Linamar Corp

TSX:LNR

Earnings Call Analysis

Linamar Expecting Double-Digit Growth

Linamar Corporation had a vibrant quarter with sales up 16% to $2.43 billion, driven by product launches, market share growth, and strategic acquisitions, such as the battery enclosure business, enhancing their top-line performance. Normalized net earnings reached $136.3 million, a 16% increase, with EPS at $2.21. The industrial segment performed robustly, notably Skyjack, MacDon, and Salford, despite higher costs. The mobility sector also blossomed from launches and acquisitions, albeit impacted by unfavorable foreign exchange rates and rising costs mitigated partially by customer pricing adjustments. The company predicts double-digit top-line growth for both 2023 and 2024, fueled by strong market and market share growth in the industrial and mobility businesses. Margins in the industrial segment expanded to normal ranges, and mobility margins are expected to recover in the second half, projecting significant EPS growth this year. Margins are anticipated to broaden further next year, resulting in another year of double-digit EPS improvement and robust free cash flow. The Q4 outlook forecasts double-digit Operating Earnings growth yearly, and a sequential increase in mobility earnings due to a full quarter impact from the new battery enclosure operations and two months of Mobex acquisition. The company's acquisition of Mobex, a vertically integrated casting, machining, and assembly business, signifies a strategic move to bolster their mobility business. Business wins in the electrified space, including nearly $40 million in differential assemblies, showcase Linamar's evolution with the industry's shift towards electrification.

Positive Revenue and Earnings Growth Projection for 2023 and 2024

Linamar is showcasing a promising future with expectations of double-digit growth on the top line—this means both revenue and earnings are on the rise for the industrial and mobility businesses over the next two years. Net margins are anticipated to expand this year, driven by significant margin growth in the Industrial segment. While the Mobility segment is predicted to see contracting margins throughout the current year, a rebound is expected in the latter half, pointing to substantial growth in earnings per share (EPS) for 2023. For 2024, Linamar foresees a continued uptrend in margins, leading to double-digit increases in earnings for both segments and being instrumental for another year of substantial EPS growth.

Q4 Expectations: Double-Digit Growth Despite Seasonal Slowdown

Heading into the fourth quarter, Linamar is set for double-digit original equipment (OE) growth compared to the previous year, although this performance will be seasonally lower than the third quarter. This optimistic outlook is supported by full-quarter contributions from new battery enclosure plans and two months of earnings from the recently acquired Mobex. While seasonal dips are typical, the Industrial segment intends to maintain double-digit growth relative to the previous year, with fiscal caution regarding potential impacts from the UAW strike on GM and Stellantis factored into the projections.

Acquisition and Integration of Mobex

Linamar's recent acquisition of Mobex, a propulsion-agnostic business specializing in casting and machining, is set to initially operate earnings below the company’s standard range of 7% to 10% of sales. However, Linamar is confident that Mobex will hit the target margin range within a year, with financial results being assimilated into the existing mobility segment. This strategic addition serves to bolster Linamar's product offerings in the vehicle structure sector, complementing their already robust electrified vehicle group.

New Business Wins and Production Expansion

Linamar has notched up wins amounting to nearly $40 million for differential assemblies linked to battery electric vehicles, signalling production commencement in the coming year across France and China. Structural components—a growth sector for Linamar that transcends propulsion types—experienced several wins across the U.S. and Europe. Additionally, significant programs for hybrid vehicle components in Europe and Asia were secured. A noteworthy win includes a structural component for an electric vehicle in a recently acquired U.S. plant, projected to reach a peak volume of $240,000 annually. These wins demonstrate Linamar's diverse and geographically expansive footprint in the realm of electric and hybrid vehicles.

Strong Q3 Performance with Notable Sales and Earnings Uptick

Linamar's third quarter revealed robust double-digit growth in both sales (up by 16% to $2.4 billion) and earnings despite various challenges, including OEM strikes and persistent supply chain issues. A significant increase in normalized operating earnings (19% increment to $200 million) and diluted EPS (up by 15.7% to $2.21) reflect a solid financial position that surpassed last year's figures. The amelioration of liquidity to $1.4 billion further underscores the financial health and prospects of the company.

Exceptional Industrial Segment Performance

The Industrial segment of Linamar experienced an impressive 26.8% surge in sales, hitting $676.6 million in Q3. This elevation in sales owes much to global market share growth in access equipment and agricultural sales, augmented by favourable foreign exchange rates. The surge translated into a remarkable 64.1% increase in normalized industrial operating earnings, which reached $121.9 million, thereby contributing to a triumphant quarter.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Linamar Q3 2023 Earnings Call. [Operator instructions] This call is being recorded on Wednesday, November 8, 2023. I would now like to turn the conference over to Linda Hasenfratz, Executive Chair and CEO. Please go ahead.

[Linda Hasenfratz, executive]

Thanks very much. Good afternoon, everyone, and welcome to our third quarter conference call. Joining me this afternoon are members of our senior teams, Jim Jarrell, Dale Schneider, Elio Berger and Kevin Hallahan and some members of our corporate IR, marketing, finance and legal teams.Before I begin, I'll draw your attention to the disclaimer currently being broadcast. I'll start off with a review of sales, earnings and context. Sales for the quarter were $2.43 billion, up 16% to last year on solid launches, market share growth, our recent battery enclosure acquisition and better pricing. Normalized net earnings for the quarter were $136.3 million and normalized EPS was $2.21. EPS is also up 16% over last year on stronger sales performance, offset by FX headwinds and higher costs.Our Industrial segment had another strong quarter with sales and OE significantly at of Skyjack in particular, primarily thanks to market share growth in targeted products. MacDon and Salford also saw both sales and earnings growth. Higher sales helped offset higher costs that we're seeing in these businesses. The mobility business had a strong quarter on the top line, thanks to strong launch performance, the acquisition done in the segment and some market growth. FX rates were unfavorable in comparison to Q3 of last year for mobility, hitting earnings part this quarter. Higher costs also continued to drag on results, although customer pricing relief is helping to offset at least part of those costs.We felt a negative FX impact in comparison to Q2 of this year as well this quarter, without which we would have seen some OE growth compared to Q2 as we had forecast. We expect to see improvement sequentially in Q4 for this segment with the full quarter instead of 2 months for the battery course business and 2 months for our recently announced Mobex acquisition. This quarter represents another solid quarter of earnings growth and margin growth in what is a very tough environment, which we are very proud of. Our business is diversified and allows us to drive consistent, sustainable growth on an ongoing basis, as you can see by this chart, which is exactly what we are delivering.We saw another quarter of solid market share growth in our mobility business with global content per vehicle up over last year. Both Europe and North America saw a content per vehicle growth on launching business to new record levels. Commercial and industrial sales were up 25% with strong growth of Skyjack and both agricultural business is also growing. Market share growth has been a big driver this quarter for all of our industrial businesses.CapEx continues to run at a more normal level than seen in recent years to support global launches and growth. CapEx as a percent of sales was 8.2%, so in line with the level of spending of 6% to 8% that will support its targeted double-digit growth. CapEx will be up significantly this year over last year and at the high end of our normal range. Next year, CapEx will stay in our normal range of 6% to 8%, but will decrease in absolute terms from 2023 levels, promoting stronger free cash flow.Free cash flow was negative for the first quarter in a while, down $124 million, with a big draw on working capital alongside another quarter of stronger CapEx. We do expect to see positive free cash flow in the fourth quarter to end the year on the positive side overall. We continue to have ample cash available for growth with $1.4 billion of liquidity available to us. Our net debt position is solid at just 0.79x EBITDA. I believe our strong balance sheet is an important factor in the time frame of some economic constant.I'll turn now to our market outlook. Market demand is continuing to look positive for 2023 with growth in most regions and businesses expected this year. Next year, it's seeing a mix depending on the market, although notably, North American light vehicle still forecasting growth as is the access market.Turning to the specific markets. Industry experts are predicting growing light vehicle volumes globally this year to 15.2, 17.7 and 50.4 million vehicles in North America, Europe and Asia, respectively. This represents 6%, 12% and 7% growth, respectively. 2024 will see further growth in North America of 5% to 10%, but flat volumes in Europe and Asia. Industry experts are predicting on-highway medium heavy truck volumes to grow in Europe and North America this year with double-digit growth in Asia after a couple of tough years. Next year, we will see continued growth in Asia but declined in Europe and North America. Industry experts predict double-digit growth in the access market globally this year, with North America and Europe expecting high single-digit and Asia low-single-digit growth.Next year, we'll see further growth of another 5% to 10% globally and in each region. Lastly, the ag industry is predicting growth in the combined rate market this year in North America, but reasonably flat in other parts of the world. The windrower market will also see single-digit growth globally this year, driving mainly out of Europe and Australia. There is a positive outlook for market growth in both tillage and crop nutrition equipment for this year as well. We'll have a better picture of the agricultural market for next year in the next month or so, but early indicators are for the market to be fairly flat globally next year, depending on the outcome of this year's harvest and general economic outlook, so not dissimilar to this year.Looking at the access market in more detail, we saw solid growth in North America in the third quarter with Asia and Europe dialing back. All 3 regions are expecting solid market growth this year and more moderate growth in 2024, as already noted. Rental company demand remains positive as companies continue to look to Comcare fleet aging that was experienced during August. Equipment utilization in North America is well ahead of 2022 year-to-date levels in line with or at times exceeding peak 2019 levels. Utilization levels in Europe are also above 2022 level and well ahead of 2019 peaks.Our backlog at Skyjack is solid and with some relief on the supply chain side, we're increasingly enabled to deliver on tech as we saw it demonstrated so strongly in the third quarter. With market and market share growth, we feel confident we can again grow Skyjack in double digits this year and next. We're, of course, keeping a close eye on potentially shifting market conditions in the event of any economic movement. In the agricultural business, Q3 combined retails in North America were down a little by high hold horsepower tractors, up 6% or overall fairly flat. Both markets are up for the year. As noted, we expect to see market growth primarily in North America for our ag markets this year.Inventory of ag equipment retailers have normalized to some degree, but is still low in historical terms, which will continue to drive demand. The order book and demand is still strong for MacDon. Our current forecast is for double-digit sales growth this year again for MacDon with continued growth in 2024 as we continue to grow our market share. Sulfur is seeing a strong order book as well and is also predicting double-digit sales growth in 2023 and continued growth in 2024.Looking at the mobility side, you can see vehicle inventory levels in North America are sitting at about 40 days, still well below historic levels. In looking at production levels compared to what was forecast at our last conference call, you can see a stronger Q3, all driving adventure, which ended at 22.3 million vehicles, up 4% from last year, which was $21.5 million.Q4 is forecast to be 22.7 million units, again up 4% from last year and in line with what we forecast back in August. The full year, as noted, is predicting overall growth now at 7.7% over prior year.Looking at launches for the mobility business. You'll be pleased to know we had another strong quarter in new business wins, and once again, a very strong quarter for wins in the electrified and propulsion agnostic space, which is dramatically shifting the landscape of our mobility business.We had a solid first 3 quarters of the year in terms of business wins for both battery electric and hybrid electric vehicles as well as propulsion agnostic areas of the vehicle. Year-to-date wins are now 74% for a combination of electrified vehicle and propulsion agnostic work, which is outstanding.Nearly 60% of our booked light vehicle sales as soon as 2027 are now for a combination of electrified vehicles or propulsion-agnostic product and this figure is growing every quarter. Our strategy is to continue to grow this percentage to minimize the concentration of our business at risk as IC vehicle trans down over the next decade. We are seeing ramping volumes on launching programs, which are predicted to reach 20% to 30% of mature levels this year, generating incremental sales of $700 million to $800 million. We will see further growth of another incremental $800 million to $900 million next year. These programs will peak at nearly $3.7 billion in sales, nearly $900 million of programs moved from launch to production in the last quarter, partially offset by business wins in the quarter.Launching business in conjunction with acquisitions and growing markets will result in double-digit sales growth for the mobility segment this year and next year. Let's turn to a summary of that top line outlook and also look at the bottom-line margins and next quarter in a little more detail. With strong markets and market share growth, we are expecting to see double-digit growth on the top line in 2023 and 2024 for Linamar overall. This drives from double-digit top line growth in both our industrial and mobility businesses.Net margins will expand this year on growing sales. We expect significant growth in margins in the Industrial segment where margins have expanded back into their normal range. Mobility margins will contract to the year, noting stronger margins are expected in the back half of the year than the first half. This will mean significant double-digit growth in Industrial segment OE, offset by a lower OE performance in the Mobility segment, combining to nevertheless drive significant double-digit growth in EPS in 2023.In 2024, we expect continued expansion in overall margins, driving out of expansion in margins in the mobility segment and continued strong margin performance in the Industrial segment. This will mean double-digit growth in earnings in both segments and another year of double-digit EPS growth in 2024. We will also see continued positive free cash flow this year and strongly positive free cash flow next year, leaving us in an excellent position from which to drive further growth.Looking specifically at Q4, you should expect double-digit OE growth from prior year, but seasonally down, of course, from Q3 of this year. The mobility segment will see earnings up sequentially over Q3 of this year despite normal seasonal slowdown, thanks to a full quarter for our new battery enclosure plans as well as 2 months of our Mobex acquisition and continued expected improvements in terms of cost and recovery, expect modest growth over Q4 of last year.I will note this outlook excludes any knock-on impact not yet known to the fourth quarter from the recently resolved UAW strike for GM and Stellantis. Although we do see some impact from the strike in October, which I have considered in our outlook, it is not fair of callouts might be increased or potentially cut in November and December as a result of inventory levels post strike. If banks rebuilt prestrike, schedules could be cut, if not, schedules may be increased to catch up and refill the pipeline. What we know now is in our outlook, which again is for growth both sequentially and over prior year.The Industrial segment will see OE doubt sequentially in comparison to Q3, of course, due to normal seasonality of all businesses, but up in double digits compared to last year. Moving on to an operational update. We were very excited to announce during the quarter a second acquisition for our mobility business for 2023 for another propulsion-agnostic business Mobex. Mobex is a vertically integrated casting, machining and assembly business. Mobex has a patented vacuum rig less passing or VRC and pressure risolistasting PRC technology that is very well suited to large hollowing parts such as knuckles or control arms and other structures. It can pass lightweight parts with superior strength.As an example, the Mobex process is able to cast the large knuckles required on pickup trucks and SUVs. We already cast in machine knuckles, but our current process is more suited to smaller vehicles, mostly passenger car. The Mobex capabilities are a great complement to our existing knuckle casting capabilities to allow us to offer a full spectrum of products to our customers. Mobex's casting capabilities also complement our existing light metal casting technology, which now ranges from static and fill to gravity to 3 types of low-pressure casting to eye pressure die casting as well. Having this flexibility is critical to be able to offer our customers full range capability in casting to produce the specific technical, mechanical and performance requirements that they might have for their costings.The business generates approximately CAD 450 million in sales annually, the purchase price was USD 64 million. We expect operating earnings levels to be a little under our normal target range of 7% to 10% of sales for our mobility business, but we anticipate to see them reach that level within 12 months. The financial results will be consolidated into our existing mobility segment results. We welcome the Mobex team to the Linamar family.The business will join our new Giga casting facility announced earlier this year as well as our existing Mills River high-pressure di-cast facility and our new battery enclosure business as a key anchor in our fully electrified vehicle and propulsion agnostic group, the Linamar Structures Group. With this latest addition, the Structures group has already become a global powerhouse at about $1.5 billion in sales with additional opportunities under pursuit.Moving on to new business wins. On the mobility side, I'll highlight a few of our more interesting wins this quarter. First, I'd like to highlight nearly $40 million worth of wins in various differential assemblies that will be used in battery electric vehicles for a couple of different customers. Production of these components will start next year in facilities in France and in China. Secondly, we saw several wins for structural components that will launch in the U.S., in Germany, the U.K. and France. Structural components are a huge growth area for us at Linamar and have the benefit of being propulsion-agnostic. Building a strong business in this area is an important strategy to stay flexible in a changing market environment.Third, we won a few important programs for hybrid electric vehicle components and assemblies. Again, it is for a variety of locations and customers throughout Europe and Asia. And finally, we already have already secured an additional business win for one of our brand-new plants acquired last quarter from Dura-Shiloh for a structural component for an electric vehicle to be produced in the U.S. The program starts production next year and will ramp to a volume of $240,000 per year at peak.Turning to an innovation update. I'd like to highlight Skyjack's latest telematics update known as Elevate Live 2.0, building on the initial elevated telematics package Live 2.0 provides Skyjack's rental customers with even greater machine usage and fleet status insights now including recent overload and safety warnings, battery has, machine control, condition, fuel, condition and anti-diagnostic details. Intelligence that enables fleet operators to run their business more efficiently.Another example of our customer focus technologies that Skyjack provides owners with better return on investment. Next, MacDon has just released its latest self-propelled wind grower, the M2 model, MacDon's market leadership and swapping goes back decades. The M2 builds on that reputation with a new engine that provides more horsepower. It features intuitive new touch screen operator controls while maintaining all the other familiar features of MacDon's South Copal's Window products.The new entry proves that even MacDon's longest-running product line is still among the most advanced and innovative in the market. And lastly, Sulfur has introduced the 56 M-Series cover crop feeder application for usage on its line of narrow tillage implement like the Alo BRT. The market is seeing increased demand for cover class and agricultural practice that helps protect the environment by reducing the risk of soil erosion.Sulfur's expertise in precise air delivery systems enable them to design a system very well suited from limited pace installations while still delivering accurately to achieve maximum ergonomic, agronomic economy and environmental benefit. Finally, we continue to execute on our global digitization journey with more and more connected machines, data connections and robots being commissioned in our plants every day. With that, I'm going to turn it over to our CFO, Dale Schneider, to lead us to a more in-depth financial review. Over to you, Dale.

[Dale Schneider, executive]

Thank you, Linda, and good afternoon, everyone. As Linda noted, Q3 was an exceptional quarter as we achieved double-digit sales and double-digit earnings growth despite the challenges of the strikes of the OEMs, the continuation of the supply chain cost issues that have further impacted our earnings in the quarter.Q3 was also another positive quarter for cash generation with strong liquidity hitting $1.4 billion. For the quarter, sales increased 16% to $2.4 billion. Earnings were normalized for FX gains or losses related to the revaluation of the balance sheet and potentially other items that have occurred. In the quarter, earnings were normalized for FX gains related to the revaluation of the balance sheet, which impacted EPS by $0.17 per share.Normalized operating earnings for the quarter were $200 million. This compares to $168.4 million in Q3 '22, an increase of $32 million or 19%. Normalized net earnings increased by $15.3 million or 12.6% in the quarter to $136.3 million. Fully diluted normalized EPS increased by $0.30 or 15.7% to $2.21. Included in the earnings for the quarter was foreign exchange gain of $14 million, which resulted from a $13.9 million gain from the revaluation of operating balances and $100,000 gain from the revaluation of financing expense balances.As I mentioned, the net FX gain impacted the quarter by $0.17 in EPS. From a business segment perspective, the Q3 FX gain of $13.9 million related to the revaluation of the operating balances was a result of an $8.5 million gain in industrial and a $5.4 million gain in mobility. Further looking at the segments, Industrial sales increased by 26.8% or $143.2 million to reach $676.6 million in Q3. The sales increase for the quarter was due to the higher access equipment sales driven by global market share growth, the positive impact from FX rates since last quarter and higher agricultural sales driven also by global market share growth.Normalized industrial operating earnings in Q3 increased $47.6 million or 64.1% over last year to reach $121.9 million. The primary drivers impacting industrial earnings were the increased contribution from the higher access equipment sales, the increased contribution from the strong agricultural equipment volumes and the positive impact from FX rates since last year, which these are partially offset by increased SG&A costs that are supporting the growth.Turning to mobility. Sales increased $192.9 million or 12.3% over Q3 last year to $1.8 billion. The sales increase in the third quarter was driven by the positive impact from changes in FX rates, the increased volumes on launching programs, the increasing volumes in certain mature programs, the acquisition of the battery and closure business and cost recoveries achieved in the quarter from our customers, which partially offset increased supply chain costs. These are partially offset further by lower volumes in certain programs that are winding down to end of life.Q3 normalized operating earnings for mobility were down over last year at $78.5 million. In the quarter, mobility earnings were impacted by the increased contribution on the higher launch and mature program volumes, the sales related to the acquisition of the battery closure businesses, but these were offset by lower volumes on ending programs and unfavorable impact from exchange rates at the operating level, the increased SG&A costs that are supporting the growth and also the net increased cost of supply chain issues, net of the customer recoveries.I would note that the strikes of the OEMs that started in Q3 2023 had no material impact to Linamar's results in the quarter. Returning to the overall Linamar results, the company's gross margin was $340.3 million, an increase of $62.4 million compared to last year due to the same factors that drove the segment results.Cost of goods sold amortization expense for the third quarter increased to $121.3 million compared to Q3 2022. This was mainly due to the launching programs in addition to the acquisition of the Battery and Closures business. COGS amortization as a percent of sales flow did decrease to 5%. Selling, general and administration costs increased in the quarter to $139.4 million from $108.7 million from last year. The increase is primarily the result of the increased management and sales costs supporting the growth, the increased SG&A costs from the acquisition of the Battery and closure businesses; and finally, the increased travel costs that are also supporting the growth.Finance expenses increased $8.9 million since last year, mainly due to the additional interest expense, due to the Bank of Canada and the U.S. federal rate increases since last year, increased debt due to the acquisitions completed last year in '22 and the share buyback program from last year. Additionally, we also had the new private placement notes that were issued in June 2023, which was used to fund the battery and closure business acquisitions. These were partially offset by increased interest earned that was driven by the interest rate from last year as well.The consolidated effective interest rate for Q3 2023 was 4.6%. Effective tax rate for the third quarter increased to 25.3% compared to last year, mainly due to the increase in nondeductible expenses compared to last year. We are expecting the 2023 full year tax rate, excluding the withholding tax issues in Q1 and Q2 to be in the range of 24% to 26% and higher than the 2022 full year tax rate. Universal cash position was $694.6 million on September 30th, a decrease of $165 million compared to December 2022, mainly to fund the CapEx and the acquisitions in the quarter, net of any cash generated from operations and the net proceeds from long-term debt.Third quarter generated $74.6 million in cash from operating activities, which was used to support those CapEx and debt repayments. As a result, net debt-to-EBITDA increased to 0.79x in the quarter from a year ago, mainly due to the acquisition of the battery and closure plants in the quarter. Based on our current estimates, we are expecting 2023 to maintain our strong balance sheet and leverage is expected to remain low.The amount of available credit on our credit facilities was $675 million at the end of the quarter. Our available liquidity at the quarter remained strong at $1.4 billion. As a result, we currently believe we have sufficient liquidity to satisfy our financial applications throughout 2023.To recap, sales and earnings for the quarter was a story of improving markets and increasing market shares in both segments, which drove double-digit sales growth and EPS growth. Supply shortages have been hampering the OEM productions have continued to improve, adding additional sales to mobility. The supply chain-related cost issues continue to impact both segments, but Linamar has continued our discussions with our customers for sales price increases and cost recoveries. These negotiations remain ongoing for certain customers.Despite these challenges in the quarter, we still maintained our liquidity levels at $1.4 billion. That concludes my commentary, and I would like to open up for questions.

[Operator]

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. [Operator instructions] Your first question comes from the line of Krista Friesen from CIBC.

[Krista Friesen, analyst]

Congrats on the quarter. I was wondering maybe we can just start with Skyjack. We've heard a few industry participants talk about a little bit of softening in kind of in this area of industrials. And I'm just wondering if you're seeing that as well or what you're hearing from your customers?

[Linda Hasenfratz, executive]

I mean we had a very strong quarter for Skyjack and so we are seeing the market growing this year and next year. So we have actually a very positive outlook for our Skyjack business, partially based on continued market growth, but also continued market share growth. So our forecast for next year is for double-digit growth at Skyjack.

[Krista Friesen, analyst]

Great. And then maybe just on the mobility side. Can you just give us an update on how the negotiations are going with your OEM partners in terms of kind of compensation for some of these inflationary items?

[Dale Schneider, executive]

Yes. I mean we sit down with them very frequently. And we show our costs, and we look for ways to together to offset those costs with new business or things like that. But we certainly sort of take it one by one, but we are definitely putting our cost on the table and making deals to satisfy both ourselves and the customer.

[Krista Friesen, analyst]

And maybe just lastly, kind of a broader question. It's been very topical in the past few weeks, the slowdown in EV sales and demand. Just wondering how you're thinking about that. Obviously, there is a longer-term trend towards EVs, but just what sort of near-term implications you're seeing or think you might see?

[Linda Hasenfratz, executive]

Yes. I mean, you're absolutely right. We're seeing several customers dialing back in terms of their EV volume expectations. So obviously, we are reacting to that quickly in terms of any programs and capital that we're putting in place. Happily, the other side to that is if they're not selling EV vehicles, they're selling ICE vehicles. So as you know, our strategy is one built around flexibility. So our target is and has been for some time, ensuring we have a similar level of content per vehicle potential in every type of vehicle propulsion. So yes, things will slow down on the EV side. But on the other side, the increase on the ICE side, and we've got plenty of content in ICE platforms as well. So the key is really to be flexible. And I think for us, our strategy is flexible equipment that we can use for ICE programs or EV programs, and we just need to be able to ship between them as required. So if EV pulls down, it means ICE is going to increase, and we just need to be vigilant about where we're putting the capital and how we're managing those commercial discussions with our customers.

[Dale Schneider, executive]

Yes. I think just to reiterate, I think really our competency is manufacturing, right? And I think you can sort of see, over the last few months, our strategy playing out on the investing into vehicles as well that are agnostic, right? So you see that with move that we just announced and as Linda mentioned, flexible capital. And inside of them, we have a very tuned in ability to redeploy it, we need to on flexible equipment that could go across an ICE vehicle or an EV, you think about it here, your manufacturing goes into ICE or it goes into EV. So I think, again, it just gets pushed out. It's okay because ICE volumes will be there. And certainly, sitting down with the customers is something we do to ensure the right capacity is in place.

[Operator]

Your next question comes from the line of Jonathan Goldman from Scotiabank.

[Jonathan Goldman, analyst]

I want to start off with mobility. I believe the guidance last quarter was that you expected operating earnings to be flat or best in Q3. It was down 17%. I just want to know, was that in line with your expectations, if not, what changed throughout the quarter besides UAW strike?

[Linda Hasenfratz, executive]

Yes. I mean the answer is pretty simple, and it is FX. So if I look at constant currency the last year, we actually would have been pretty close to prior year levels of earnings in our Mobility segment. So unfortunately, something that's a little less easy to predict, but that was the impact this quarter, which mobility is a little higher than the impact we normally see from FX, but it was really related to probably more meaningful changes to the exchange rate than we would normally see in the quarter.

[Jonathan Goldman, analyst]

Okay. That makes sense. And just to clarify on the UAW impact. The outlook considers everything up until the end of October?

[Linda Hasenfratz, executive]

Yes. So as Dale mentioned, very little impact for us in the third quarter. We did feel some impact in October, but I did consider that in my outlook for you for the fourth quarter for mobility.

[Jonathan Goldman, analyst]

Perfect. And then one more on the mobility outlook for next year. The outlook calls for margin expansion. I was wondering if you can just dive into a bit of the drivers underlying that guidance.

[Linda Hasenfratz, executive]

Yes. I mean it's obviously linked to continued sales growth and launches. We've got a big uptick. As I mentioned, in launches next year, $800 million to $900 million of incremental sales growth from launches that obviously has a big impact in terms of equipment and teams that are in place launching those programs. So sales growth is certainly a part of that, continued cost improvement and price recoveries would be a factor as well.

[Operator]

Your next question comes from the line of Tamy Chen from BMO Capital Markets.

[Tamy Chen, analyst]

I wanted to go back to the cost inflation headwinds and recovery. So did you, like in Q3, would you say you did make progress overall with the customers? And it just kind of seems like the cost inflation issue has impacted you a bit more than some of your competitors. I'm not sure exactly why that may be the case. But I just wanted to get an update on that. I know, for example, Europe Energy has continued to be a bit of a headwind and some of the other items, too. So if you can just give a bit of an update on that would be helpful.

[Dale Schneider, executive]

I mean Europe Energy, I mean, obviously, has come down through the year, right? So it's not as big of a deal now than it was at the beginning of the year. But again, I would say we deal with each customer separately, and we lay out all the costs, like 100% of the truck. And that's what we try and achieve. But of course, you're sitting down, negotiating with new business to offset versus the cost impact, right? And regarding the competitors, I would say, I would be surprised if we're not at the same level of other competitors. I'm thinking I don't know where that would actually come from. So we are definitely focused on that.

[Tamy Chen, analyst]

Got it. And I'm trying to understand, you're guiding to mobility margin expansion next year. You did list the key drivers between -- I know you are incurring a lot of launch costs right now from the big book of wins and then also the cost inflation headwind. I'm just trying to get a sense of are you -- like between the 2, I mean what is the larger headwind? And when really should we start to expect to see that meaningful improvement in the mobility segment margin?

[Linda Hasenfratz, executive]

Yes. I mean, as noted, we do expect to see mobility margins improving next year. I expect to see it happening really right out of the gate as we get into next year. And again, it is really driving out of increased sales on all these launching programs, a pretty big incremental increase of $800 million to $900 million in sales on programs that are launching at the moment. So obviously, that means assets that are in place, people that are in place that are underutilized are going to be much better utilized next year. So clearly, that is going to make an improvement. I would say, again, on the inflationary cost, I have to say, I think we've done an excellent job of offsetting inflationary costs with customer recoveries. Is there more to do? Of course, there's. That's always a moving target, but I think we've done a pretty good job of offsetting a good chance of those costs. So the recovery next year is more about better utilization of assets and teams as we launch these programs.

[Tamy Chen, analyst]

And Linda, did I hear you correctly for the third quarter, as you say, if it was constant currency in the mobility segment, the OEM dollars would essentially be fairly close to flat year-over-year? Just wanted to make sure I heard that right.

[Linda Hasenfratz, executive]

They would be close to what last year was, which is exactly what we were expecting, frankly. If you recall last quarter, we said at best flat. So in the absence of the FX impact, that's exactly what we would have delivered.

[Operator]

Your next question comes from the line of Michael Glen from Raymond James.

[Michael Glen, analyst]

So just to go over like the Slide 23 in the deck, when you have everything going on in the Structures group, it does seem -- I can't recall there being this much activity like you have the Mills River integration still going on, the welling giga casting now you're integrating the Dura Shiloh and with the Mobex assets coming on. I'm just curious, Linda, how you're managing through all of this because it does seem like a substantial amount of change coming out of the company in a pretty short period of time.

[Linda Hasenfratz, executive]

Yes. I mean, yes, there's a lot happening in the structures group. This is a brand-new group that we put in place with seasoned Linamar people to focus on exactly this. So we did create an entire new structure to focus just on these areas of opportunity. And I would say, I think it's going extremely well. I mean, don't forget, the battery enclosure business is just 3 plants. So this is a business that is of a size that we can manage that integration. It is a profitable business. Mobex, similar size to the battery enclosure business in terms of sales and also a profitable business out of the gate. So that's quite helpful. It's not like these guys have a whole bunch of start-ups and problems that they need to work through. Is it work for the integrated team, of course. But we have a lot of confidence in the team that we've put in place.

[Dale Schneider, executive]

Yes. I would also just say, so both the Dura-Shiloh and the Mobex have integration teams. On top of that, we have the structures group, which is, as Linda said, brand-new of seasoned people. And then we also have the functional leads inside of Linamar to that support that. And so all of them have the integration plans. They all have stand-alone plants and managers in those plants. So yes, for sure, there's a lot of activity. It's really getting them integrated to the systems of Linamar and understanding how we do things, right? And I think we've got really good seasoned capability there.

[Michael Glen, analyst]

Are these the Dura-Shiloh and the Mobex, are those acquisitions accretive to like the year-to-date margin in mobility is about 4.5%, call it, plus or minus on a normalized EBIT. Are these 2 acquisitions accretive to that margin?

[Linda Hasenfratz, executive]

I mean they're all smaller in size. So they have to have some pretty hefty margins to move the dial on such a big business, right? So I think that both businesses are profitable and margins are better than the overall, but they're probably not going to move the dial on the overall when that mobility business is $7 billion in sales in these 2 businesses are less than $1 billion.

[Michael Glen, analyst]

And on Mills River, can you give an update? Are you making progress in terms of where you want to be in that operation?

[Dale Schneider, executive]

Yes. We've done a few things. One is we've changed the product mix in the facility, meaning we've exited a couple of programs that were underwater. And so those are done now. And we've had capacity that we can now fill. We've streamlined the operation by reducing headcount quite a bit over the last 6 months and leveraged our purchasing. So definitely making progress, still more to go, but really good progress.

[Operator]

Your next question comes from the line of Brian Morrison from TD Securities.

[Brian Morrison, analyst]

Can we go back to the operating mobility margin, please? And specifically looking at normalized earnings and margin. So I understand the FX impact on operating earnings. Does it also impact the operating margin as well? Is it transactional or just translational?

[Dale Schneider, executive]

It's both. You just have to keep in mind, depending on currency payer that you're looking at. You could have a situation where you're naturally hedged. So you have a sales impact, but it nets out at the OE and is basically 0. So we have a number of currency payers like that, but then we have other payers where you may have little or no sales and you only have the expenses. So it does fluctuate from currency payer to currency payer. But in this specific case, yes, it was driven by a net purchase exposure and change in rates from last year.

[Brian Morrison, analyst]

Okay. So, Dale, just the 4.5% versus the 6%, are you able to give me a bridge? Just walk me through FX launch costs, inflation cost recovery. And then the acquisition from Dura-Shiloh in the notes, it looks like it was actually quite positive contributor to the quarter. So can you just go through the buckets of what gets me to 4.5% from 6%? I realize sequentially, it's flat.

[Dale Schneider, executive]

Yes. Like we said, the big change is really the FX, as Linda noted.

[Brian Morrison, analyst]

Under the operating margin percentage?

[Dale Schneider, executive]

Well, we took it at the operating level because of the change in rates. So yes, it impacts the margins. So the margins go down if we're taking a loss on translation and transactional from last year.

[Linda Hasenfratz, executive]

Yes, I mean we don't normally disclose specific details around transactional and translational exchange, really for competitive reasons. So they often offset over time and we find our customers are way more interested in discussing pricing when they see us posting games. I'm not very interested in discussions when there's a lot. So we don't disclose the specific detail around it. I'm telling you directionally that it was an issue in the quarter. We're not going to give you the specific number and walk you from last year's margin to this year's margin in specific buckets. But I can tell you that if we had the same currency as last year, we would have been similar in terms of earnings level to last year. That's not the same as the same margin. That's not the same as the same margin because the sales changed, right?

[Brian Morrison, analyst]

I'm just trying to get an understanding because it's a pretty big delta as to what the buckets are that are really driving this. And if it's all FX on the operating margin percentage, that's fine, but it seems like a big movement.

[Linda Hasenfratz, executive]

Yes. I didn't say that the margin would have been the same. I said the dollars of earnings would have been the same. And obviously, sales are higher this year, so that would not have meant to say margins. There are obviously underlying issues around costs that we're trying to offset with pricing as well and a big launch.

[Brian Morrison, analyst]

Can you quantify the launch percentage, how much that's impacting? Because obviously, that's going to be a tailwind as we get into '24 and '25.

[Linda Hasenfratz, executive]

I don't have all those specific buckets for you, no.

[Brian Morrison, analyst]

Okay. When I take a look at changing gears to industrial, you're obviously doing extremely well here. When I look at the China and Mexico facilities coming online at Skyjack, are you able to give us a degree of capacity, how much capacity increases with those facilities online?

[Dale Schneider, executive]

Yes. I mean we're able to come up about -- I'm trying to think of the best way of giving you the answers here. But I would say in unit size is probably 20%-to-30%-unit output.

[Brian Morrison, analyst]

Okay. And then, I guess, in terms of the ag order book, you're very comfortable with respect to growth despite the softening of commodity prices?

[Dale Schneider, executive]

Yes. I mean, our book next year is excellent right now for the ag business.

[Brian Morrison, analyst]

Okay. Last question. Linda, I know this gets asked every several years, but I feel with how strong your industrial operations are performing, how strong your balance sheet is, your free cash flow positive. The outlook for both segments is very good. And yet you trade at 4x EBITDA or maybe even lower at this stage. But I guess the question the surface value is, are these 2 businesses need to be -- is there any reason that they can't be standalone or do they need to be combined?

[Linda Hasenfratz, executive]

We feel strongly that they perform much better as one unit combined under Linamar than they would individually. We've often talked about the deep interconnections between our businesses in terms of shared resources, in terms of linking and levering from a purchasing perspective, from a systems perspective, from a talent perspective, all of which becomes much more difficult if they become independent businesses. I think we have an excellent balance of independently run businesses that are getting a lot more value from their deep interconnection. And I would also say that we have done the analysis to look at whether it makes sense to do this or not. And our conclusion was absolutely clearly that it is not.

[Dale Schneider, executive]

Yes. Brian, a couple of good examples that I think are relevant that we see and we share amongst the group like Elen, you guys know we have Elen, which is electrification of Linamar, which a lot of people say that's just auto-focused, it's not. I mean they are helping on the e-Drive systems to controlling the actuation at both MacDon and Skyjack as well as Salford. Just recently, MacDon ended up with a supplier issue, they needed machining help. Our center jumped in. We're able to help them immediately to relieve that, which actually helped the sales continue. And as Linda said, the supply chain purchasing side to leverage when supply chain has been a big problem to be able to share that back and forth has been incredibly helpful and to ensure that sales are there, right? So for sure, there's those synergies that you probably can't see sitting outside.

[Brian Morrison, analyst]

It's not an easy question, but I think you answered that very well. So I appreciate that very much.

[Operator]

There are no further questions at this time. I will now hand the call back to Linda Hasenfratz for closing remarks.

[Linda Hasenfratz, executive]

Thanks so much. Well, to conclude this evening, I'd like to always leave you with 3 key messages. First, we are thrilled to deliver another quarter of double-digit top and bottom-line earnings growth, 16% growth in this environment, I think, is something to be very proud of. Secondly, it's great to see continued market share growth in all of our businesses, contender vehicle hitting new highs in North America and Europe and access and Angra gains as well. And finally, we're excited to welcome another acquisition to the Linamar family with Mobex and its solid taxing technology, combined with our existing strong product portfolio and our earlier acquisitions this year, the battery enclosure business were rapidly and meaningfully transforming our mobility business to align to the future of mobility while maintaining flexibility. Thanks so much, and have a great evening.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.