a package in revenue. And finally, several wins are highly efficient, highly fuel-efficient cylinder head programs that are going to be produced in Mexico and in France, we're in aggregate, almost $100 million per year in revenue.Turning to an innovation review, I would like to highlight a few great technology developments launched in the quarter. First, I'd like to show you a recent new product offering from the SkyJack portfolio that was named Editors Choice from rental magazine. The SJ20 is a new vertical Mast lift that SkyJack launched into the market this spring. It features an all-electric drive an increased duty cycles and superior battery life. The word illustrates that the product has captured the attention of end users as well as rental professionals and of course, Rental Magazine's team of editors. And it's a great example, I think of Linamar SkyJack commitment to provide in the aerial work platform industry with simple, reliable equipment solutions.Next MacDon is very excited to announce the launch of the FV2 header. The 2 series Flex Draper builds on MacDon's leadership and harvesting technology with significantly improves cutting capacity, increased operating speeds and more flat for improved ground following. The FCC begins production in the spring of 2022 and is another great example of innovation and R&D that MacDon was long been known for in the agricultural equipment industry. Next, our R&D efforts continue to prepare for the electrification transition in the mobility segment. We now have E-Axle product solutions for the commercial vehicle market covering Class 1 all the way to Class 6 segments. The commercial vehicle segment is an area where Linamar see actual technology has granted a lot of attention. Our sales and engineering teams are showcasing this product and will be at the advanced clean transport Expo in California later this month.And lastly, our innovation hub is excited to announce the new partnership opportunity with an early stage start-up. As part of the iHUB technology outreach initiatives, And Linamar has funded an agreement with innovative mechatronic systems or IM system out of the Netherlands. IM systems has developed a consing new friction drive gearbox system for use in the industrial robotics industry. The design is more accurate, it's more robust and efficient. And what that means is the robot can work a lot faster and do more than traditional designs for a lower investment. We feel a huge opportunity in this large and growing market for an innovation like this. We will aid as design for manufacturing, testing and prototyping and will be the production manufacturing partner for the system once the technology is fully proven. We've also taken a small equity position in IM systems as part of their most recent capital rates. Finally, we continue to execute on our global digitization journey with more and more connected machines, data connections and robust being commissioned in our global plants every day. With that, I can turn it over to our CFO, Dale Schneider, to lead us through a more in-depth financial review. Dale?
Thank you, Linda, and good afternoon, everyone. As Linda noted, Q2 was a strong quarter for sales and an exceptional quarter for earnings. As a result of the recovery from the COVID-19 shutdowns that occurred last year. It was also a great quarter for cash generation as we generated $138 million of free cash flow. Additionally, we're able to grow our strong level of liquidity to $1.7 billion. For the quarter, sales were $1.6 billion, up $652 million from $900 million last year. Earnings are normalized for any FX gains or losses related to the revaluation of the balance sheet and unusual items that may have been occurred. In the quarter, earnings were normalized for FX gains related to revaluation of the balance sheet, which impacted EPS by $0.02 per share. Normalized operating earnings for the quarter were $152 million. This compares to a loss of $19 million last year, an increase of $172 million or 885%.Normalized net earnings increased $129 million or 586% in the quarter to $107 million. Fully diluted normalized EPS increased by $1.97 or 579% to $1.63. Included the earnings for the quarter was a foreign exchange gain of $1.5 million, which is fully associated with the revaluation of operating balances. As I mentioned, the net FX gain impacted the quarter's EPS by $0.02. From a business segment perspective, the Q2 FX gain of $1.5 million was a result of a $7.4 million gain in industrial and a $5.9 million loss in mobility. Further looking at the segments, industrial sales increased 52% or $134 million to reach $394 million in the quarter. The sales increase for the quarter was due to the additional access equipment sales due to the market recovery from COVID-19 in addition to blowing market share bearings in both Europe there.Likewise, strong demand and market share ratings drove the agricultural equipment sales as well. These are partially offset by the negative impact on sales from the change in CapEx rates since last year. Normalized industrial operatings in the quarter increased $30 million or 82% over last year and $66 million. The primary drivers impacting industrial with increased contributions from strong access and equipment volumes. The reversal of a provision due to amounts that we collected in the quarter, and these were partially offset by a reduced government support related to COVID-19 due to the recovering of the market, the negative impact of foreign exchange rates since last year and the ongoing supply chain issues impacting raw material and operating costs.Turning to mobility. Sales increased by $517 million over Q2 last year to $1.2 billion. The sales increase in the second quarter was driven by a significant increase in volumes due to the recoveries since Q2 last year and the 2020 shutdowns that did not recur this year. The increasing volumes on launching programs, both of these were partially offset by the impact of the semiconductor tip shortage, which is impacting our customers and the negative impact of changes in FX rates since last year. Q2 normalized operating earnings for mobility were higher by $142 million or 254% over last year. In the quarter, mobility earnings were impacted by the increase in sales, net of the semiconductor issues, which were partially offset by the reduced government support within COVID-19 and the negative impact from changes in CapEx rates since last year.Returning to the overall Linamar results. The company's gross margin was $229 million, an increase of $188 million compared to last year, and this was due to the same factors that drove the statement that I just discussed. Cost amortization expense for the second quarter was $109 million, COGS amortization as a percent of sales, this increased to 6.9% due to the strong recovery in sales since last year. Selling and general administration costs increased in the quarter to $77 million from $60 million last year. The increase is primarily the result of the reduced government support and the increased cost supporting the sales growth, which were partially offset by the reversal of the provisions.Finance expenses decreased $17 million since last year due to the Q2 2020 make-whole payment related to the prepayment of the private place of milk that we did last year's did operating curve. In addition, the lower interest rate as a result of the significantly lower debt level since last year as well. These are partially offset by the lower interest earned on the declining long-term receivable balances. The consolidated effective interest rate for Q2 remained flat at 2% this last year. Effective tax rate for the second quarter increased to 25.9% compared to last year, due primarily to a prior period adjustment made in Q2 2020 that did not reoccur in '21. As a result, we are expecting 2021 full year tax rate to be in the range of 24% to 26% and consistent with the full year 2020 tax rate.Linamar cash position was $732 million on June 30, an increase of $356 million compared to June 2020. The second quarter generated $186 million in cash from operating activities, which was used mainly to fund CapEx and debt repayments. This also resulted in a free cash flow generation of $138 million in the quarter. As a result, net debt-to-EBITDA decreased significantly to 0.17x in the quarter for 1.8x a year ago and down from Q1 levels of 0.31x. Based on our current estimates, we are expecting net debt-to-EBITDA to continue to improve by the end of 2021. The amount of available credit on our credit facilities was $958 million at the end of the quarter. Our availability at the end of Q2 remained strong and grew to $1.7 billion. As a result, we currently believe we have sufficient liquidity to satisfy our financial obligations this year.Recap sales and earnings for the quarter as a story of COVID-19 recovery driving strong financial performance driven by strong market recoveries from COVID-19 and strong market share growth, driving normalized earnings growth of 586%. Linamar had a great cash generation quarter as we generated $138 million in free cash flow, while growing our liquidity to $1.7 billion. That concludes my commentary, and I'd now like to open up for questions.
[Operator Instructions] Your first question comes from the line of Peter Sklar with BMO Capital Markets.
I have a few questions here. First, can you tell us how much was the total amount of government support you received in the quarter?
Sure. So after tax, government support was around $16 million in the quarter. It is down substantially, obviously, from last year. I think last year was at least double that level. And we do expect this is going to be the last quarter for subsidies.
So I just want to make sure I heard you correctly, it. So it's $16 million, $1.6 million after-tax provision?
Correct.
Okay. Great. And then next, in the industrial segment, you said there was a reversal for some provisions. Can you let us know how much that was?
Yes. We haven't disclosed the specifics around that, but I can tell you that it was certainly a factor in driving the margins a little higher than you might have expected. If we strip it out, the margins would drop back down to sort of the level that we're guiding for the year just at the low end, just under the normal range that we would guide to.
Okay. Next, I noticed that like your interest expense really went down like not year-over-year, but versus Q1. I think in Q1, your interest expense was about $7.6 million, and now it's effectively 0. What happened there? Is that just debt getting paid down? Or are there other -- is there other noise in there?
No, they're a combination of debt coming down, the lower interest rates, but we also had a foreign exchange loss in Q1 that did not happen in Q2 this year.
Okay. And then next, I wanted to ask you, like when you -- like in your MacDon business and the Skyjack business, like are the back -- like, I'm just wondering how stretched out are the backlogs? Like is that the situation now where you've got these big stretched out backlogs and like you're struggling to meet that demand because of supply chain issues. And so like what are you doing as the orders come in? You just push them out? And so are you kind of beyond 6 months for backlog? Is that kind of the situation?
Well, I mean, the backlog is indicative of the level of demand. So an increase in backlog is not indicating that our inability to supply, it's indicative of market demand sharply rebounding. So when I say that the backlog is up so significantly over last year, it's really to do with -- we've got a lot more orders. So normally, those orders would translate into sales in the near term. Certainly, supply chain issues are constraining our ability to execute on these customer orders as expeditiously as we normally would. But you shouldn't interpret the bigger backlog as being indicative of our inability to produce it. It's much more indicative of the market rebounding.
Yes. Maybe just a little bit more information on it. So with the backlog, we've had that Skyjack, let's say, would be sort of very close to what we had at the beginning of 2018. So that's probably about a 6-month backlog to your point that you brought up. So again, people are placing orders, knowing that we're going to be delivering Q1 of next year. And that's another thing we're now taking orders for 2022 at both Skyjack and MacDon. Both Skyjack and MacDon plan for this year are sort of complete, right? We know the plan of attack, what we're going to do this year. And the orders are getting strong coming in for next year for both companies. And then to exacerbate it, Peter, is the supply chain, right, which is exactly a limit has highlighted. So we're trying to keep up with the demand and the backlog to try and eat away at it. But as we have problems with deliveries for supply chain, it treats a potential bigger backlog down the road.
Right. So Jim and Linda, like typically, like in a normal year, when the business is more stable, usually, like there's a seasonal pattern for the industrial segment, at least in terms of profitability, where the second half is weaker than the first half. But it sounds like what you're saying is the backlog is so healthy that like Q3 -- the Q3 and Q4 profitability are going to kind of be like Q2 profitability may be a little bit more. Is that what you're saying.
It could be the just pent-up demand, right. And what happens is you just keep sort of pushing it down the road a little bit, if you can't get enough of the park. And it's sort of like if you look at what Linda's commentary on the inventories in the auto side, right, if you go back to 2019, June, there would have been about, I don't know, Mark, 65, 68 days of inventory, 26. Now to eat up that, we got to create another 40 days over the next -- how do you pick up the 40 days, right? If consumer demand stays up, you've got to make that up. So again, it's sort of pushing it down the road a little bit. So that pent-up demand is there. It's just now getting caught up with the supply chain.
Our next question comes from the line of Krista Friesen with CIBC.
I just -- I was wondering on the labor costs. Should we expect to see some margin pressure from that through the back half of the year and into 2022?
I mean the labor to is less of an inflationary issue more of an availability issue, although obviously, the 2 are linked because if you continue to not be able to attract people, you may have to make some changes in that regard. I wouldn't say we're expecting to see a big spike in labor costs, but I wanted to illustrate that the labor side is certainly an issue that we're struggling with to try to fill open positions, which is impacting also our ability to produce just as the supply chain side.
Yes. I think the incentives too are something that plays into this, too. And as that sort of tapers off, I think we're going to get a better read of that. But I mean, certainly, there is competition for labor in the marketplace. So we have a very specific formula for labor at a certain percentile, and we stick to that, and we are monitoring labor ranges all the time to the different disciplines.
Okay. Great. And I was just wondering, your -- the guidance that you've provided for 2021, is that more reflective of IHS' expectations on the chip shortage or your more conservative stands on the impact of the chip shortage?
I mean, our forecasts are currently based on what our customers are saying, which is generally in line to what IHS says. So I mean, that's what we normally run about forecast, but we are suggesting that you'd be a little more cautious in terms of what you're expecting in terms of volumes. So there could be additional pressure.
Okay. That makes sense. And then just as far as CapEx is concerned, I know you're saying that you're -- it will return to more normal levels in 2022. So for the remainder of 2021, should we just assume that it stays at this more -- at the lower level?
Yes. I mean, we are expecting to stay under our normal range for the year.
Okay. Perfect. And then just lastly, I was wondering, if you can comment on how you're thinking about your buyback, given how strong your balance sheet is at this point?
Yes. I mean that's absolutely dividends and buyback or both questions on the table. We had some discussions today about it, and we'll continue to discuss that. It is something that we talked about with support every quarter in terms of where we're at in cash position, which, as noted, is obviously very good. And what our expectations of cash needs are coming up. I mean we're conscious of the fact that we've already raised the dividend twice in the last 9 months. So conscious of that and we try to balance out the needs of our shareholders and those of other areas of the business. So it's something that's always an option. And of course, we would surely consider something that is certainly on the table for discussion with us for.
[Operator Instructions] Your next question comes from the line of Brian Morrison with TD Securities.
If I can just follow-up on the buyback question there. I just -- maybe you could explain the Board conversations against being axed in the buyback. Your balance sheet is extremely strong. The guidance is great. Your free cash flow is positive. Maybe just what would be against buyback stock?
Yes. I mean, obviously, expectations around needs for cash. So I mean, it's got to be a listed conversation that looks at every peak. So it is a topic that we discuss regularly, and we'll continue to do.
Okay. If I can turn to Industrial, maybe a question for Jim. Maybe just help me understand, when you talk about past your limited past with respect to commodity costs. Can you just remind me of the pricing set opportunity? When did that happen? And what would your approach be? I think it happens in the fall? So both.
Yes, Brian, that's short of timing is sort of now. So we're sort of taking an estimate of where things are on the commodity side, Of course, I think sheet metal was like 300 per ton. And a year ago, it was probably $700 a tonne. We now need to figure out where the sweet spot will be for that, and that will drive our sort of price listing in our discount levels. And we would do that for both industrial companies MacDon and Skyjack. But we're in that mode right now, the pricing models over next year.
Okay. And then sticking with industrial, maybe, Dale, the almost a 17% normalized margin in industrial, despite your pre-quarter presentation highlighting major commodity and shipping costs. And maybe just can you reconcile this, it sounds to me like the CDWs and receivable reversal, that takes you down to about 12.5%, 13%. Maybe just give us some context of what the margin pressure from shipping and logistics was?
Well, I think Linda's slides kind of shows that pretty well on the shipping cost. In some cases, we're paying up to $20,000 of shipping container, whereas a couple of years ago, that was like 3 grand. So that is really impacting the industrial side because they are looking at raw materials globally and not just within the U.S. where -- on the auto side, most of our raw material suppliers are coming here on 20 have the same chipping use is you have anything also see finish goods products around the world from a OTA. A great example of what true margins and those pressures continue to -- for while.
Yes. I think there's another push on margin too on OE could be also the supply and the impact on our efficiency at our facilities, So if we're waiting for a part, and you've got to run over time on the weekend and things like that, to get things done. They're create any efficiency if you have to disrupt lines as well. So that also puts a little bit of pressure on our earnings side.
Okay. And then last question for me. In terms of the auto margin forecast for 2021 and '22, can you just clarify for me, you've got this 2021 mid normal range and then 2022 normal range, what does that mean? It sounds to me like it's down, while volume should be much higher. And if that's the case, is that simply because of the CDWs benefit?
So I'm sorry, you're thinking that the 2021 should be higher. I didn't quite understand your question.
No, I'm just understanding -- trying to understand what that means. 2021, you say mid normal range and then 2022, it says normal range. Does that infer that 2022 should be lower than 2021 like volumes should be much higher?
No. In fact, we specifically say that we expect margins to expand next year for the mobility segment, right? So we expect margins to expand this year, and we'll be in the kind of mid- range. And then we expect further expansion next year.
Understood. Well done in a very challenging quarter.
Thank you.
You have a follow-up question from Peter Sklar with BMO.
Linda, there's a slide -- there's a slide in the deck. It's slide you're Page 31. And I'm just wondering if you could -- I mean, you did touch on it, but I'm just wondering if you could spend a little more time on it. I just want to make sure I understand exactly what you're showing there. It's a slide that says electrified vehicles, key growth opportunity for Linamar.
Yes.
Three lines there?
Right. So this is showing our booked and actual content per vehicle for different types of propulsion. So trying to show you that we are rapidly growing our content per vehicle that is forecast out a few years out based on actual booked business. So this is not -- there's no potential business in here. This is based on things that have actually been awarded and our expected sales revenue for those propulsion types for products for those propulsion types divided by the number of that particular type of vehicle that is expected to be built in that year.
Okay. And then under the electric, is that BEVs and plug ins?
Yes.
And what are the...
Well, or, sorry, Hybrids are separate. Pardon me. Hybrids, this is separate. So a plug-in hybrid electric vehicle would be under the hybrid line. So that dotted gray line. The electric line is a battery electric vehicle, pure battery electric vehicle. I mean you obviously punched into around that it's not a plug-in hybrid.
Okay. And then on the electric line, like, you're kind of getting up to about $50 of content by mid-decade. What is the major product category? Is it e axles or is it structural parts? Or is it all of the above?
Pretty well we did both to the Q1 there. Okay. Structural and care driven axle systems.
Okay. And the structural, that's out of your diecast joint venture that you have in the U.S.?
Yes. Yes, but also part of our low-pressure gravity out of -- if you remember, the Montey acquisition, that also helps us grow and chassis sort of components that are part of that. So it would be a lot goes in there, too.
There are no further questions at this time. I will now hand the call back over to Linda Hasenfratz, for closing remarks.
Thank you very much. So to conclude this evening, I'd like to leave you with 3 key messages. First, it is great to see such dramatic sales growth in the quarter, which is significantly outpacing the market growth. Secondly, it's great to see our balance sheet in such fantastic shape despite the pressures of last year with consistent free cash flow, giving us a war test to drive continued growth. And finally, it's great to see strong market demand indicating that we will be entering a period of strong sustained performance once supply issues are behind us. Thanks very much, everybody, and have a great evening.
This concludes today's conference call. You may now disconnect.