Linamar Corp

TSX:LNR

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Linamar Q2 2022 Earnings Conference Call. [Operator Instructions] Today's call is being recorded on Wednesday, August 10, 2022. And I would now like to turn the conference over to Linda Hasenfratz, Executive Chair of the Board and Chief Executive Officer. Please go ahead.

[Linda Hasenfratz, executive]

Thank you. Good afternoon, everyone, and welcome to our second quarter conference call. Joining me this afternoon are members of my executive team, Jim Jarrell, Dale Schneider, Roger Fulton, and some members of our corporate IR, marketing, finance and legal team. Before I begin, I will draw your attention to the disclaimer that is currently being broadcast. I'll start off with a review of sales, earnings and content.

Sales for the quarter were $1.98 billion, up 25.8% last year on recovery markets and market share growth. Normalized net earnings were $109.3 million. Earnings were up over last year on stronger sales despite massively higher costs and lack of subsidies in comparison to the prior year and a drag from foreign exchange. Our Industrial segment had a good quarter on the topline with sales up at both MacDon and Skyjack on stronger market, market share growth and better pricing that was imposed both in January and again in May.

We also have the benefit of a month of our new agricultural business, Salford. That said, higher costs related to materials, labor, freight and utilities had a major negative impact to the bottom line in both industrial businesses in comparison to prior year. In addition, we had a bad debt reversal that benefited Q2 of last year that is negatively impacting the year-over-year comparison. The mobility business had a strong quarter, thanks to strong North American market launches and increased pricing related to cost recovery, partially offsetting associated materials, utility and freight costs.

We continued to work with our customers globally to try to recover some of these massive cost increases. We also saw the impact of our Mills River Foundry acquisition from our JV partner, moving this loss-making facility into operations as set as below the line in prior quarters. We have a plan in place, we are steadily executing on to bring the facility to profitability, which we expect will happen within the next year. We saw strong growth in content per vehicle in our core North American and European regions, reaching the highest content to date in both regions, which is great to see. Launches are a big part of that as are vehicles that we have high content on being selectively prioritized for builds by our customers.

North American sales growth was particularly notable, up 47% over prior year in a market of just 12%. Commercial and Industrial sales were up 22.9% with growth at both Skyjack and MacDon on market growth and market share growth. Skyjack's market share gains in scissors globally and in booms in North America, which coupled with a market up in high single-digits translated to some solid sales growth. MacDon is seeing supply chain issues easing somewhat, and allowing them to start fulfilling a deep backlog. Market share is growing in all core products globally, which is fantastic to see. We also had one month of results for Salford helping to grow our ag sales.

CapEx continues to climb back to higher levels to support launching business. 2022 will be up significantly from 2021 and in our normal range as a percent of sales, as will 2023. Free cash flow was slightly negative in the quarter, thanks to a draw on noncash working capital, driving out of that big sales increase. Despite that, we do expect to see solidly positive free cash flow for the full year this year, driving in the back half. 2023 should see strongly positive free cash flow. We have $1.4 billion of liquidity available to us, which is also excellent.

With free cash flow relatively flat and active NCIB program and 2 acquisitions in the quarter, we are back into a modest net debt position at $337 million compared to about $200 million at the same time last year. Leverage remains very strong at just 0.35x net debt-to-EBITDA. We purchased more than 1.3 million shares back under the NCIB in the second quarter for a year-to-date total of 1.9 million before we enter Q2 blackout early -- in early July. Our strong balance sheet and liquidity means we have the ability to continue to pursue acquisition opportunities as they arrive in a dynamic market and drive even more growth.

Let's turn to a quick update on some of the headwinds we're facing at the moment around supply chain issues, energy costs, logistics costs and labor shortages. This slide gives a good high-level summary of the issues and their current status. We're seeing improvements in several areas. For instance, chip shortage shutdowns are becoming less frequent. Shipping costs are leveling and declining. Commodity prices are generally declining as supply chain availability is improving in some areas, but still a challenge in others. Labor availability continues to be a challenge primarily in North America and Europe, and most acutely in the U.S., and of course, energy prices are remaining very high.

Looking more closely at a few of these areas, you can see on the chip impact, the predictability of volume loss has really improved. If you look at the top left chart, you can see that 720,000 less vehicles were built in Q2 regarding chip shortages that were planned at the beginning of the quarter compared to much higher figures in earlier quarters. That doesn't mean everyone has the chips they want. It just means they're planning less builds and getting price flat, which is a good thing for volatility, which is very disruptive. Ship availability is improving somewhat with additional capacity coming online at the moment. More meaningful capacity will come online in next year to further augment vehicle build levels and satisfy that deep backlog and need to refill the pipeline of inventory on dealer lots.

We're seeing good improvements in several commodity areas such as steel and aluminum, which is a positive. Although middle market adjustments in the mobility business helped to offset these changes, we do not offset 100%. And with this magnitude of change, we are feeling the impact most deeply in our casting business. The industrial businesses, of course, feel the full brunt of these costs until price increases flow to offset, which, of course, has already started to happen. We are also seeing a big issue and 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. It's also very disruptive on the productivity side, which is particularly driving labor costs up.

The issues are starting to improve on the MacDon side of the business as illustrated by this chart, with assembly-line shortages down and header production up. But unfortunately, there is still a big issue for Skyjack. And you can see here the issues are improving at Skyjack as well, but more slowly. Ocean freight cost is still well above normal levels, so we have seen costs level off in Europe and they are trending down in Asia. Energy cost is still a major issue for us, notably in Europe and have become more of an issue globally as well. Natural gas prices in Europe are up massively over last year. And for that matter, what we have seen for the last decade. We're certainly feeling the impact of that in our European plants. Natural gas in the U.S. has backed up over the past few months as well as you can see and is starting to be an issue.

On the positive side, energy costs for us are typically 1% to 2% of sales in most of our facilities, but much higher, of course, in our foundry. So not a massive weighting overall in our cost structure, but even something small can have a really big impact if the change is substantial, which is exactly what we're seeing. We're at the same time actively engaging our plants in energy conservation and off-grid energy projects to reduce our dependence and costs. Unfortunately, I don't see these costs regulating anytime soon.

Finally, we're seeing a little shortage in availability of labor at the moment. Acceleration of retirement, insufficient immigration notably in the U.S. and lingering effect of COVID on the number of workforce is the issue. This puts pressure on costs, of course, both in terms of wage inflation, but also in terms of higher recruiting and retraining costs. Unfortunately, wage inflation is not something that would be considered transitory. So to summarize on the challenges side, higher labor and energy costs are likely here to say. Shipping costs and commodities tapering back, [indiscernible] chips in the back half of the year and next year are going to enable higher and more consistent levels of vehicle build.

Obviously, the fact that some of these higher costs are not transitory means we must seek cost recoveries from our customers and are diligently pursuing such. We have had some success in weeks and months to offset at least a portion of the cost, and we continue to pursue added relief with additional customers. I'll now turn to the market outlook. Market demand is strong pretty much across the board at the moment, which is great news and expected to be strong next year as well. Unfortunately, supply chain issues are constraining industry's ability to deliver that demand and notably on the industrial side. With strong underlying demand, we'll be looking at a sustained period of strong performance for some time after these issues get resolved.

Turning to the specific figures, industry experts are predicting growing light vehicle volumes globally this year to 14.7 million, 16.3 million and 44.8 million vehicles in North America, Europe and Asia, respectively. This represents double-digit growth in North America, but single-digit growth in Europe and Asia. 2023 should see high single-digit or double-digit growth in all 3 regions. Semiconductor chip supply, war-related supply chain issues, mainly in Europe, and China lockdowns continue to create volatility in customer schedules putting predictive volumes of risk. It is [indiscernible] predicting on-highway medium heavy truck volumes to be up in North America this year, but down in EU and Asia. Next year, we will see contraction in North America and Asia but growth in Europe.

Industry experts predict double-digit growth in the access market globally this year in all 3 regions of North America, Europe and Asia, and double-digit growth for the overall market in 2023. Our backlog at Skyjack is up meaningfully from prior year at nearly 2.5x, thanks to robust market demand. Delivery of orders is being impacted by those supply chain challenges. However, as we work through these issues, we feel confident we can grow Skyjack at double-digits this year and next year based on this exceptionally strong backlog and strong market conditions.

Lastly, the ag industry is predicting solid growth in the combined retail header market this year in double-digits in North America. Europe and Rest of World will also grow but at a more moderate 5%. We're also seeing solid pickup in the windrower market this year again with 7% growth in North America, but 20% to 25% growth in Europe and Australia. The order book is up over last year with farmers feeling more confident with persistently strong commodity prices. Meeting demand is a big challenge for MacDon regarding supply chain and logistics issues and is the relating factor to growth as opposed to demand. That said, our current forecast is for double-digit growth this year and continued growth next year from MacDon on the back of solid market growth, continued market share growth and a strong backlog.

Looking at a little more detail on the auto side, you can see inventory levels in North America have continued to languish well below historic levels, sitting at only 26 days at the end of July. What this means is regardless of consumer demand for infra -- sustained period of strong production levels just to replenish inventory when the pricing issues are resolved. The industry is predicting at least 2 years just to refill the pipeline regardless of demand. And looking at production levels compared to what was forecast at our last conference call, you can see a slightly weaker Q2 basically all driving out of Asia, thanks to the lockdowns in China. That said, Q3 is actually looking much stronger, up from Q2 prior forecast and prior year. Q3 compared to Q3 last year is now forecasted to be up 21%. For the full-year 2022, it is expected to be slightly better than prior forecast and up 4.7% from 2021.

Looking at the access market in more detail, you can see first that both the North American and European markets shows double-digit growth over prior year in Q2. And as noted, expect double-digit growth this year and a similar picture in 2023. Utilization in North America slowed a little during Q2, but was trending back up to 2019 levels as of the end of the quarter. Utilization levels in Europe are trending well above 2019 levels. Asia was down in Q2, likely related to shutdowns in China, but still expecting double-digit growth for the year. In the agricultural business, Q2 combine retails in North America are down slightly over the prior year, up in Canada, but down in the U.S., thanks to supply chain issues across the board. Despite the slow start, as noted, we expect the market to grow both this year and next year for both draper headers and windrowers.

Turning to an update on growth and outlook. You'll be pleased to know that we had another outstanding quarter in new business wins and more notable wins in the electrified space. I'll highlight a couple of our more strategic wins in a moment. Electrified vehicle continues to provide great opportunities for us. We had a huge quarter in terms of new business wins for both battery electric and hybrid electric vehicles. In fact, in just 2 quarters our new business wins for electrified vehicles are nearly 2.5x what they were for all of 2021, as we can see on this chart. Momentum is clearly building in our portfolio at these important vehicles of the future. At this point, looks half of book sales in 2026 in our mobility business is for non-ICE vehicle powertrain product, a huge shift from less than 25% in that category in 2021.

With respect to launches, we are seeing ramping volumes on launching programs, which are expected to reach 35% to 45% of mature levels this year, generating incremental sales of $500 million to $600 million. Next year, we'll see incremental sales growth of $800 million to $900 million. These programs will peak at nearly $4.9 billion in sales. We saw a shift of nearly $65 million of programs moving from launch to production last quarter, which was more than offset by very strong business wins in the quarter.

As usual, we are summarizing all of these expectations on our outlook slide, which is now being displayed. Despite the challenges we're facing, we are still expecting to see double-digit growth on the topline and high single-digit growth in earnings per share in 2022. We expect to see double-digit top and bottom line growth next year as well. This drives from double-digit growth at both Skyjack and MacDon this year, coupled with solid launches in a growing market on the mobility side. Next year, we will see continued growth in both segments as well.

Net margins will contract somewhat compared to last year on the back of those higher material, energy, freight and labor costs. Next year, we do expect net margins to expand back into our normal range. We also see continued positive free cash flow this year and next, leaving us in an excellent position from which to drive further growth.

Looking specifically at Q3, you should expect sales modestly up from Q2 2022 and more meaningfully up from prior year. Both segments will show a similar pattern. Industrial segment margins will be modestly better than Q2, but not nearly as good as Q3 2021 due to the much higher cost levels that they are experiencing. Improvements sequentially are thanks to a full quarter at Salford and modest improvements on the supply chain side, which of course is not fully determinable at this time.

On the mobility side, margins should modestly improve in comparison to both Q2 of this year and Q3 of last year. All of that boils down to net earnings in Q3 2022, up from both Q2 of this year and Q3 of last year. Roger would like me to again remind you that the situation is very dynamic and the impact is not fully determinable in terms of their impact at this time. Notable risk areas, our supply chain, lockdowns of China and geopolitical risk.

Last quarter, we announced 2 exciting strategic acquisitions, which I'm pleased to announce both bodes in the time frame and manner expected. We are actively working on integrating both teams into the Linamar family, which is going very well. This quarter, I'd like to highlight Skyjack's global expansion plan. We are increasing our global footprint at Skyjack to meet a strongly growing market and growing market share, both here in North America and internationally. As noted last quarter, we're adding capacity in China. We are also adding capacity here in Canada. We're adding in Mexico and continuing to add product capacity to our facility in Hungary. We'll also be further investing in innovation in the Canadian hub where the team is headquartered to continue to develop the products and processes gaining such excellent international recognition for Skyjack.

Moving on to new business wins. On the mobility side, I'll highlight a few of our more interesting wins this quarter. First off, we won a few programs for cylinder heads for hybrid electric vehicles. They are worth in aggregate more than $40 million a year in revenue. Secondly, we had a very exciting win in the quarter for a commercial vehicle e-axle. This is for a medium-duty vehicle. This system will be used in electrically-driven delivery trucks and is our first full e-axle for the commercial vehicle sector. Linamar will be the system integrator responsible for all elements of the eAxle and clean motor and the controller. We are very excited about this win.

Finally, we saw several different program wins for a variety of body, chassis and eAxle components for battery electric vehicles in both North America and Europe. In aggregate, these programs represent more than $90 million a year in revenue, adding steadily to our backlog for battery electric vehicles.

Turning to innovation, I'm excited to share the newest product from our recently acquired Salford acquisition. The HALO VRT is an industry-leading advanced soil tillage design. VRT stands for variable rate tillage. Traditional tillage is typically on the same way throughout an entire field. Modern precision agriculture has proven that tillage requirements vary within the same field. The HALO VRT allows for the tillers to change on the go to adjust tillage gap, improve soil leveling or avoid unnecessary soil disruption altogether in isolated areas; just another example of the focused Linamar's agricultural portfolio is putting into leading innovation in crop production.

From Skyjack, we're excited about the new articulating boom model that was launched in Europe. The SJ45 AJ has been adapted for the European market and is specified to CE certification. The 45-foot boom comes equipped with Skyjack's trademark SMARTORQUE technology. SMARTORQUE is the 4-wheel drive system that delivers an optimized balance of engine horse power, torque, and hydraulic performance, resulting in a cost-effective solution for both emissions regulations and [indiscernible]. This latest boom model is developed with field data inputs that were gathered over several years from our advanced ELEVATE telematics package. This data enables Skyjack to design the SMARTORQUE system to a size and power requirement that offers customers the most efficient package for their investment. That means they are not purchasing a piece of equipment that's too big for the job. This is another reason why Skyjack booms have been gaining popularity and market share in the European market over the past number of years.

Finally, we continue to execute on our global digitization journey with more and more connected machines, data connections and robots being commissioned in our global plants every day. With that, I will turn it over to our CFO, Dale Schneider to lead us through a more in-depth financial review of detail.

[Dale Schneider, executive]

Thank you, Linda. Good afternoon, everyone. As Linda noted, Q2 was a great quarter for sales and earnings despite the continuation of the supply chain issues impacting sales and the other cost issues that are further impacting our earnings, net of the customers' recoveries we were able to achieve. Q2 was another solid quarter for cash flows after considering the purchase and close of the 2 acquisitions in the quarter. As a result, we were able to maintain a strong level of liquidity at $1.4 billion.

For the quarter, sales increased 25.8% to almost $2 billion. Earnings are normalized for any FX gains or losses related to the revaluation of the balance sheet and potentially other items that may have occurred. In the quarter, earnings were normalized for FX losses related to the revaluation of the balance sheet, which impacted EPS by $0.07 per share. Normalized operating earnings for the quarter were $149.2 million. This compares to $152.2 million in Q2 last year, a decrease of $3 million or 2%. Normalized net earnings increased $2.4 million or 2.2% in the quarter to reach $109.3 million. Fully diluted normalized EPS increased by $0.05 per share or 3.1% to $1.68.

Included in net earnings for the quarter was a foreign exchange loss of $6.3 million, which resulted from a $5.4 million loss related to the revaluation of operating balances and a $900,000 loss related to the revaluation of financing balances. As I mentioned, the FX loss impacted the quarter's EPS by $0.07. From a business segment perspective, the Q2 FX loss of $5.4 million related to the reevaluation of operating balances was a result of a $9.7 million loss in industrial and a $4.3 million gain in mobility.

Further looking at the segments, industrial sales increased by 28.2% or $111.1 million to $504.6 million in the quarter. The sales increase for the quarter was due to the higher agricultural sales driven by growth in both the global markets and in our global market shares for our products. Higher access equipment sales driven from stronger volumes in North America and by market share gains in both scissors and booms. Additionally, higher sales prices that we have achieved to help release some of the supply cost issues and pressures. And finally, as Linda noted, the acquisition of Salford did add one month of sales for the quarter.

Normalized industrial operating earnings for Q2 decreased by $16.9 million or 25.5% over last year to $49.4 million. The primary drivers impacting industrial earnings were the Q2 '21 reversal of provisions -- receivables that we were able to collect last year; the ongoing supply chain issues impacting raw material, labor, freight and utility costs, the fact that there was no government support for COVID-19 this year compared to last year; the negative impact of FX rate changes since last year, and these are obviously partially offset by the increased contribution from the strong agricultural equipment volumes and the increased contribution from the access equipment volumes.

Turning to mobility, sales increased by $295.2 million or 25% over Q2 last year to $1.5 billion. The sales increase in the second quarter was primarily driven by the stronger volumes on the improving customer supply chain situation, cost recoveries achieved in the quarter from our customers, the sales impact of fully consolidating GFL is now 100% owned and the increased volumes on launching programs and certain other high-demand programs. These were partially offset by the negative impact of changes in FX rates since last year.

Q2 normalized operating earnings for mobility were higher by $13.9 million or 16.2% over last year. In the quarter, mobility earnings were impacted by the increased contribution from the improving supply chain issues at our customers, the increased contribution on the higher launch volumes and certain demand, high demand price as well. These are partially offset by operating earnings impact from fully consolidating GFL, once again, from having no government support this year compared to last year for COVID and the increased raw material, freight and utility costs, net of the customer recoveries.

Returning to the overall Linamar results, the company's gross margin was $249.9 million, an increase of $21.4 million compared to last year, and this was due to the same factors that drove the segment. COGS amortization as a percent of sales reduced to 5.6%, but remained relatively flat at $110 million. SG&A costs increased in the quarter by $100.7 million from $77 million last year. The increase is primarily due to the Q2 '21 reversal provisions that occurred last year, increased travel costs as global travel restrictions continue to be relaxed, the acquisition costs related to GFL and Salford, and once again the fact that we had no government support related to COVID this year.

Finance expenses increased $4.2 million since last year due to the lower interest earned and declining long-term receivable balances, the additional interest expense due to the Bank of Canada rate increases, the increased debt due to the acquisition and share buyback programs that we completed in the quarter and the negative impact of changes in FX rates on our debt since Q2 last year. As a result, the consolidated effective interest rate for the quarter was 2.1%.

Effective tax rate for the second quarter decreased 24.8% -- or decreased to 24.8% compared to last year, mainly due to the decrease in nondeductible expenses compared to last year, decrease in tax expense now that GFL is fully owned, and this was partially offset by an unfavorable mix of foreign tax rates. We are still expecting the 2022 full year effective tax rate to be in the range of 24% to 26% and consistent with the 2021 full year tax rate.

Linamar's cash position was $877.5 million on June 30, an increase of $145.9 million compared to June 2021. The second quarter generated $66.4 million in cash from operating activities, which was used partially to fund CapEx with the proceeds from debt being used to fund acquisitions and share buybacks. As a result, net debt-to-EBITDA increased to 0.35x in the quarter from 0.17x a year ago, mainly due to the acquisitions completed and the share buyback program. Based on our current estimates, we are expecting 2022 to maintain our strong balance sheet and the leverage is expected to remain low.

The amount of available credit on our credit facilities was $527 million at the end of the quarter. Our available liquidity at the end of Q2 remained strong at $1.4 billion. As a result, we currently believe we still have sufficient liquidity to satisfy our financial obligations during 2022.

The recap, sales and earnings for the quarter was a story of improving markets and increasing market shares in both segments. The supply chain shortages that have been hampering OEM production requirements have started to see some improvements and additionally, helping mobility sales and earnings. Supply-related cost increases continue to impact both segments earnings though. The good news is that cost increase have tempered with the sales price increases, the industrial -- within industrial and cost recoveries within mobility. Despite these challenges and with the 2 acquisitions in the quarter, we're still able to maintain a strong liquidity of $1.4 billion.

That concludes my commentary, and I'd now like to open up for questions.

[Operator]

[Operator Instructions] Your first question will come from Mark Neville of Scotia Capital.

[Mark Neville, analyst]

Maybe just first on the recoveries in automotives and mobility. I think on a sequential basis, sales were up about $70 million and production was roughly flat, I think. So I guess, how much of that would be mix of business versus recoveries? And again, ultimately, what I'm trying to get at here is trying to understand the cost inflation for the year and sort of how far along the way in recovering some of these costs were?

[Linda Hasenfratz, executive]

Yes. So I mean, we're not releasing specific details around what the cost recoveries were. This is an ongoing -- these are related ongoing discussions we're having with customers and we don't feel comfortable disclosing it. I mean, obviously, it was a material amount. It had a notable impact on this quarter. I can tell you that I considered where we're going to be in coming quarters in the guidance that I gave you. So I suggest you circle back to that. And I think you'll be able to figure it out to yourself.

[Mark Neville, analyst]

Just on the -- maybe on the industrial margin. Presumably, I would assume lower commodity price relief would help. But the big improvement in margin, will that have to wait until sort of next year when prices are reset?

[Linda Hasenfratz, executive]

Yes. I mean, absolutely on both segments, but certainly in the mobility segment, it is performing well below levels that we would expect it to from a margin perspective, and it's all related to these higher costs. We do expect to see improvements as we get into next year. There will be some improvement in the back half of the year, but more meaningful, I would say, next year.

[Dale Schneider, executive]

On the industrial side, Mark, the prices in the ag side are pretty well locked for the year, right, in 2022. And then on the industrial Skyjack side, there was some release that we were able to play through during the year. So we're getting, as Linda said, some of that. And so now we're really setting into 2023 ag and sort of Skyjack industrial prices. And the way we're playing that out is to set them pretty straightforward right now, but with the caveat, if economics are changing in those industries, we may have to come back during the year because we can't control what we can't control. So a little bit probably different next year in our approach.

[Mark Neville, analyst]

Maybe just on the guidance for the year, the high single-digit growth in earnings. If my math is correct, I think that would require roughly $5 in earnings in the back half for share. I know you're not giving specific guidance, but is that the ballpark of what you're thinking?

[Linda Hasenfratz, executive]

I think we're not going to be going to give you a number for the back half, but I'm telling you, earnings per share, we think can be in the high single-digits.

[Operator]

Your next question comes from Krista Friesen of CIBC.

[Krista Friesen, analyst]

Congrats on a great quarter. I was just wondering if you could give some color around what you're hearing from your customers in Europe and specifically around energy prices and what level of concern they have or if there are any precautions that are being taken at this time?

[Linda Hasenfratz, executive]

Yes. It's obviously a key area of concern. Prices are way up, potentially going higher, and everybody is pretty sensitive to it.

[Dale Schneider, executive]

Yes. So again, part of the recoveries that we have been doing this year, specifically in Europe has been around energy, not getting full recovery with any of our customers, but getting an adequate recovery for sure. But going into next year, we think that the OEMs in Europe may be trying to come up with a scenario to come out to the supply base with. But our focus is really to work with each customer and say, 'hey, do you want to lock in, do you want to float?' And really try and lock down those agreements with them because next year looks pretty unpredictable, but definitely going up further.

[Krista Friesen, analyst]

And then I was just wondering on the industrial side of the business. I know you're not really hedged there on commodity prices as you are on the mobility side. But are there discussions now after going through the last several quarters of so much volatility to have some pricing mechanisms put in place? Or is that just not as accepted in that industry?

[Dale Schneider, executive]

With the supplier or you're talking to the customer side?

[Krista Friesen, analyst]

Yes, with the customer.

[Dale Schneider, executive]

You're talking about the commodity costs?

[Krista Friesen, analyst]

The commodity cost, yes.

[Linda Hasenfratz, executive]

Yes. We do like -- both businesses are treated a little bit differently. So MacDon does do some forward purchases. It depends on the product and it depends on the market. So we're really trying to gauge where we think things are going and lock in where we think it's appropriate and then -- and not lock in, in other areas. So it's a bit of a dynamic approach.

[Dale Schneider, executive]

And then on the customer side, they really don't treat indices like they would in the auto sector. So [indiscernible] trying to [indiscernible] pricing plan ahead of time.

[Operator]

Your next question comes from Peter Sklar of BMO Capital Markets.

[Peter Sklar, analyst]

On the industrial side, the -- like you indicated that supply chain disruptions are easing. So is that true for both the ag business and Skyjack? And which one is it more severe right now? It sounded like supply chain is more of an issue for Skyjack now. I think I picked that up from your comments. So if you could just kind of run through that.

[Linda Hasenfratz, executive]

Yes, sure. So there was a slide we can pull it back up, looking at the supply chain issues for the 2 businesses. So MacDon, the situation has improved. You can see on -- I think you -- you can see on the slide that -- you can see certainly line shortages declining and completed header production, meaning like fully built on the line without having to be pulled off to wait for something that was missing is increasing. So things have definitely improved at MacDon. It's not perfect by any stretch. There still are issues that they're dealing with, but it has definitely improved from where it was earlier in the year, which is why they had a stronger quarter than you might expect with the ag market down in North America overall, although notably up a little bit in Canada.

But if we go to the next slide, you can see Skyjack, slight improvement, like definitely a little better than it was earlier in the year, but not a huge amount of improvement. So I would say Skyjack at the moment is struggling a little bit more then MacDon did. I would probably say 6 months ago, I would have said the opposite. MacDon was having more issues. But at the moment, it's Skyjack that is struggling a little bit more; seeing some improvement, but still -- but not nearly as quickly as MacDon and is definitely feeling the disruption.

[Peter Sklar, analyst]

And do both businesses have strong backlogs?

[Dale Schneider, executive]

Yes.

[Linda Hasenfratz, executive]

Correct.

[Dale Schneider, executive]

Absolutely. So as well as Salford.

[Peter Sklar, analyst]

So the issue there then, it's all supply chain?

[Linda Hasenfratz, executive]

Yes.

[Dale Schneider, executive]

Yes. I would say labor, supply chain, which are sort of one and the same, if you break it down to the root cause.

[Peter Sklar, analyst]

And while we're on industrial, like there's just so much activity there, with acquisitions and some of these dynamics that we talked about, can you just give us some guidance on seasonality now through the quarters of the year, with all these acquisitions and everything. I'm not too sure how the seasonality looks for this business.

[Dale Schneider, executive]

I think we're getting sort of used to Salford right now, but...

[Linda Hasenfratz, executive]

I mean, it's a little more difficult to call right now, just because the seasonality is being a little bit eclipsed by the supply chain issues. So whereas Q4 is normally your slowest quarter, it may not be quite as slow as we can recover some of the supply chain side, right? So certainly, Q4 is slower. Q2 and Q3 are the strongest. Q4, Q1, the slowest, but the supply chain stuff is kind of playing with patterns a little bit at the moment.

[Dale Schneider, executive]

Yes. And I'd say we're learning like that would be traditional MacDon, Skyjack, we're learning a little bit with Salford right now that the summer months are probably a little bit slower. You get to the fall, that's a little better and then you got February through May, that are strong. That's what we're seeing. But as Linda said, I mean, if you have a strong order book, if you can get the parts, you can ship anytime.

[Linda Hasenfratz, executive]

Yes, exactly. But I mean the nice thing with Salford coming into the fold is, as Jim described the seasonality is slightly different. So because they're tillage, they're more in the spring. MacDon is harvesting, that's in the fall. So they do help to complement each other a little bit.

[Jim Jarrell, executive]

Yes. I know that, I heard that, that if you look at it from a sales perspective, Salford is not as material as either Skyjack or MacDon. So it may -- in the comment, it may adjust seasonality, but I wouldn't expect it to materially change.

[Peter Sklar, analyst]

And like why did -- like if you look at the industrial segment as an overall, why did the operating earnings improve so much in Q2 versus Q1? Like I'm just looking here. So you did $49 million of operating earnings in Q2, but only $13 million in Q1. Is that the improvement in the supply chain and the impact it's having on your results?

[Dale Schneider, executive]

I mean the supply chain, but also as we talked about, there was some pass-through of customer prices.

[Linda Hasenfratz, executive]

Yes. So Skyjack had a second price increase that went through at the beginning of May. That was helpful. The mix was different. Q1 had a poor showing at MacDon because they had all those supply chain issues and they have a much higher level of contribution than Skyjack. So MacDon had a much stronger quarter in Q2. So that had a big impact on the quarter-over-quarter or the sequential comparison as well.

[Peter Sklar, analyst]

Just one last question. When you're going through your commentary, you said the consolidation of GFL had a negative impact on results. So is that -- is it operating at a loss because you're still ramping the die-cast operation? Is that what's going on there?

[Linda Hasenfratz, executive]

Yes, exactly. So it's not unusual for a foundry to take a little longer to get up to profitability than a machining operation. But of course, they are also highly challenged by all the challenges that the industry is facing, in particularly around energy and material and fixed costs. So they are still in a loss position because they are still ramping and bringing the facility to a profit is absolutely a key priority for the team. So it's something we expect to see happen at some point during next year.

[Peter Sklar, analyst]

And it's a high-pressure die-cast operation, correct?

[Dale Schneider, executive]

Yes. It's high-pressure die-cast, larger machine, feeder for structural parts and it's magnesium and aluminum.

[Operator]

Your next question comes from Brian Morrison of TD Securities.

[Brian Morrison, analyst]

I just have a couple of clarification questions because the quarter seems pretty good here. Linda, in Q1, your comment on the mobility side was that sales would be at best equal to Q1, but you beat by 5% relative to the high end of -- relative to the Q1 numbers. So I guess you don't -- I respect you don't want to get into the cost recovery, but your volumes are the same, your Georg Fischer was known, launches really didn't change. Is it fair to say that the difference between your performance in Q2 and Q1, that's the biggest contributor to the cost recovery?

[Linda Hasenfratz, executive]

I wouldn't put it all on that, no. There was a pretty big increase in sales compared to Q1. I would say it's obviously more than we have been expecting, but I do think we saw production levels with our customers a little higher than what we have been expecting. So that was part of it. And then part of it would be the recovery.

[Brian Morrison, analyst]

So industry volumes were as expected, but your customer specifics were higher than what you thought?

[Linda Hasenfratz, executive]

Yes.

[Brian Morrison, analyst]

And then just a clarification. In your guidance for the operating margin for mobility in 2022, it says modest contraction, then '23 expands back in the normal range. I just want to be clear. You're saying that the normal margin, you should be below the normal margin range for 2022. That's correct?

[Linda Hasenfratz, executive]

Modest contraction with respect to the 2021 level. So 2021 was 8.4%. So I'm saying it's going to be a modest contraction to that. I'm not saying where it's going to land in comparison to the range.

[Brian Morrison, analyst]

Modest contraction in my book is like 25 basis points, but you're saying that Q3 is going to be similar to Q2. And so you're kind of tracking in that 6.75% range as you get through Q3 based on your guidance. So it's certainly not a modest contraction. It's a very good performance, but it's well below 8.4%. That's fair to say.

[Linda Hasenfratz, executive]

Yes. I guess it depends on your definition of modest. You got this to my definition, it will be slightly different.

[Brian Morrison, analyst]

And then the base level of earnings for last year normalized to $6.50 basically as well, correct?

[Linda Hasenfratz, executive]

For normalized earnings for last year?

[Brian Morrison, analyst]

Yes. That's what you're basing the number off of, correct?

[Linda Hasenfratz, executive]

$6.53 is normalized earnings from last year.

[Operator]

There are no further questions from the phone lines. I would like to turn the conference back to Linda Hasenfratz for closing remarks.

[Linda Hasenfratz, executive]

Okay. Thank you so much. Particularly this evening, I'd like to, as always, leave you with 3 key messages. First, we're very pleased to see market dynamics starting to improve. Markets are improving in all of our businesses. Market share is growing, and some relief is starting to slow on customer pricing related to higher costs. Secondly, we continue to strongly execute on electrified new business wins in our mobility business, 74% of wins year-to-date are electrified, well over double the dollar value of all of our 2021 in just 2 quarters and an important strategic win in the commercial eAxle space. And finally, we are actively returning cash to shareholders through our NCIB with nearly 1.9 million shares repurchased, more than 1.3 million in Q2 alone and continue to execute on such. Thanks very much, everybody, and have a great evening.

[Operator]

Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank you all for your participation and ask you to please disconnect your lines.