Linamar Corp

TSX:LNR

Earnings Call Transcript 2022-Q4

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Linamar Q4 2022 Earnings Call Conference Call. [Operator Instructions]. This call is being recorded on Wednesday, 8 of March 2023.

I would now like to turn the conference over to Linda Hasenfratz, Executive Chair and CEO. Please go ahead.

[Linda Hasenfratz, Executive Chairman and CEO]

Thank you. Good afternoon, everyone, and welcome to our fourth quarter conference call.

Joining me this afternoon are members of my executive team, Jim Jarrell, Dale Schneider, Roger Fulton, Mark Stoddart, as well as members of our corporate IR, marketing, finance, and legal teams. Before I begin, I'll draw your attention to the disclaimer that is currently being broadcast.

I'm going to start off as usual with a review of sales, earnings and content. Sales for the quarter were $2.1 billion up 34% from last year on recovering market and market share growth. That took sales for the full year to a new record at $7.92 billion more than recovered from the pandemic, which is fantastic to see.

Normalized net earnings for the quarter were $99.5 million. Earnings were up 69% over last year on stronger sales despite massively higher costs, a lack of subsidies in comparison to prior year and higher SG&A, fixed costs supporting our growth strategies.

Normalized EPS for the year was $6.26 reasonably flat to last year with a strong back half basically offsetting a tough first half in terms of earnings growth, not bad for a very tough environment in terms of cost increases.

Our Industrial segment had a great quarter with sales significantly up at both MacDon and Skyjack on stronger markets, market share growth or better pricing or in some cases all of the above.

Strong sales growth drove strong earnings growth compared to a tough quarter last year despite significantly higher costs related to material and labor challenges. And of course, results were enhanced by our Salford acquisition, which is performing really well.

The mobility business had a strong quarter on the top line thanks to a very strong launch performance and market growth, as well as increased pricing related to cost recoveries, partially offsetting associated increases immaterial, labor and utility costs.

We continue to work with our customers globally to try to recover some of these massive cost increases, which are really dampening our earnings growth. We also felt the impact of our mills with our foundry acquisition from our JV partner moving this loss making facility into operations versus it being below the line last year. We have a plan in place. We're steadily executing on to bring the facility to profitability inside in the next 12 to 18 months.

The Industrial segment had an excellent quarter on both the top and bottom line with both our access and agricultural businesses seeing strong sales and earnings growth on stronger markets, enhanced by market share growth. The inclusion of Salford this year also enhanced results. These businesses saw strong performance despite significant cost issues related to higher labor and material costs.

We saw growth in content per vehicle in every region this quarter, which is excellent to see. In fact, we hit a new annual record for content per vehicle in both North America and Europe at more than $230 and nearly $100 respectively.

Launches are a big part of that as was our Mills River acquisition for the North American figure and vehicles we have high content on being selectively prioritized for build by our customers. Customer cost recoveries played a role as well more so in Europe than in North America.

Commercial and industrial sales were up 60% with growth at both Skyjack and MacDon on market growth and market share growth in key products. Salford also played a role in growing sales in this area.

CapEx continues to scale up supporting our global launches. We have a significant book of business to launch and we'll need to continue to invest at higher levels to support that particularly given we've had subnormal levels of spending during the pandemic years.

2022 was up significantly from 2021, though just under our normal range as a percent of sales. 2023 will see another increase from 2022 levels taking us back into our normal range of 6% to 8% to drive double digit growth.

Free cash flow was up $68 million in the quarter on strong earnings despite heavier CapEx. That takes up to $94 million in free cash flow for the year, another year of positive free cash flow, our attempt consecutive year of such. 2023 will also see solidly positive free cash flow.

We have $1.3 billion of liquidity available to us, which is also excellent. Net debt position improved in comparison to the last quarter and thanks to that good cash flow despite continued activity in our NCIB. Leverage remains very strong at just 0.42x net debt to EBITDA. We purchased 700,000 shares back under the NCIB in the fourth quarter for a final total of $3.9 million bought back under the program. We do not currently have plans to renew the NCIB, although of course if our share price drive to economic pressure, we won't hesitate to do so.

In the interim, you will note we have increased our dividend by 10% Our strong balance sheet and liquidity means we have the ability to continue to pursue acquisition opportunities as they arise in the dynamic market and drive even more growth.

So 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 I think gives a really 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 decreasing and even normalized in some regions. Commodity prices are declining, supply chain availability improving, in some areas that's still a challenging others. Energy costs have also improved compared to last year, but do remain above normal levels in Europe. Labor availability continues to be a challenge primarily in North America and Europe and most acutely in the U.S.

Looking more closely at a few of these areas, you can see on the chip impact, the predictability of volume walk has really improved. We saw 660,000 light vehicles built in Q4 regarding chip shortages than was planned at the beginning of the quarter. That compares to my higher figures in earlier quarters and a significant impact that we saw in Q4 of 2021.

That doesn't mean everyone wants the chips they want. It just means they're planning glass bills and getting surprise glass, which is a good thing for volatility, which is very disruptive. Chip availability is improving somewhat with additional capacity that's come online, more meaningful capacity comes online throughout this year and next which will further augment vehicle build levels and satisfy the deep backlog needed to refill the pipeline of inventory on dealer lots.

You can see here trends for the commodities that most impact us at Linamar. We're seeing good improvements and recently stable conditions in almost all of these key commodity areas. We continue to see issues in the ability of suppliers to meet demand, notably on the industrial side, which impacts not just cost, but our ability to meet production needs for rebounding market. It's also very disruptive on the fact productivity side, which is part of what is driving the labor costs up.

The issues are starting to improve at MacDon as illustrated by this chart showing completed header production picking up, but we aren't fully out of the woods yet. Skyjack is also seeing in general a positive trend. The problem is for each of MacDon, Skyjack and Salford, even with overall less issues, we continue to see some chronic issues repeat. And the bottom line is if you're missing anything, you don't have a product you can shift, which is frustrating to the team.

Ocean freight costs are a good news story with Asia lanes basically back down to pre-COVID levels and Europe finally trending down as well. Energy costs have also started to normalize, which is great to see as Europe plans new sources for fuel. Both gas and electricity prices have backed off the exceptional highs that we're seeing late summer last year, but are notably still about triple historical levels.

We're seeing a mixed level of impact in our plants on the energy side, given some plants in some regions have locked in some energy contracts before levels really escalated which have now expired. Other plants and regions were on the spot last year and therefore are seeing an improvement to energy costs.

Overall, despite improvements, we do expect to see energy prices higher in Q1 of this year than we saw in 2022 which will put a bit of extra pressure on mobility performance until we can negotiate pass throughs with our customers.

Finally, we're continuing to see a real shortage in availability of labor, acceleration of retirement, just more jobs being thought to be filled in sufficient immigration in some regions and lingering effects of COVID on the number of workers is -- are some of the issues.

This puts pressure on cost, of course, both in terms of wage inflation, but also in terms of higher recruitment and retraining costs. Unfortunately wage inflation is not something that would be considered transitory.

So to summarize on the challenge side, higher labor costs, likely here to stay, energy definitely still weighing on results. Shipping costs and commodities tapering back and better supply as chips continuing to build.

Obviously, the fact that some of these higher costs are not transitory means we must see cost recoveries from our customers and we continue to diligently pursue such. We have some success in recent months to offset at least a portion of the cost and we continue to pursue added relief.

I'll now turn to market outlook. Market demand is continuing to look good with growth in most regions and businesses expected. Supply chain issues do continue to constrain industry's ability to deliver on that demand but it does feel a little less volatile than last year.

Turning to the specific markets, industry experts are predicting growing light vehicle volumes globally this year to 15.1 million, 16.6 million and 48.1 million vehicles in North America, Europe and Asia respectively.

This represents mid to low single digit growth in each region. Semiconductor chip supply, other supply chain issues as sporadic China pandemic related disruptions continue to create volatility in customer schedules putting predicted volumes at risk.

Industry experts are predicting on highway medium heavy truck volumes to be flat in North America and Europe this year, but up in Asia after a tough couple of years. Industry experts project double digit growth in the access market globally this year with North America and Europe expecting high single digit and Asia low double digit growth.

Lastly, the agricultural industry is predicting growth in the combined paper header market this year in mid-single digits in North America are reasonably flat in other parts of the world. The wind grower market will also see single digit growth globally this year, driving mainly out of Europe and Australia. North American high horsepower tractor retails are expected to be up 5% to 10% in 2023 flat in the rest of the world and EU versus last year.

Looking at a little more detail on the auto side, you can see inventory levels in North America have settled in around 36 or 37 days over the last few months. But are still well below historical levels. Refilling the pipelines vehicles will still be a major priority for the automakers and will take some time to get done.

And looking at production levels compared to what was forecast at our last conference call, you can see a slightly stronger Q4 basically all driving out of Asia as China tries to catch up on lost production. Q4 ended at 21.9 million vehicles, up from -- at 21.2 million. Q1 is forecast to be a little softer than both Q4 actuals and what we were expecting on our last call at 20.4 million units, largely on declines in China that are COVID related post their reopening.

Looking at the access market, you can see first that all three regions showed good double digit growth over prior year in Q4 and for the full year. Rental demand is strong as companies look to counter fleet aging experience during COVID. Utilization in North America slowed a little during Q4 tracking a little closer to 2021 levels and pre-pandemic. Utilization levels in Europe continued to trend above both 2019 and 2020 levels basically in line with 2021.

Our backlog at Skyjack is up significantly from prior year at nearly 40% improvement, thanks to continued solid market demand. Delivery of orders is being impacted by five chain challenges. However, as we work through these issues, we feel confident we can again grow Skyjack in double digits this year. We are, of course, keeping a close eye on potentially shifting market conditions in the event of an economic slowdown.

In the agricultural business, Q4 top line retails in North America were up 43% over prior year, a huge pickup versus earlier in the year. The order book is up over last year, but meeting demand is a continued challenge for MacDon regarding supply chain and logistics issues and is the limiting factor to growth as opposed to demand.

That said, our current forecast is for double digit growth this year again at MacDon. North American high horsepower tractor retails were up 10% in Q4, which is a good indicator for Salford's market segments. Salford is seeing a strong backlog in all products well up over prior year and is also predicting double digit growth in 2023.

Turning to an update on growth and outlook, you'll be pleased to note that we had another outstanding quarter in new business wins and once again a very strong quarter for wins in the electrified space. I will highlight a couple of our more strategic wins in a moment.

Electrified vehicles continue to provide great opportunities for us. We had a huge year last year in terms of business wins for battery electric and hybrid electric vehicles. In fact, new business wins for electrified vehicles are well over 3x what they were for all of 2021 and represent over $1 billion in annual sales.

Momentum is clearly building in our portfolio of these important vehicles in the future. At this point, 51% of book sales in 2027 in our mobility business is for non-ICE powertrain, a huge shift from less than 25% in that category in 2021.

With respect to mobility launches, we are seeing ramping volumes on launching programs, which are predicted to reach 40% to 50% of mature levels this year generating incremental sales of $700 million to $800 million. Launching programs in 2022 generated incremental sales of over $750 million. These programs will peak at more than $4.1 billion in sales. We saw a big shift at nearly $1.5 billion of programs moving from launch to production last quarter, partially offset by very strong business wins in the quarter.

As usual, we're summarizing all of these expectations on our outlook slides now being displayed. With strong markets, and market share growth, we are expecting to see double digit growth on the top and bottom line in 2023. 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. Net margins will expand in 2023 on growing sales and better performance in both segments. Notably the industrial segment where margins will expand back into their normal range.

Mobility margins will be flat overall for the year, stronger in the back half than the first half of the year. We will also see strongly positive free cash flow this year, leading us in an excellent position from which to drive future growth.

Looking specifically at Q1, you should expect sales modestly up from Q4 2022 but meaningfully up from Q1 of last year. The Mobility segment will see again sales modestly up from Q4, but well up from Q1 last year with growth in North America and Europe from Q4 being partially offset by COVID related declines in Asia.

Normalized OE will be at that flat to Q4 2022 based on those lower Asian sales, as well as higher material costs in Europe in addition to the higher energy costs that I mentioned earlier. The industrial segment will see sales seasonally up from Q4 of last year and significantly up from Q1 of last year. OE will be meaningfully up from Q4 '22 levels on stronger sales and cost controls as well as normal annual pricing reset.

As a result, on the overall earnings side, you can expect modest to good normalized OE and EPS growth from Q4 2022 with flat to modestly improved margins but notably significant EPS growth to Q1 of last year.

Roger would like me to remind you that the situation is very dynamic and impacts are not fully determinable in terms of their impact at this time. Notable risk areas, our supply chain, labor shortages, lockdowns in China and geopolitical markets.

Moving on to new business wins on the mobility side, I will highlight a few of our more interesting wins this quarter. First, we were awarded a variety of gears for a hybrid vehicle, electric vehicle transmission program. These will be produced in India with an average annual volume of 600,000 units per year launching next year.

Secondly, we were awarded a component to be used in industrial electrolyzers, which are used to produce hydrogen using renewable electricity and water. We'll produce 37,000 of these units per year at one of our German entities starting next year.

Lastly, we won a significant uplift in program extension for an eAxle program with a significant amount of revenue adding to our content on battery electric vehicles. This program will launch in 2026 in Hungary.

Turning to an innovation update, I'm excited to share that our range of eLIN Propulsion Solutions is rounding out nicely. We recently announced our naming and connections for our off the shelf product family of eAxle solutions. In addition to the products that are designed to OEM specific applications, this portfolio offers standardized propulsion system that can easily integrate into existing architectures, all predeveloped by Linamar.

This is of particular importance in the commercial vehicle suite segment where OEMs and app centers want ready to go, full system solutions that are fully validated and available now. The eLIN family of eAxle offers designs for both independent and beam axle applications and covers vehicle classes 1 through 6. This is another great example of how our eLIN team is well positioned to capitalize on the opportunities in the transition to electrified vehicles.

Next, the Skyjack team continues to evolve their product with practical and useful customer focused technologies. The Skyjack accessories catalog of custom features now add perimeter lighting to the lineup. New LED lighting at the base of the DC scissors creates a no-go zone around an active machine. This improves safety on and around the machine. A visual lighting indicator is added to the existing audible alarm to let workers know that a machine is working nearby. This is another example of continually enhancing safety user friendly or customer focused features. This thoughtful engineering is what makes Skyjack a highly sought after brand on construction site.

Lastly, we're proud to share that we have won, not one but two industry product innovation awards in the agricultural space. Both MacDon and Salford were 2023 AE50 Award recipients, proving both of Linamar's agricultural business lines are industry leaders in their respective product categories. The A350 is an annual award ceremony by the American Society of Agricultural and Biological Engineers. It's given for new products that represent the best innovation in engineering and technology for agriculture, food and biological systems.

Salford won for their HALO VRT, which stands for variable rate tillage, and MacDon for the TM100 tractor mount header adapter. Both are great examples of delivering new product innovation to growers and to farmers.

Finally, we continue to exceed 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'm going to turn it over to our CFO, Dale Schneider to lead us through a more in-depth financial review. Over to you, Dale.

[Dale Schneider, CFO]

Thank you, Linda, and good afternoon, everyone.

As Linda noted, Q4 was a great quarter for sales and earnings growth despite the continuation of the supply chain issues impacting sales and other cost issues further impacting earnings net of any customer recoveries that we achieved. Q4 was another positive quarter for cash generation And as a result, we're able to maintain strong levels of liquidity at $1.3 billion.

For the quarter, sales increased 34.3% or $2.1 billion. Earnings are normalized for any FX gains or losses related to the revaluation of the balance sheet and any potential other items that may have occurred in the quarter.

In Q4, earnings were normalized for FX losses related to the revaluation of the balance sheet, which impacted EPS by $0.22 per share. Earnings are further normalized for a net gain recognized in the quarter as we continue to finalize the purchase price accounting for the acquisition of our Mills River facility.

Removing this net gain impacted EPS by $0.10 per share. A total of these two issues impacted EPS by $0.12 per share and as a result normalized EPS for the quarter was $1.61. Normalized operating earnings for the quarter were $140.9 million. This compares to $81.1 million in Q4 of '21, an increase of $59.8 million or 73.7%.

Normalized net earnings increased $40.5 million or 68.6% in the quarter to $99.5 million. Fully diluted normalized EPS increased $0.71 or 78.9% to $1.61. Included in earnings for the quarter was a foreign exchange loss of $17.4 million which resulted from a $17.1 million loss related to revaluation in the operating balances and a $300,000 loss related to the revaluation of financing balances. As I mentioned, the net FX loss impacted the quarter by $0.22 per share.

From a business segments perspective, the Q4 loss of $17.1 million related to the revaluation of operating balances was a result of up $200,000 gain in industrial and a $17.3 million loss in mobility.

Further looking at the segments, industrial sales increased 73.1% or $214.1 million to $507.1 million in Q4. The sales increase for the quarter was primarily due to the higher agricultural sales driven by both growth in the global market and in our global market shares for our products. It also grew due to the acquisition of Salford, the higher excess equipment sales driven also by higher growth in our markets, and market share gain in certain targeted markets and products.

Higher sales prices were also achieved in the quarter to help release some of our supply chain cost issues. And lastly, we had a positive impact from the changes in FX rates since last year. Normalized industrial operating earnings for Q4 increased $59.7 over last year to $55.5 million.

The primary drivers of the industrial earnings were the increased contribution from the strong agricultural equipment volumes, the increased contribution from the higher access equipment volumes, the positive impact from changes in FX rate since last year and the increased margins from the acquisition of Salford. These were partially offset by the ongoing supply chain issues impacting labor and raw materials and the fact that we know government support related to COVID-19 in Q4 of 2022.

Turning to Mobility, sales increased $311.5 million or 25.1% over Q4 last year to $1.6 billion. The sales increase in the fourth quarter was driven by the increasing volumes and launching programs, but also on certain other high demand programs. The sales impact of fully consolidating our Mills River location now that it's 100% owned. The cost recoveries, we covers received in the quarter from our customer negotiations and the positive impact from changes in the FX rates since last year.

Q4 normalized operating earnings from Mobility were flat over last year at $85.4 million in the quarter, the Mobility earnings were impacted by the increased contribution on launching programs and certain mature programs, the positive impact from the changes in FX rates since last year and these were partially offset by the impact of fully consolidating Mills River and the increased raw and utility costs net of any customer recoveries in the quarter and also due to increased travel costs that are supporting our growth.

Turning to the overall Linamar results, the company's growth margin was $248.8 million and increase of $87.9 million compared to last year due to the same factors that drove the segment that I just discussed. Cost of goods sold amortization expense for the fourth quarter did increase slightly to $112.7 million compared Q4, 2021, but COGS amortization as a percent of sales decreased to 5.5%.

Selling, general and administration costs increased in the quarter to $110.1 million from $96.1 million last year. This is primarily the result of the incremental SG&A cost from both the Salford and Mills River acquisitions and the increased travel costs that are supporting our growth.

Finance expenses increased by $10.9 million since last year, primarily due to the additional interest expense as a result of the Bank of Canada and the U.S. Fed rates increasing. We also had increased debt levels due to the acquisitions and the activity on the share buyback program that was completed last year.

And finally, we had a negative impact on changes of FX rates on debt since the last year. The consolidated effective interest rate for Q4, 2022 was 3.2%. The effective tax rate for the fourth quarter was 23.3% compared to last year and this increase is mainly due to an increase in non-deductible expenses compared to last year and favorable mix of foreign exchange - foreign tax rates. These are partially offset by the decrease in tax expense now that Mills River is fully owned.

We are expecting the 2023 full year effective tax rate to be also in the range of 24% to 26%, but higher than the '22 full year tax rate. Linamar's cash position was $860.5 million on December 31, a decrease of $67.9 million compared to December 21. The fourth quarter did generate $221 million in cash from operating activities, which is used mainly to fund CapEx and our share buyback program.

As a result, net debt to EBITDA did increase to 0.42 times in the quarter from a year ago, mainly due to the acquisitions completed in Q2 and the activity on the share buyback program. Based on our current estimates, we are expecting 2023 to remain strong and leverage is expected to remain low.

The amount of available credit on our credit facilities was $462.5 million at the end of the quarter. Our available liquidity at the end of Q4 also remained strong at $1.3 billion and as a result, we do believe we have sufficient liquidity to satisfy our obligations in 2023.

To recap, sales and earnings for the quarter was a story of improving markets, increasing market shares in both segments, the supply shortages that have hampered OEM production requirements have also continued to see improvements adding to additional mobility sales and earnings. The supply chain related cost issues continue to impact both segments' earnings. The good news is that the cost increases have been tempered with sales price increases and cost recoveries achieved in both segments. Despite these challenges, the quarter -- in the quarter, we still remained - very strong liquidity levels at $1.3 million.

That concludes my commentary. And I'd now like to open up the call for questions.

[Operator]

Thank you. [Operator Instructions] Your first question comes from the line of Michael Glen from Raymond James. Your line is now open.

[Michael Glen, Raymond James]

Hi, good evening. So just a couple of questions. So based on the guidance, it looks like CapEx next year, is going to be somewhere in the $650 million to $700 million range. So can you just break that down a little more like where do you need to spend the capital exactly? Like what are some of the big buckets of spending?

[Linda Hasenfratz, Executive Chairman and CEO]

Yes. You're right CapEx is going to be up quite a bit this year. Really the issue is we've really been skinny on CapEx the last couple of years, well under the level of spending that would normally result in double digit growth. So what's happening is we've got a lot of catch up happening this year. We're still driving that double digit top line growth, but we didn't have the capital spending to really make it happen.

So we've got a big launch of business. A big book of business travel that we're launching and we need to spend the capital. So the level of spending is going to be in line with our normal level of spending. We like to see sort of 6% to 8% to drive that double digit growth. So this is a normal level to drive that kind of growth. And that is up from prior years. So, how it breaks down is into a whole variety of different programs.

So not really a level of disclosure we would normally get to kind of break that down for you. But I can say that it's really -- it's catch up since we've had a couple of really tight years on the CapEx side.

[Dale Schneider, CFO]

Yes, I think as well as just to add maybe some perspective and it's across the board too, right, like it's -- we've got a lot of great launching in regards to very electrified and [technical difficulty] in fact, in the industrial side, regional growth as well to increase capacities, like we've talked about backlogs and things like that to really increased capacity than the industrial side too. So all positive and as Linda said, some catch up. But a lot of great to be matching our electrified wins.

[Michael Glen, Raymond James]

Okay. And working capital, if I look back historically, typically there had been a recovery that would take place in Q4 in working capital. It didn't happen this year. So is there some timing there? Should we expect something different in Q1 for working capital? I'm just trying to get some clarity there.

[Jim Jarrell, President, COO and Director]

Yes. I would say the biggest impact of working capital for prior years is the economic hardships that we've negotiated. So we have negotiated some good recoveries and some of those are still in receivables through this year. And I don't see as we negotiate recoveries through 2023, that will also impact non-cash working capital depending on timing of payments.

[Michael Glen, Raymond James]

That's when the $4 billion backlog and it's nice to see that skewing to electric. But one of the issues we've seen though is that some of these electrified programs have started to have margin profiles that are perhaps somewhat underwhelming at the beginning. Like can you just give us some degree of expectation like how we should think about the margin profile for these electrified business wins and how they will impact Linamar's margin profile as you wrap those?

[Linda Hasenfratz, Executive Chairman and CEO]

Yes. I mean, when we're quoting business for electrified vehicles, we use the same return targets as we do for more traditional internal combustion business. The margins are always something that ramp up. So when you're starting out, obviously, your any program, it doesn't matter whether it's electrified or not. You're going to start out in a loss and then make your way up to profitability and targeted margin levels. We'll see the same kind of curve happen with the electrified business.

It's obviously going to be reliant on volumes. So if volumes are slower to ramp, then margins are going to be slower to ramp as well. We have faced the exact same scenarios with internal combustion business launches if volumes were lower. So I don't really see a big difference other than is there potentially more volume ramp risk with electrified because we're relying on market adoption of new technology.

So that's certainly would potentially be the case. But I will remind you as well that when we're tooling up new programs, we try to always use flexible CMC equipment. We have if kind of modular in nature in the sense that we don't have to put necessarily 100% of the capital in place upfront. We can add some elements of the capital in over time. Obviously, it depends on the process and how many machine jobs at every operation.

But that does help us to manage the volume risk and is how we have traditionally managed volume risk and ramp - volume risk with our internal combustion engine business, we would do the same on the electrified side.

[Jim Jarrell, President, COO and Director]

There's a lot of capital as well that is sort of -- you could do it on both, right, an internal combustion engine as well as electrified, so a gear is a gear. And so as long as we have the ability to pivot fast during a launch, if the launch isn't ramping up and we could take those pieces of equipment and redeploy them, it's very useful for us.

[Michael Glen, Raymond James]

Okay. Thank you for taking the questions.

[Operator]

Your next question comes from the line of Peter Sklar from BMO Capital Markets. Your line is now open.

[Peter Sklar, BMO Capital Markets]

I wanted to ask you about the operating margin performance in the Mobility segment in the fourth quarter. So it was the lowest margin quarter for the year 2022. So for example, in your Mobility segment, the operating margin was 6.4% and in Q4 it came in at 5.5%, so down almost 100 basis points.

So I'm wondering like what happened in the fourth quarter that you got the depressed margin like I understand there's the diecasting facility, the Mills River facility that's losing money that you're fully consolidating that now, but is that enough to drive down the margin by that much relative to Q3? So maybe you can elaborate a little bit on what's going on with the margin in the quarter?

[Linda Hasenfratz, Executive Chairman and CEO]

Yes, sure. I mean, it's not unusual for Q4 to be softer than Q3. It depends on what happens with Christmas shutdowns compared to summer shutdown. And in fact, what we saw in the fourth quarter were production sales actually down a fair bit compared to the third quarter. You're not seeing that in the overall sales because sales were bumped up, the top line was bumped up by two things. One was the customer price relief that is offsetting the cost increases, right? So you get this bump on the top line. It's offsetting some big cost increases, but it's not sort of contributing its own margin as you might expect if it was a production program.

And secondly, the top line was bumped up by a favorable exchange rate, which, thanks to our natural and formal hedging program, also doesn't have much impact on the bottom line. So that also has a negative impact on margin. So really a couple of things going on there in the fourth quarter FX diluting margins and then the customer price relates to diluting margins.

[Peter Sklar, BMO Capital Markets]

Okay. On the -- like the customer relief and these net input costs, like how is this going to play out like are -- like do you anticipate that you're going to recover all of these costs through relief in these commercial discussions or is there going to be like a certain amount of this net input cost that you just can't get back from your customer and you're just going to have to absorb that in your business structure and wait till these programs roll off and then incorporate the new cost levels into - like your, I guess, your pricing process for new contracts? How is all this going to play out in your opinion?

[Linda Hasenfratz, Executive Chairman and CEO]

Yes, I mean, it really depends customer-to-customer and program-to-program and also what the nature of the cost. So, if the cost that's going, that have gone up is something that transitory in nature. So for instance, higher freight costs or higher energy costs - then are normalizing, that's not a permanent increase to your cost structure. So I wouldn't say it's a that this is a permanent negative impact to margins, because many of these cost issues will with time, recover will we get all the costs increase back, like probably not.

I mean, it's a negotiation with customers and we're able to achieve some level of cost relief. And the team has done a fantastic job of that. And you know, but it's not necessarily going to be a 100%

[Dale Schneider, CFO]

Yes, I can give - maybe a little bit more specifics around it, Peter. I mean, the key is, if you can get things on indices that scale up and down based off where we are. That's always the best thing to do, just because you're protected 100%, but that's difficult with some of the customers. So you do try and push for indices, but you can't put everything on an, indices and as Linda said - we're going after every dollar, every cent of cost we go after.

And we basically sit down with each customer, negotiate and we say here's the cost and we want to get 100% relief. And in every case, we're not getting 100% I mean, some we have, but I would say most not and you are negotiating to get new business offsetting businesses and things like that. But also I would say when we're negotiating, if we have the ability to let an engineering change or and uplift or something else.

We will negotiate as well, because if you're sucking up costs and you have something new to come, you want to recover that cost as you pointed out. So it's pretty fluid. Costs as Linda said are stabilizing, but there's, other areas that are going up and so, each one of them will take in to all the customers.

[Linda Hasenfratz, Executive Chairman and CEO]

And I will also add that new programs, of course, are being quoted at current cost levels. So, if this is not impacting future business that hasn't been won yet, that's obviously going to be quoted at a level that is reflective of the current level of cost.

[Peter Sklar, BMO Capital Markets]

Okay, okay that was good backdrop on that. And then just lastly, I to ask you the $1 billion of electrified business awards that you received. Can you give us a rough like a rough split, like how much is that related to hybrid vehicles and how much would be related to pure battery electric vehicles?

[Linda Hasenfratz, Executive Chairman and CEO]

Yes. It is a blend of both. But we are heavier on the battery electric side generally. And if I look over time at all the good - at all the wins that we've had, I'd say, it's more battery electric than hybrid. But in any one year, you might see more hybrid than electric, it kind of depends on what's happening in the market at that time.

[Peter Sklar, BMO Capital Markets]

Okay, that's all I have. Thank you.

[Operator]

Your next question comes from the line of Krista Friesen from CIBC. Your line is now open.

[Krista Friesen, CIBC]

Hi, thanks for taking the question. I just wondered if you could talk a little bit more about when we look at your Q3 guidance for mobility, the margins you're guiding for expansion in the margins in 2023, and now you're guiding for those margins to be flat? What's changed for you since November when you reported Q3 versus now to call for flat margins?

[Linda Hasenfratz, Executive Chairman and CEO]

Yes, I mean, I would say continued escalation in costs on specific the engineering and - sorry, energy and material side is certainly a factor - also a little softer first quarter in Asia just given the impact of COVID disruptions after their opening. So their Q1 is a little softer than we'd expected that it would be. So that's impacting Q1 margins, which obviously impacts the overall.

[Krista Friesen, CIBC]

Okay, great. And then obviously your balance sheet is in a great position right now. Can you speak to the M&A pipeline and if you're seeing any opportunities out there right now?

[Linda Hasenfratz, Executive Chairman and CEO]

Yes, I mean, I think there's always a lot of opportunities out there. And of course, we're interested in looking at opportunities like for instance on the mobility side anything that's going to continue to drive our electrification strategy, our strategy to reduce our reliance on ICE powertrain, which we've done a fantastic job of actually just in terms of new business wins.

As noted, more than half of our business not reliant now on those products that anything we can do to add to that is going to be of priority interest. There's always interesting things on the industrial side as well. So yes, I mean that's something we're always looking for products. There are businesses that might be the right fit from a product technology and geography perspective.

[Krista Friesen, CIBC]

Perfect. Thanks so much. I'll jump back in the queue.

[Operator]

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

[Brian Morrison, TD Securities]

Thanks very much. Good evening, everybody. Thanks for all the color on the Mobility margin. I want to come out a little bit of a different way, but you provided a lot of color, which is great. So, if I do my math right, I think you should get maybe 100 basis points of margin improvement from volumes and incremental margins or increments from volumes, excuse me?

So I guess when I take a look at energy and materials, is that sort of what's baked into your guidance for 2023 that we should have some in the neighborhood of 100 basis points of margin degradation from that when you say that's been the key change?

[Linda Hasenfratz, Executive Chairman and CEO]

Yes, I mean, I can't see that specific for you on exactly the - in fact dollar level or percentage level that it is impacting. But energy and material costs, I can tell you, are - and again, I'll point out the softness in the first quarter for Asia which is impacting on the margin side. I'll remind you as well that the Mobility segment is going to grow in double-digits on the top line.

And with flat margins, that obviously suggests we're going to be growing in double-digits or close to it on the bottom line as well. So, we are expecting some pretty significant earnings growth in the Mobility segment this year even as margins remain flat.

[Brian Morrison, TD Securities]

Understood, that's a good performance. But if I look at what in terms of the margin, so the key factors are obviously energy inflation, its launch costs that are going to be significantly higher than last year and then the COVID impact that you just noted, correct?

[Linda Hasenfratz, Executive Chairman and CEO]

Yes, energy and material cost increases.

[Brian Morrison, TD Securities]

Okay. When I take a look at the Industrial segment, I'm hoping you might be able to give me in terms of annual price resets. What's the magnitude? I guess just on a consolidated basis of the increase in pricing. I realize it's what the market will accept. But when you have performed this, is that aimed at targeting margins that are in the middle of target range or should we be thinking somewhat towards a lower end there is improvement?

[Linda Hasenfratz, Executive Chairman and CEO]

Yes, I mean, I think it fantastic that we're getting margin improvement back into 14% to 18% margin range when we've been down in the 10% to 12% range. So I can't be any more specific for you of where in the range, but I think the fact that we're going to be back in that 14% to 18% is fantastic.

[Brian Morrison, TD Securities]

Okay. More importantly though, I just wondered - you might be able to share in terms of the pricing resets that happened at the beginning of the year?

[Dale Schneider, CFO]

Well, they happened at the beginning of the year. I guess is what we did tell you and we really wouldn't want to say what we do with each customer. But you know, we sit down with each customer Brian and we're go to deal and we factor in the cost that we've seen over the last year and specifically put out that to the customer base.

[Brian Morrison, TD Securities]

Yes, okay. No, the performance of the guidance, was moment consensus. So it's all very good. Last question I want to ask though is in terms of your balance sheet, which is in great shape and the free cash flow. How are you approaching the NCIB as we get into 2023?

[Linda Hasenfratz, Executive Chairman and CEO]

Yes, so - the NCIB expired. And we purchased about 4 million shares under it. So I think it was a very successful program. We did - we have not as yet renewed the NCIB. If the share price softens, then obviously that is something that we can do quite quickly. In the meantime, I'll just remind you, we did increase our dividend by 10% this quarter. So, we're continuing to return cash to shareholders in a slightly different way.

[Brian Morrison, TD Securities]

Okay. No, it's well done to capitalize on the market weakness. Thanks very much.

[Linda Hasenfratz, Executive Chairman and CEO]

Okay.

[Operator]

There are no further questions at this time. I will turn the call over -- oh, we do have another question from Michael Glen from Raymond James. Your line is now open.

[Michael Glen, Raymond James]

Hi, just a follow-up on the Mobility margin. What's the level of losses from the Mills River that you're expecting in 2023 versus 2022? How do you see that improvement?

[Linda Hasenfratz, Executive Chairman and CEO]

I mean, it's going to be well improved. So I mean, we already saw improvement in the fourth quarter compared to the third and earlier in the year. So, we have a plan in place. We're executing on it. It's going well. We will see definitely lower losses this year than last year also.

[Dale Schneider, CFO]

Okay. And I'd point out as Linda mentioned your commentary, we're expecting it to get to breakeven in 12 to 18 months, so that will cause your business make an improvement.

[Michael Glen, Raymond James]

Okay. Thank you.

[Linda Hasenfratz, Executive Chairman and CEO]

Okay, great.

[Operator]

There are no further questions at this time.

[Linda Hasenfratz, Executive Chairman and CEO]

Okay good. So to conclude this evening, I would like as usual to leave you with three key messages. First, we are thrilled to deliver exceptionally strong double-digit, top and bottom line growth in the fourth quarter. Second, we continue to execute very successfully on our strategy to grow our electrified vehicle content and transform our Mobility business with over $1 billion in new business wins secured, more than triple any other year in our history and more than half of our book sales in 2027 already not internal combustion engine powertrain.

And finally, we're really proud of the multiple records logged in 2022 record sales, record new business wins, record market share in our Mobility business as well as targeted products in the Industrial business and of course our tenth consecutive year of free cash flow, which is excellent.

Thanks very 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.