Good day, and thank you for standing by. Welcome to Linamar Q4 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question -and -answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to Linamar's Executive Chair and Chief Executive Officer, Linda Hasenfratz.
Thanks very much. Good afternoon, everyone, and welcome to our fourth quarter conference call. Joining me this afternoon are members of my executive team, Jim Jarrell, Chris Merchant - who is stepping in for our CFO, Dale Schneider, this quarter - Roger Fulton, Mark Stoddart, as well as members of our corporate IR, marketing, finance, and legal team.
Before I begin, I will draw your attention to the disclaimer that is currently being broadcast. I won't pretend it's been an easy start to the year for us here at Linamar. Quite aside from the business challenges we're all facing, we of course had to deal with the loss of our Founder, Frank Hasenfratz. My father was a mentor, a teacher, a friend to so many of us here at Linamar and many outside our company as well.
I can only take comfort in the fact that he spent so much time teaching us how to save money, the importance of taking new jobs, how to treat our people and our customers, the importance of technology and innovation to our success, that these lessons are very firmly embedded within each of us.
He's reiterated these things over and over to every one of us at Linamar. It's why he was successful. It's why we are successful, and it's how we will continue to be successful. Now, I know that for anything we have to pay for by the word or by the minute, he would want me to be very brief, so I will leave it at that for the moment.
I'll start off then with a review of sales, earnings and content. Sales for the quarter were CAD 1.53 billion, down from last year on soft light vehicle markets and continued supply chain constraints. Our industrial segment had a tough quarter, thanks to supply chain constraints impacting MacDon's ability to ship products. Skyjack was actually up over prior year, but not enough to offset MacDon declines and a less than favorable exchange rate.
The auto sector also had a tough quarter, thanks to supply chain issues, notably the shortage in semiconductor chips, which has triggered continued shutdowns for our customers. European light vehicle markets were down 24%, and North America, down 14% in the quarter. Exchange rate changes versus last year have also not been in our favor, impacting our top line in the mobility group. Launches helped temper our decline to just 11% over prior year, even after considering the less favorable exchange rate.
Normalized net earnings are down thanks to significantly higher costs in material, energy, freight and labor, declining sales in both segments, lower government subsidy levels, and as noted, a less favorable exchange rate than last year. We saw double-digit growth in our core North American and European regions on content per vehicle, which is great to see.
Launches are a big part of that, as our vehicles, we have high content on being selectively prioritized for builds by our customers. We finished 2021 with record levels of annual content per vehicle in each region, which is also great to see.
Commercial and industrial sales were down 6.5% in the quarter due to supply chain constraints noted at MacDon, offsetting growth at Skyjack. Skyjack is seeing excellent market share gains in all three core products in North America and market share growth in booms globally, which, coupled with a market up in double digits, is translating to some solid sales growth.
MacDon is seeing strong market share growth as well, but supply chain constraints are impacting their ability to sell into that robust market. The good news there is, they should be able to recoup those sales in subsequent quarters as supply chain issues ease.
CapEx was down from 2020, but up from the first three quarters of the year, both in dollars and as a percent of sales, as we start to anticipate more launches and volume growth. 2022 will also be up from 2021 and back into our normal range as a percent of sales.
We have continued our track record of generating free cash flow with CAD 145 million generated this quarter despite higher CapEx for a full year of CAD 673 million in free cash flow. This marks our fifteenth consecutive quarter of positive free cash flow, which I think is excellent. We expect to see continued positive free cash flow for 2022.
We have CAD 1.9 billion of liquidity available to us, which is also outstanding. Our strong balance sheet and liquidity means we have the ability to take on takeover work or acquisitions as they arise in an opportunistic market and drive even more growth. The solid cash flows allowed us to further reduce net debt levels. We are still in a net positive cash position, now CAD 137 million, meaning we have brought net debt down by more than CAD 2.3 billion since our peak in early 2018.
We have an active NCIB program, and anticipate being active in the program just as soon as our blackout ends, given the weakness that we've seen in our share price since the start of the year. We thought it would be a good idea to talk a little more in depth around some of the headwinds that we're facing at the moment around supply chain issues, energy costs, logistics costs, and labor shortages.
Of course, top of mind is the aggression we're seeing in Eastern Europe with Russia's unprovoked attack on Ukraine. We have watched events unfold with deep sorrow, concern, and apprehension for the Ukrainian people, and we, at Linamar, globally stand by and in support of the Ukrainian freedom fighters.
First and foremost, this is a humanitarian crisis of significant proportions. Our global team is working to support the freedom fighters and the refugees as best we can. We are offering accommodation, jobs, and money in more than one country we operate in globally to the people of Ukraine. Fundraising efforts within our company have been very successful already, and we are matching anything raised at the corporate level.
We are also actively rolling out fundraising efforts in additional countries as we speak. We have seen the first of refugee families arrive in Hungary to take up accommodations that we are offering there, and we are working with various governments to fast-track refugees into our countries and into job opportunities.
Turning to the business impact. Top of mind is supply chain impact to ourselves and our customers for products being supplied from Ukraine or Russia. Resourcing activities are well underway and supply chain mapping to identify risks continues. This will take some time, but many of these issues will be solved in the next one to three months in our estimation.
Some products will take longer to resource, and will impact volumes for longer for it. We feel the supply chain impact will be largely a Q1 and Q2 issue. There are logistical challenges in terms of European companies bringing product from China to Europe by rail across Russia. Alternative routes are being established that will solve this issue, again, in the next one to two months in our estimation.
Of course, one of the bigger business impacts is the impact on energy costs, already sky high on business operations. We were already feeling the impact of gas prices up 5x late last year. This will create added pressure until such time as additional supply can be brought on board. This will take some months, possibly a year to do. The impact will continue for at least that time frame, but will resolve as well.
Sales to Russia will of course be impacted given sanctions. The only business really affected by that will be our agricultural business, whose level of sales to Russia was not significant. Finally, the impact on consumer sentiment is unclear. It will be determined, in part, by the length of time the conflict continues and the resultant human and economic impact of that.
We're keeping a close eye on the demand side of this equation. In short, we believe many of the business impacts of the war are largely solvable in the near term, and our customers and ourselves are actively enacting plans to resource and reroute as quickly as possible.
Here's a great example of that resourcing. We had a bearing that one of our plants in Germany was purchasing from a supplier in Ukraine. The team rapidly mobilized to find alternate supply, and fast-tracked approval for that with our customer all within 10 days. The result is, our customer line will not be shut down for lack of the product that we assemble this bearing into.
Turning to an update on other areas of disruption. We're seeing improvements in several areas. For instance, chip shortage shutdowns are becoming less frequent. Shipping costs are starting to moderate, and some commodity prices are also starting to moderate and even decline. Although, I will note others are continuing to climb. Labor availability continues to be a challenge, primarily in North America.
You can see here the impact of semiconductor chip shortages. Total impact to 2021 ended up being 9.6 million units of production, with the biggest impact to planned production felt in the third quarter of last year. Since then, impact to planned production has declined but has not been eliminated. You can see a forecast for Q1, for instance, of 830,000 units lost, down from the 2 million lost in Q4, but still significant. This situation will not resolve until additional capacity for chips gets put in place. This starts to happen in the back half of this year and, more meaningfully, early next year.
In terms of the impact of lost vehicles by region, you can see the impact regionally is relatively balanced between Europe and North America, with Asia taking the biggest hit. This makes sense given Asia is by far the largest market.
In terms of OEMs, Ford and GM took the biggest hit as a percent of planned production in 2021 at around 22% or 23%, followed by Volkswagen and Stellantis, who saw 15% of production loss, and finally the Asian producers at 10%-12% of planned production loss. Commodity prices are taking divergent tracks depending on the commodity that you're looking at. Steel products, for instance, are leveling off and even declining, but aluminum and oils just keep climbing, in part due to the war in Ukraine.
Of course, on the mobility side, the majority of contracts do allow for a pass-through on metal price changes based on a predetermined metal market index. Although, I will note that there is a lag effect, and there is not 100% coverage. Normally, this is not much of an issue, but of course, even a very small exposure on an increasingly big number starts to become more meaningful in terms of dollars.
On the industrial side, there is no mechanism for making adjustments for commodity price movements, meaning these changes are more challenging. We have imposed price increases as of January first of this year to try to mitigate some level of these commodity cost increases.
We are also seeing a lag in the ability of suppliers to meet demand, notably on the industrial side, which impacts not just cost, but our ability to meet production needs for a rebounding market. It is also very disruptive on the productivity side, which is part of what is driving labor costs up.
These challenges are continuing at both Skyjack and MacDon, but I will say are more pronounced on the MacDon side. It is their estimation that shortfalls in shipments being felt in the fourth quarter of last year, and that they expect to see in the first quarter of this year will be caught up in subsequent quarters. Of course, this is very supplier dependent. Ocean freight costs are still a big challenge, but we're seeing costs leveling off in Europe and possibly trending down in Asia. Although we did see a jump back up early in the year this year.
We continue to believe that these costs will continue to normalize as we get farther into the year, although it is possible that some of those logistics constraints mentioned regarding shipping across Russia may put some added pressure on ocean freight to take place. I mentioned gas prices earlier in the context of the war in Ukraine. Natural gas prices in Europe are now up nearly tenfold over last year. They were up 5 x when we last spoke in November. They're now 10 x where they were a year ago at this point, and we are certainly feeling the impact of that in our European plants. I do expect energy costs to be an ongoing issue.
We were already seeing pressure on energy prices given reduced supply, thanks to declines in investment in fossil fuel energy and an insufficient offsetting increase in investments in alternative energy, and coupled with them, increased demand. With additional supply constraints now, thanks to Putin, we are feeling more and more pressure on energy costs.
On the positive side, energy costs for us are typically only 1%-2% of sales in most of our facilities, higher, of course, in assembly. Not a massive weighting in our cost structure, but even something small can have a big impact if the change is substantial, which is exactly what we're seeing. We're, at the same time, actively engaging our plants in energy conservation and off-grid energy products to reduce our dependence and cost.
Finally, we are seeing real, a real shortage in availability of labor at the moment. The issue is twofold, really it's lack of availability of people largely, and higher than normal turnover broadly, although we have seen that level off in our own facilities in recent months. I'll note as well, this is a North American issue, not a global one, and definitely worse in the U.S. than in Canada.
This puts pressure on costs, of course, both in terms of wage inflation, but also in terms of higher recruiting and retraining costs. Unfortunately, wage inflation is not something that would be considered transitory, but we are hopeful as more people come back to the labor market now that subsidies are wrapped up and a more normal cadence is resuming with schools and childcare, that these costs will decrease.
To summarize on the challenges side, war-related supply challenges should be largely solved in the next few months. Higher labor and energy costs, likely here to stay. Shipping costs and some commodities are already tapering back, but others, notably aluminum, still rising. Better supply of semiconductor chips expected in the back half of the year and early next year.
I'll turn now to market outlook. Market demand is strong pretty much across the board at the moment, which is great news. Unfortunately, supply chain issues are constraining industry's ability to deliver that demand, notably on the industrial side. With strong underlying demand, we will be looking at a sustained period of strong performance for some time after these issues get resolved.
I'll start off by saying there is of course potential for impaired consumer demand or production disruptions related to the war in Ukraine or the aftereffects of the COVID-19 global pandemic and resultant supply chain constraints. We can provide the latest forecast from the various industry experts around market levels, but you should receive them with the knowledge that these forecasts can and are changing.
Turning to the specific figures. Industry experts are currently predicting growing light vehicle volumes globally this year to 15.2 million, 18.7 million, and 45.1 million vehicles in North America, Europe, and Asia, respectively. This represents double-digit growth in North America and Europe and single-digit growth in Asia. Semiconductor chip supply and other market pressures continue to create volatility in customers' set schedules, putting predicted volumes at risk.
Industry experts are predicting medium- and heavy-duty truck volumes to be solidly up again in North America this year, with more moderate growth in Europe and a decline in Asia. Industry experts are predicting double-digit growth in the access market globally this year in all three regions of North America, Europe, and Asia.
Our backlog is up meaningfully from prior year at seven times what we were last year, thanks to robust market demand. Delivery of orders is being impacted by supply chain challenges. However, as we work through these issues, we feel confident we can grow Skyjack in double -digits this year based on this exceptionally strong backlog and the strong market conditions.
Lastly, the agricultural industry is predicting solid growth in the combine draper header market this year in double- digits in North America. Europe and rest of world will also grow at a more moderate 5%. We're also seeing solid pickup in the windrower market this year, again with 5% growth in North America, but 20% growth in Europe.
The order book is up over last year, with farmers feeling more confident with persistently strong commodity prices. Meeting demand is also a challenge for MacDon regarding supply chain and logistics, and appears to be the limiting factor to growth as opposed to demand. That said, our current forecast is for double-digit growth this year for MacDon on the back of solid market growth, continued market share growth, and a strong backlog.
Looking at this in a little more detail, on the auto side, you can see inventory levels in North America continue their trend downward, with average days inventory at only 24 days overall. What this means is, regardless of consumer demand, we're in for a sustained period of strong production levels, jobs to replenish inventory once supply chain issues are resolved. The industry is predicting at least two years just to refill the pipeline regardless of demand.
In looking at production levels compared to what was forecast at our last conference call, you can see a stronger Q4 driving EMEA and Asia. Q1 2022 is forecast just a little higher than we expected last quarter, but you should expect that to come down due to short-term production declines in Europe thanks to supply issues out of Ukraine and Russia.
For the full year, 2022 is also expected to be better than forecast in October, as discussed on our last call, and up 9% from 2021. All the pickup is coming from Asia. This forecast would not consider any lost production due to the Ukrainian war, which would primarily impact Q1 and Q2, hopefully with an offsetting pickup in the back half. Again, the situation here is pretty fluid and difficult to predict.
Looking at the access market in more detail, you can see first that all three markets showed exceptional growth over prior year in the fourth quarter, as well as for the full year 2021, with double- or triple-digit increases across the board. Equipment utilization levels continue to look positive on average within 3.5 percentage points at the utilization levels that we saw in 2019, and 1.5 percentage point higher than the utilization levels we saw in 2020. Market growth and the strong backlog already noted should drive double-digit sales growth for Skyjack this year.
In the agricultural business, Q4 combine retails in North America were up 34% from prior year, for a full year up 24%. E.U. was up 17% in 2021, and the rest of the world was up 25%. All markets are projected to grow again in 2022.
MacDon continued to build market share globally in our windrower products over the last 12 months. We're seeing solid growth in our windrower business globally, in part due to pivot to growth developing as the market shifts to windrowing from straight cutting in reaction to regulatory changes, notably in Europe.
Markets are up substantially and market share growth is accelerating our own sales growth. We also saw market share growth in 2021 for draper headers in pockets of Europe where we have been targeting growth. Market share growth has been hampered by our inability to build products due to supply chain issues, which is frustrating. Order intake remains strong, supporting double-digit sales growth for MacDon this year as well.
Turning to an update on growth and outlook, you will be pleased to know that we had an excellent quarter in new business wins, the second-highest in dollars of wins in our history, in fact, taking 2021 to a record year. I will highlight a couple of our most strategic wins in a moment. Electrified vehicles continue to provide great opportunities for us. Almost 20% of business wins last year were for electrified vehicles, which likewise makes up a substantial share of the book of business currently being pursued.
The dollar value of annualized sales won last year was 50% higher than the dollar value of sales won in 2020, which is excellent progress. You can see here a steady build in our global content per vehicle for battery electric vehicles as a result of these wins.
We have also been building our business wins in other areas of the vehicle agnostic to the propulsion type to again offer less risk and more growth opportunities in the transition to electrified vehicles. We now have more than 41% of book business by 2026 in parts and systems not related to ICE vehicle powertrains. We will continue to build this book of business for the future.
Our eLIN Product Solutions Group launch was very well received in the marketplace and is a big part of driving those business wins for the future. ELIN is focused on developing electrified products in four key areas - power generation, energy storage, propulsion systems, and structural and chassis systems for all of Linamar's businesses globally - as well as developing strategies and, of course, winning new business.
eLIN is an important asset in supporting all of our existing groups of plants, and we utilize and leverage resources in our existing R&D organizations globally. Our addressable market across a range of vehicle propulsion types continues to look excellent, with the total addressable market for us today around CAD 80 billion, growing to more than CAD 300 billion in the future, an increase of more than 3x . As you can see, our addressable market potential for electrified vehicles is really growing, particularly as we get out into the late 2020s, which is exciting.
Our potential content for battery electric, hybrid electric, and fuel cell electric vehicles is equivalent to our content potential for internal combustion engine vehicles at roughly CAD 3,200 per vehicle, with an intent, of course, to continue to grow content potential for the electrified vehicles.
With respect to launches, we're seeing ramping volumes on launching transmission, engine, driveline, and body platforms, which are predicted to reach 45%-55% of mature levels this year, generating incremental sales of CAD 600 million-CAD 700 million. These programs will peak at nearly CAD 4.1 billion in sales. We saw a shift of more than CAD 165 million of programs moving from launch to production last quarter, more than offset by very strong business wins in the quarter. As usual, we're summarizing all of these expectations on our outlook slide, which is now being displayed.
Despite the challenges we're facing, we are still expecting to see double-digit growth on the top line and in earnings per share in 2022. This drives from double-digit growth at both ag and access this year, coupled with launches in a growing market on the mobility side. Net margins will stay fairly stable to what we saw in 2021, close to being back into a normal range.
Material, energy, freight, and labor costs are still weighing on results, and though improving in some areas, are worsening in others. We will also see continued positive free cash flow this year, leaving us in an excellent position from which to drive further growth. Looking specifically at Q1, you should expect chip and war-related constraints to negatively impact vehicle build levels in Q1, which will be lower than Q1 2021. This will weigh on sales in the mobility segment, which you should expect to be down meaningfully from Q1 last year, but up somewhat from seasonal lows and higher levels of chip impact in Q4.
Higher costs will weigh heavily on margins in the first quarter, as you may expect. You should expect margins well below our normal range in Q1, and then improving in subsequent quarters. Ag and access will see sales up from seasonal lows in Q4 and flat to up over prior year on more robust demand that continued constraint from supply chain challenges. Lack of supplies will weigh on sales, and costs will weigh, and will heavily weigh on margins, which will be well below our normal range as well, improving in subsequent quarters.
That means you should expect a decline in OE for Q1 in comparison to Q1 last year based on those three key factors, r eally, continued significant energy, supply chain logistics, and labor challenges, the sales declines, and no subsidies. Expect below normal net earnings margins in Q1, improving in subsequent quarters. Roger would like me to again remind you that the situation is very dynamic, and the impact is not fully determinable in terms of their impact at this point.
I'll highlight a few of our more interesting new business wins this quarter. First, we won a major driveline system product for a European OEM in the quarter, which will be produced in one of our German facilities. Volume is substantial at nearly 1 million units per year at peak volume, generating significant revenues.
Second, we saw another meaningful quarterly win for a variety of battery electric vehicles, a combination of shafts, gears, and differential assemblies, which, in aggregate, are nearly CAD 40 million in annual sales. Third, we saw some significant gear wins for a next-generation hybrid transmission program with, again, quite meaningful volumes of 600,000 per year. We will start production in 2024 in our plant in France for that program.
Next, we had an exciting quarter in wins for commercial vehicle programs in a whole variety of components worth CAD 130 million a year in sales in aggregate. We've seen a real pickup in business opportunities on the commercial vehicle side after a quiet few years. Finally, we saw a few more wins for balance shaft programs in the quarter, including one for an Asian-based OEM customer new to Linamar.
Balance shafts are a key component for smaller engines, and key to more fuel-efficient and hybrid vehicles, importantly, and have been a key target for us in terms of wins, given their reliance on strong capabilities in gear and shaft manufacturing, which is right up our alley. Aggregate value of the wins are over CAD 80 million a year in sales.
Turning to an innovation review, I'd like to highlight some of the work we've been doing in our lightweight aluminum casting process development. As I just noted, in the quarter, we secured new business wins for components used in battery electric vehicles, including some cast aluminum structural and chassis components. Our technical teams within our light metal groups have been successful in expanding our engineering and process development capabilities to pursue "unweaned" products in the market.
Low pressure and gravity die-cast assets that were used in the past for ICE components are being adapted to produce these lightweight vehicle structural components like cradles, cross members, and nodes consistent with our eLIN product focus. This, along with our high-pressure die-cast strategy, is increasing our portfolio offerings and content potential for all vehicles, but particularly for electric vehicles, where lightweight cast aluminum structural solutions are particularly important to offset the enormous weight of the battery pack. Finally, we continue to execute on our global digitization journey with more and more connected machines, data connections, and robots being commissioned in our global plants every day.
With that, I'm going to turn it over to our Global VP of Finance, Chris Merchant, to lead us through a more in-depth financial review. Over to you, Chris.
Thank you, Linda, and good afternoon, everyone. As Linda noted, Q4 was a tough quarter for sales and earnings, with continuation of the semiconductor shortages impacting sales and creating other cost and supply issues, further impacting earnings. Despite these challenges, Q4 was another great quarter for cash generation as we generated CAD 144.7 million in free cash flow. Additionally, we were able to grow our strong level of liquidity to CAD 1.9 billion.
For the quarter, sales were CAD 1.5 billion, down CAD 170.4 million from Q4 2020. Earnings are normalized for any FX gains or losses related to the revaluation of the balance sheet and potentially other items have incurred. In the quarter, earnings were normalized for FX gains related to the revaluation of the balance sheet, which impacted earnings per share by CAD 0.07.
Earnings were also normalized for providing for Canada Emergency Wage Subsidy. In reviewing the legislation related to the subsidies, we potentially found misinterpretation of our calculations, which should be performed. We are currently recalculating each of these claims to ensure that we are claiming correctly. This provision for potential adjustment to our CEWS claims impacted Q4 EPS by CAD 0.20 per share.
Normalized operating earnings for the quarter were CAD 81.1 million. This compares to CAD 176.4 million in Q4 2020, a decrease of CAD 95.3 million or 54%. Normalized net earnings decreased CAD 70.1 million or 54.3% in the quarter to CAD 59 million. Fully diluted normalized earnings per share decreased by CAD 1.07 or 54.3% to CAD 0.90.
Included in earnings for the quarter was a foreign exchange gain of CAD 5.7 million, which resulted from a CAD 5.6 million gain related to the revaluation of operating balances and a CAD 100,000 gain due to the revaluation of financing balances. As I mentioned, the net FX impact impacted the quarter's EPS by CAD 0.07.
From a business segment perspective, the Q4 FX gain of CAD 5.6 million relating to the revaluation of the operating balances, which results in a CAD 4.4 million loss in industrial and CAD 10 million gain in mobility. Further looking at the segments, industrial sales decreased by 7.2% or CAD 22.6 million to CAD 293 million in Q4.
The sales decrease for the quarter was due to lower agricultural sales due to supply and cost issues impacting our ability to produce and deliver product, and a negative impact on sales from the change in FX rates since last year, which were partially offset by higher access equipment sales driven by market share gains in North America for all three of our product families.
Normalized industrial operating earnings in Q4 decreased CAD 44.1 million or 110.5% over last year to a loss of CAD 4.2 million. Primary drivers impacting industrial losses were the ongoing supply issues impacting raw material, labor, and freight costs, t he reduction of our agricultural sales, reduced government support related to COVID-19 due to the recovery in market conditions, and the negative impact of changes in FX rates, which were partially offset by increased contribution from strong Access equipment volumes and a reduction in AR provisions since Q4 2020.
Turning to mobility, sales decreased by CAD 147.8 million over Q4 last year to CAD 1.2 billion. The sales decrease for the fourth quarter was driven by the market impact of the semiconductor chip shortage, which is impacting our customers, and the impact of negative changes in FX rates since last year, which was partially offset by increasing volumes on launching programs and certain programs which are high in demand, and the increase in material costs and pricing.
Q4 normalized operating earnings for mobility were lower by CAD 51.2 million or 37.5% over last year. In the quarter, mobility earnings were impacted by the ongoing semiconductor issues that our customers are experiencing, the ongoing supply issues impacting energy, raw materials, freight, and labor costs, the negative impact of changes on FX rates since last year, reduced government support utilization related to COVID-19, which were partially offset by the increased volumes of launching certain mature programs and lower management compensation tied to the lower volumes.
Returning to the overall Linamar results, the company's gross margin was CAD 160.9 million, a decrease of CAD 112.6 million compared to last year due to the same factors that drove the segment results. Cost of goods sold, amortization expense for the fourth quarter was CAD 110.1 million. Cost of goods sold, amortization as a percentage of sales remained flat at 7.2%.
Selling general administration costs improved in the quarter to CAD 96.1 million from CAD 106 million last year. The decrease is primarily a result of the reduction of accounts receivable provisions over Q4 2020, l ower management compensation tied to lower earnings, which were partially offset by increased sales and marketing costs to support future growth, and a reduction in government support.
Finance expenses increased by CAD 0.3 million since last year due to lower interest earned on declining long-term accounts receivable balances, which were partially offset by lower interest as a result of significantly lower debt levels since Q4 2020.
The consolidated effective interest rate for Q4 2021 was 1.9%. The effective tax rate for the fourth quarter increased to 19.6% compared to last year due to decreased one-time adjustments related to prior tax years, decreased non-taxable expenses compared to Q4 2020, which were partially offset by increased unrecognized benefits and losses.
As a result, the full year tax rate was 25.2% and at the midpoint of our expected range of 24%-26% in 2021. We are expecting the 2022 full year effective tax rate to also be in the range of 24%-26% and consistent with the 2021 full year rate. Linamar's cash position was CAD 920.4 million for December 31, an increase of CAD 67.3 million compared to December 2020.
Fourth quarter generated CAD 217 million in cash from operating activities, which is used mainly to fund CapEx, dividends and debt repayments. This also resulted in free cash flow generation of CAD 144.7 million for the quarter. As a result, net debt-to-EBITDA decreased to - 0.13 x in the quarter from 0.5 x a year ago and from - 0.01 x at the end of Q3.
Q4 2021 was the second quarter in a row where the company had a net cash position. Based on our estimates, we are expecting 2022 net cash to EBITDA to continue to improve over the 2021 levels. The amount of our available credit on our credit facilities was CAD 957.5 million at the end of the quarter.
Our available liquidity at the end of the quarter remains strong at circa CAD 1.9 billion. As a result, we currently believe that we have sufficient liquidity to satisfy our financial obligations during 2022.
To recap, sales and earnings for the quarter was a story of supply and other cost issues. The semiconductor shortages continued to hamper OEM production requirements, significantly impacting mobility sales and earnings. Other supply issues such as commodity prices, logistics, energy, and labor issues also continue to impact those segments. Linamar had a great cash generation quarter as we generated CAD 144.7 million, while growing our strong liquidity to CAD 1.9 billion.
This concludes my commentary, and I'd now like to open up the call for questions.
As a reminder, to ask a question, you will need to press star one on your telephone. Again, that is star one. To withdraw your question, press the pound key. Your first question comes from the line of Mark Neville with Scotiabank.
Hey, good evening. I guess I just want to understand or clarify just the comments around the conflict in Ukraine and the impact on the business. Linda, what you said, again, just to sort of paraphrase my own words, direct exposure is sort of minimal. You're managing your company-specific sourcing, but the primary impact will be energy costs and, I guess, the broader impact regionally and globally on wherever the fallout may be. Is that how you're summarizing it, or am I summarizing it correctly?
Yeah. You're correct. The direct exposure is minimal. You know, the impact will come from lost vehicle builds because our customers who are buying product in Ukraine. You know, that will have an impact on us, right? Because we'll definitely see lower vehicle builds this month in March, right? That'll impact Q1 and over the next month or two. That'll affect Q2.
We do certainly expect to see lower vehicle builds because our customers are going to have to resource products that they're currently buying in Ukraine. Some will be easy to resource, like that bearing example that we were buying in Ukraine that we quickly resourced somewhere else. They'll have products like that. Some will take a little bit longer. They may see like a longer impact on vehicle builds beyond that. To me, that's the big impact.
On the energy side, I mean, we were already feeling the pinch on higher energy costs, and I do expect that that's going to continue for some time, in part due to Ukraine, but in part due to some of those other issues as well.
Right. I guess just to follow up, I guess it does sound like you're already sort of seeing some changes to production schedules in Europe. Is that right?
Yes.
Okay. Yeah, sorry, and I guess just broadly, do you have a rough number of sort of your European sales exposure, either by division or just consolidated?
Sorry, do you want the impact of the-
No.
... the production schedule changes?
No. Just, I guess, from a real high level, roughly how much of Linamar sales are coming from broader Europe? Is it 25%, 30% of your sales?
Yeah. I mean, we do geographically segment our sales. If you reference, y ou can see what total European sales are, I mean, for 2021 in total. Now, that's a combination of the automotive and as well as the industrial, was about CAD 1.8 billion.
Okay. Yeah, I just wasn't sure if I had the industrial. In terms of the energy, Linda, you mentioned some numbers earlier. I just missed those. I don't know if it was 1% or 2% of sales or you mentioned some numbers. Yeah, just around your energy costs.
Yeah. Energy costs in our machining and assembly plants are typically 1%-2% of sales, depending on what they're doing. It is a pretty small, you know, element of our cost structure. The problem is when something goes up tenfold, you know, even if it's small, you know, the dollar value starts to get a little bit bigger. It is something that's a concern and for sure a bigger concern for our foundries, right, where the percent of cost for energy is higher.
Mainly Europe.
Yeah. Yeah, absolutely, Europe. I mean, that's where the energy costs are up.
Yeah. Right. On the supply chain impact in the quarter, it sounds like it was much more acute in ag. I guess I'm just curious why. Why was it so much worse in ag than the other parts of the business?
Yeah, I would say that there's just a lot more supply chain components and things that are in the ag. The risk level or the numbers are just greater there, right?
Okay.
You know, like a day-to-day basis, Mark, is, you know, it could be from a trucking issue or an example just recently, the border protests, you know, at the Emerson in Manitoba, right? That put a constraint in or it moves to an idler bearing or something like that. It's just the amount of components that we are dealing with, you know, and we are building, right?
We are building the product, and then what we do is we put it out, and then we gotta take it through a rework process when they bring the parts in. As Linda said, the efficiency level is not that good when we're doing that. It really is driven by the numbers of suppliers in the supply chain.
Yeah. If I could ask just one more question. There was an adjustment or provision taken this quarter for CEWS. That's the-- I'm just curious what that was. Is it a repayment, or what exactly is that number?
Yeah. As you know, the CEWS program ended in October 2021, and we're finalizing our submission of the final claims for 2021. They're due within six months of the end of the claim period. Given that the program is ended, we wanted to ensure that the CEWS impacts were accrued within 2021.
As a result, after further reviews of the legislation, we noticed that what appears to be a potential discrepancy between information on the CEWS website and the actual wording of legislation. As a result, we're currently assessing this potential discrepancy to ensure the accuracy of our claims to date. Given the level of detail required to submit the claim, it will take a few months to recalculate the claims to be confident with their accuracy.
As a result, we thought it would be prudent to record a provision until the analysis can be completed in the potential discrepancy.
Actually, I'll just point out as well, Mark, that the accrual represents like less than 9% of the total CEWS claim. It's not, you know, massive in terms of the claim. It's like, I don't know, CAD 2 million a quarter if you spread it out over the full claim period. You know, when you spread it out, it doesn't look like that much, but when you put it all in one quarter, it does.
Yeah. It's not a big number, but it's just a claim, a provision for a potential repayment.
Yes.
Right? Yeah. Okay. All right. Thanks.
Your next question comes from Krista Friesen of CIBC.
Hi, thanks for taking my question. More of an industry question. With the reduction in auto production in Europe, given the supply chain issues and being exacerbated right now by the geopolitical situation, do you think it's possible that some chips will move from Europe to North America, where we have less production and supply chain issues, and we could see heightened North American production versus Europe?
I'm not sure. I didn't quite understand the question.
I think she's wondering if, because production is gonna be constrained in Europe because of the specific issues there as opposed to North America, maybe chips get sent to North America instead of Europe.
Yeah. Potentially. I mean. Yeah, I think the chips, if there's available chips, they're gonna go. Like, people will take them, right? I think there's no question if they're not being used in Europe, they'll come to, like an OEM for sure.
Well, I think, too, you need to keep in mind that pretty much all of the OEMs are global. They'll be managing that internally. Obviously, you know, for, you know, for GM or Volkswagen or, you know, Toyota, Honda or whatever, they're gonna allocate, and they've been doing that already, allocating chips globally as to, you know, where they can put them and build vehicles and where the needs are.
A lot of tier ones as well, you know, will shift them around. A lot of tier ones are using them, that go into a system for an OEM, so they could play off in a different region as well.
Okay, great. That makes sense. Just what are you hearing on the sentiment for the ag industry? Obviously, crop prices are higher, which bode well for the farmers, but we're seeing input prices, or prices for inputs rise, just as quickly too. Just wondering what you're hearing there in terms of farmer net income for this year.
Yeah, I mean, I think, you know, the increase in commodity prices is pretty significant, and that's always gonna bode well for the farmers. Our general sense is that the outlook is pretty positive in terms of farmer income sentiment and therefore supporting the continued growth in the ag industry. On the demand side, that's we're seeing.
Maybe just to add, I think that, I mean, all the indicators that we're seeing on the ag side are very positive in regards to dealer and field inventories being sort of at an all-time low. As you just stated, farm net income up, cash receipts, crops are up, demand is up. The thing that's holding back is the supply chain, right? That's really what's keeping everybody from fulfilling that.
Right. I guess maybe just a broader question. Labor's obviously an issue and not a transient cost. Do you think we could see a structurally lower margins, I guess? However you wanna quantify it, maybe 50 basis points hit to margin structurally over the next couple of years with higher labor costs?
I mean, I wouldn't say that. I wouldn't go that far. I mean, certainly availability of labor is an issue. Solving that is gonna be a combination of immigration to bring more people in, getting more people back to work who are not engaging in the workforce for whatever reason at the moment.
Of course, automation, which is a path that we've been going down for quite a few years of, automating more on the shop floor. In terms of changes that structurally changes labor as a percent of sales in any case, because you're shifting it into robotics that are flexible, and we can shift around in the programs as well. I think that the labor issue is certainly a challenge. You know, that's how we'll approach solving it over the next few years.
Great. Thanks. That's it for me.
Thank you.
Your next question comes from Brian Morrison of TD Securities.
Thanks very much.
Your line is now open.
Great. Thanks very much. I've just a couple follow-up questions to start. Can you actually provide us with what you're seeing with respect to European schedule adjustments? I know you alluded to that in Mark's question.
Yeah. I mean, they're coming fast and furious, so, like, that's a really difficult question to answer, Brian. I mean, as I was suggesting in my formal comments, the analysis is still underway, so our customers are still uncovering areas of risk and digging into the sub-tiers to see, you know, where there's areas of risk. We're really only just starting to get some of the notifications that they're gonna need to be down. You know, nobody has been able to kind of add that up yet. The impact is, like, I can't quantify it for you right now. I mean, we're definitely seeing shutdowns.
We'll, you know, as I was suggesting, I think we'll continue to see them over the next month to two months as these issues sort of percolate up and then get solved.
Yeah. I gotta say, it's like a day-to-day thing. You know, we have a daily note that comes through on this, and, you know, you'll see on a day that customer A reduces by 25% this week on a part, and then customer B has got a supplier issue that, you know, can't sustain under the energy cost issues.
You know, customer three, you know. It's sort of like that going on on a day-to-day basis. Really, I think, as Linda started in her discussion earlier, is the customers are now just trying to figure out at the different tiered levels where the impact is, and then how do you resolve that, and who do you go to to resolve it.
To me, I look at this also as an opportunistic time as well, that as things can't be sourced, they'll come to, you know, companies like Linamar that have the ability to ramp up quickly and, you know, that example in the bearing, right? Again, it is very fluid, Brian, like, I mean, you know, minute to minute almost.
Brian, as of today right now, BMW and Volkswagen have reported combined about 100,000 vehicles are going to be lost due to the shutdown. That doesn't, you know, include what is gonna happen with BMW and Toyota now that they've announced their plants being shut down, and other car companies to come.
Okay. I appreciate that, the situation's fluid. Can I just ask a question with respect to industrial and the performance in Q4 in terms of the operating margin and the outlook? Is it fair to say that Skyjack, the OM, is it near normal or is this all MacDon, or is Skyjack well below normal operating margin as well?
Oh, no, Skyjack is below normal margin as well, because they, you know, they're dealing with these cost increases, right? The problem is MacDon's struggling with just getting product in-house so that they can actually build product and get it out the door, plus higher costs as well. You know, MacDon's impacting on the top line that they're not selling what we think they should be selling and what they've got the orders to sell. They're both being impacted on the bottom line.
Is the operating margin, is there a big gap between the two?
Well, I mean, there's always been a gap between the two, to be honest. They're different businesses. They're in different markets, and they have different cost structures, so they're not at all aligned.
Right. I'm just talking about the performance today, though.
Yeah. I mean, the impact is higher at MacDon right now than it is Skyjack, but Skyjack is feeling the impact as well.
Okay. Can I? This might be a question for Jim. Just in terms of the annual contractual reset, we've talked about this before with Skyjack and MacDon, but I probably need an update. Can you just talk to me, like, what is the ability here? I think you've priced for the year now, but what is your ability to reset with the conflict and commodity price increases and pass those through? Do you have ability to do that?
Yeah. I mean, let's just talk about Linamar-wide, and then we can get into the sectors. First of all, I mean, you know, just it goes without saying that we pride ourselves on sort of best product, best price, right? The cost, you know, increases. I mean, the first thing we do is push back, right?
We try and lean things out through our CapEx process and all that. I can tell you in every sector, mobility, ag, and industrial, we are, you know, face-to-face with customers now reassessing all the costs and pricing that we will need to reset. You know, there's customers now that are not on the industrial side, but the mobility side, really looking at indexes, you know, related to energy as, you know, exploding over in Europe.
They're looking at setting indices around that and logistics, dealing with fuel surcharges and metal market-based prices differently in mobility. We have a very solid review going on with each of our customers, and we are on the infrastructure and ag side, certainly reassessing what we had put in place in sort of fourth quarter to come in, you know, and sit down with customers again.
But we're gonna play it out really opportunistically as well because, you know, I think we can weather the storm in a lot of areas better than some other suppliers. Looking sort of longer term view too, you know, we gotta take that into consideration to protect our growth as well.
Last question, very quick. Linda, last quarter, you had a headline, you know, being active with your buyback. I haven't seen any participation here. Your share price is obviously, balance sheet's in a fantastic position. What's your approach to the buyback now?
Yeah. 100%, good question. When we completed the NCIB process late last year, what was happening was our share price was already appreciating. It made us a little reluctant to get into the market at that time. Unfortunately, it was just as we entered blackout in January that the share price started to deteriorate, by which time we couldn't purchase shares.
We have made the decision not to enter into an automated program for share purchases during blackout, as we like to have a little more control over the decision of when to buy. We've been extremely frustrated because we have an NCIB. We have the ability and the cash to buy shares. But as long as we're in blackout, we can't do so.
Just as soon as we're out of blackout, I can assure you we're gonna be out buying the market.
Thank you very much.
Your next question comes from Peter Sklar of BMO Capital Markets.
Linda, when are you out of blackout? Do you wait, like, two more trading days? How does that work, for sure?
Yeah. It's two full trading days after the end of the quarter when we issue the press release.
Okay. Today is Wednesday, Thursday. You could be in the market on Monday, I think is what that means.
Correct.
Okay. Can you review, like, in your mobility business, like, the major commodities? Like, I think you're buying, like, a lot of castings. You're buying aluminum castings. I believe you're buying steel castings. I don't know if you also machine iron castings, but what are the major material inputs for mobility? And in which materials, in which casting materials do you have contractual, you know, arrangements for price movement as the, you know, as the underlying commodity moves around?
Yeah. I mean, the commodities that we're most exposed to are aluminum and steel. That's for both the mobility and the industrial businesses, would be the quantities we would be most impacted for. We are buying aluminum castings. We are buying steel forgings. We're buying straight up steel for fabrication in the Industrial side as well as steel bar for the mobility side.
We're also buying iron castings, which also kind of driven by steel prices. So on the mobility side, we do have metal market adjustment programs with most customers that cover most of the exposure. Normally, there is I mean, almost nothing in the way of noise around that. It's a little bit up, a little bit down, but it's not at all noticeable.
The problem is, of course, that the costs have increased so much, for instance, on the aluminum side, that even a tiny level of exposure on a very big number starts to become a more meaningful number. That's kind of what we've got going on right now.
Okay. On the issues you're having with MacDon, getting the product out the door, just from like reading the press releases, it sounds in addition to supply chain, you're having labor issues. Like, it sounds like the labor issues are more acute at MacDon than they are at Skyjack. If that's true, I'm just wondering, like, is the labor situation different in Winnipeg than it is in Guelph?
I wouldn't say that it's the labor issue is worse at MacDon. I would put them on the same level because it's just the numbers of supply issues that are out there with MacDon are more than what they are at Skyjack, and there's more suppliers. The risk level of that supply base is higher, right?
I mean, again, what's happening is, you know, the parts are coming in, so you go build this, you know, SD-one unit, you put it out in the yard. It's not fully built. You're waiting for parts to come, then you gotta go out and rework it. It's a really awkward system that's set up right now. There's just more to the manufacturing around that assembly versus Skyjack, which is creating that gap, a bigger gap.
I would just add that it's far and away the supply chain issues that are impacting our ability to build. I mean, labor is a piece of it, but it's, you know, it's a smaller piece. We're less productive and less efficient because of what Jim just described. You know, building something not quite complete, having to bring it back, you know, send it out, bring it back in, put the parts in. This is by far the bigger issue is supply chain and availability of product.
Okay.
Hey, Peter, I just want maybe just go back. I just had a comment, which I didn't say when you were on the surcharge issue and things like that. It's the surcharge, as Linda said, it's a pretty straightforward calculation. But keep in mind, too, there's base metal pricing that is changing, too, meaning base prices, because these suppliers are now being hit with, you know, increases in labor, logistics and things like that. It's not just the metal market stuff now, it's base metal pricing that's also going up across them, like the ductile, the iron, the aluminum, the magnesium casting suppliers.
Do your mechanisms take that into account as well in terms of recovery?
Yeah, absolutely. We're in on these things in our commercial discussions with our customers, right? That's exactly what we are now doing. We are sitting down saying, "Look, you know, it's just not tenable for us to be the middle person and holding all that." We are now sitting down being opportunistic, saying, "Hey, you know, here's what the total cost is. We need recovery, but also, you know, we're willing to play ball and but what else opportunity-wise can we gain from that to grow with you?" It's just not the surcharge. I just wanna make sure you understand it's just not the surcharge.
I think what Jim's saying when he says the base prices, he's talking about the, like, their actual cost to make it. We're not talking about metal, right? Like, I mean, labor costs have got higher. Labor costs versus other costs are going up. That's increasing how much it costs for them to make the part. In addition to that, there's the metal piece that's adjusting as well. That's what we're trying to address with commercial discussions with our customers.
Sorry, I'm a little confused. Like, are you talking about tier twos or are you talking about your other costs?
Tier twos.
Tier two.
Yeah. Okay. Like, I think you've answered this question. Linamar does not have a forecast on how much you think, you know, how Western European vehicle production is going to be impacted. Like, you don't have a number for, you know, for Q2, like 500,000 units or 100,000 units.
No.
You don't have a view on it.
Not yet, Peter. It's a work in progress, right?
Okay.
As to what the impact is gonna be. I will say that the general sense is it's gonna be made up, right? If we lose some vehicle builds in March and in the next month and a half, or so or two months, then the general sense is it's gonna be made up within the year.
Yeah. Okay. Just lastly, sorry, I have to plead ignorance. Like, this claim you're talking about, like, which government program is that?
The government subsidy, the federal subsidy program, the CEWS.
Oh, okay. The CEWS. Is that the CAD 0.20 a share negative that was mentioned in the financial part of the presentation?
Yes.
That's an after-tax, so CAD 0.20 after tax?
Well, yeah.
Yeah. Okay. That's all I have. Thanks.
There are no further questions at this time. I will now turn the call back to Linda Hasenfratz for closing remarks.
Thanks very much. Well, to conclude this evening, I'd like to leave you with three key messages. First, we had an outstanding record year in new business wins, key to future growth, with EV wins notably 50% higher in dollars than we saw in 2020.
Secondly, we had yet another quarter of strong cash flow, meaning we are sitting on wads of cash, and we are putting it to work for shareholders this year. Third, despite continued challenges, we did deliver double-digit top and bottom line growth in year two of the COVID-19 pandemic, as promised, and we are poised for solid growth again this year. Thanks very much and have a great evening, everybody.
This concludes today's conference call. You may now disconnect.