Ladies and gentlemen, thank you for standing by, and welcome to Linamar's Q3 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's 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. Please be advised that today's conference is being recorded. If you should require any further assistance, please press star zero. I would now like to hand the conference over to your speaker for today, Linamar's CEO, Miss Linda Hasenfratz. Thank you, ma'am. Please go ahead.
Thank you. Good afternoon, everyone, and welcome to our third quarter conference call. Joining me this afternoon on the call are members of our executive team, Jim Jarrell, Dale Schneider, Roger Fulton, Mark Stoddart, Kevin Hallahan, and 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. Okay. Why don't we start off with an update on the COVID-19 crisis and Linamar's reaction to such. As you know, we took a four-step approach to dealing with COVID-19. We assembled a team, we gathered data, we made a plan, and we executed on that plan, and we communicated broadly. We continued to make excellent progress on each one of these steps. Our focus now is very much on the next phase of this crisis, restarting, rejuvenating, and recovering.
First and foremost, we are determined to create a work environment where people feel and are as safe or safer coming to work than not coming to work. We launched a testing pilot in August to regularly test employees at two sites in Guelph to prove we're not seeing transmission in the plants of any asymptomatic positive people or any positive cases whatsoever. We plan to continue with the study for a few more months. More than 94% of our employees are now actively back at work, which is great to see. Of those, 97% are physically back at the office or plant and have been since May. Safety protocols in both office and the plants are protecting our people, and we are not seeing transmission onsite of the virus.
We're working with the balance of our people on appropriate return-to-work plans that make sense for them and when the time is right. We are actively building market share in our businesses, particularly where there may be some weakness in the competitor base. Of course, we continue to be very cautious around cost reduction and cash management. Although many of our cost reductions are only temporary measures, we do believe some can be permanent changes in how we manage these costs. Our safe work protocol is based on five key principles: screening, PPE that includes masks and or face shields, distancing, increased cleaning and hygiene, and contact tracing. We are regularly surveying our employees as to how safe they feel at work and the adequacy of the safe work protocols and are continuing to see consistently strong scores for both metrics since we've started doing so.
If there's a concern in any one plant or region in terms of how people are feeling, we can quickly focus in on that through this data that we're gathering, which allows us to drill down by region and by plant. We are making excellent progress on the financial aspects of our Linamar Health First action plan, as is evidenced by our great results this quarter. On the P&L side, you can see we have implemented strong levels of cost reduction and as noted, continue to be very cautious around spending. We have an excellent system we put in place to accurately forecast our next five quarters on a biweekly basis, which is now part of the rhythm of how we manage. From a balance sheet perspective, we continue to operate with the highest levels of cash payment control.
Capital spending was cut by more than 50% in the quarter compared to last year. We continue to stress test our forecasts to evaluate impact on cash and covenants. Our stress test continues to show we are well in control in terms of still generating profit, free cash flow, and staying well away from debt covenant levels this year and next. In an attempt to further risk mitigate our balance sheet, given the uncertainties in the current environment, we early negotiated terms for refinancing a piece of debt that was due in January. The CAD 435 million principal amount owing under Facility B of our bank credit agreement matures in mid-January of 2021. We have identified our preferred option for replacing that financing, circled preliminary terms with our lenders for such, and are confident in completing the paper close in the next few weeks.
Another key area of focus, of course, has been community support. I think that what we've done in terms of rapidly retooling lines for ventilator components and full assembly production of ventilators is a great example of Linamar's innovation, responsiveness, and flexibility. We were in part production on several orders within two weeks of the first phone call. We were assembly-ready to build UV disinfection units for CleanSlate in four weeks, and we were assembly-ready to build the ICU in a box integrated ventilator and life support system for Thornhill, comprised by the way, of 1,700 different components, in only six weeks. How did we do that? We were able to do it because we are a remarkably agile, flexible company, both in our management style, our engineering, and supply chain management capabilities, and in our actual equipment, which can be easily and rapidly retooled to new programs. We are technically incredibly deep.
Our team honestly is fantastic and adaptable, and I'm so proud of them. The excellent job that they did. Now I blow this horn a little as we are often challenged about how Linamar will handle a changing landscape of design and technology in fields that we focus, electrified vehicles as one example. Linamar is an advanced manufacturing company through and through. We can design and manufacture products for all kinds of industries, and we do, and we will continue to do so long into the future, regardless of where technologies take us. We see technology change as only one thing, opportunity, and we will, as we always have, chase these opportunities down and continue to prosper. We're at various stages of completion for these products. For the component work for GM , ZOLL and O-Two , we are complete.
For Thornhill, we have built nearly 300 units, and we'll have the full order of more than 1,100 complete within a few months. There is some potential for additional volumes on this product as well. Similarly, we have built nearly 200 units for CleanSlate on the UV disinfection product, and we'll continue to ramp up production as we get into the fall. There's also some potential for additional volume on this product as well. Okay, with that, let's jump into some of the specifics about the quarter. We'll start off as usual with sales, earnings, and content. Sales for the quarter were CAD 1.64 billion, down 5.9% from last year. Auto sales have bounced back nicely from Q2 lows, although with Skyjack are still feeling a drag from the pandemic. Launches have resumed ramping up. MacDon had a strong quarter as well.
Skyjack is definitely still feeling the pinch of the pandemic, but we did see a little better markup performance in the quarter compared to Q2. In terms of earnings, normalized net earnings are up 46% to CAD 140.5 million, driven by the strong sales performance, improved margins on launches, cost reductions implemented, and government support programs. Earnings are better than expected last quarter, thanks to a stronger than expected performance in Asia and also at MacDon, and higher government support than had been forecast. In North America, content per vehicle for the quarter was CAD 182.76, up 9.6% over last year, with customers we have a heavy weighting with also seeing the biggest market share gains. Vehicle production levels were down 1% compared to last year, meaning automotive sales in North America grew 8.4%.
In Europe, content per vehicle dropped to $ 77.72 in a market down significantly, thanks to continued impacts of the pandemic. We're seeing volumes pick up as of Q4, but we do note an element of risk given the strength of the second wave of the pandemic in Europe. In Asia, content per vehicle was also up significantly at CAD 12.74, up 25.5% over last year, again due to our key customers seeing strong market share gains in certain products in a market that was actually down 1.8%. This gave a 23% boost to auto sales in the region. Global content per vehicle was also up, driven mainly by the strong growth in North America. Commercial and industrial sales were down 20% in the quarter due to lower Skyjack sales on North American and European markets down 30%-40%. Somewhat improved from last quarter, but still a very big decline.
On the plus side, MacDon saw sales growth over last year with the draper header market up in double digits in Canada and the U.S. in the quarter, recovering much of the ground lost after a tough first half. MacDon also saw market share gains again in Europe and CIS, which also helped to boost results. Carefully managing CapEx continues to be a key theme for us in these uncertain times. We were down 53% from last year, although up, of course, from the lows of Q2 as we hit more solid ground. The year will end up with CapEx down at least 40% from last year. In 2021, we will be back to a more normal range of spending of a percent of sales.
Linamar's utilization of flexible programmable equipment is the key factor in allowing us flexibility in times of market softness to continue to tool up new business without requiring significant CapEx. This is a massive advantage Linamar has in comparison with competitors who may invest in more dedicated equipment, which, although cheaper and often requiring less labor, is not easy to reallocate to new programs or to scale the line to match actual capacity needs. I have to say we had an absolutely outstanding quarter in terms of free cash flow, with $445 million generated to further reduce net debt levels. Net debt now sits at $ 877 million, which is down over $ 1 billion from a year ago, despite the pressures of the pandemic. Leverage likewise improved dramatically to 1.1 x last 12 months EBITDA.
As noted, we have circled terms to refinance debt due again in January and have no other debt due until 2023, so our balance sheet is in excellent shape. Free cash flow is something Linamar is quite good at managing and generating. We have seen strong free cash flow over the last five years and clearly expect to see strong positive free cash flow this year as well, given the performance through the first three quarters, which has been more than double last year at this time. Free cash flow yield sits at 44%, which I think is pretty impressive. We have $ 1.3 billion of liquidity available to us, which is also outstanding.
Our strong balance sheet and liquidity mean we have the ability to take on takeover work or acquisitions as they arise in an opportunistic market and drive even more growth. In addition, our strong cash position has allowed us to double the dividend to $ 0.12 per share for Q3. Turning to our market outlook, we are seeing markets steeply down across the board this year, which shouldn't be a surprise. Industry experts are predicting steeply declining light vehicle volumes globally this year to 13 million, 16.4 million, and 39.7 million vehicles in North America, Europe, and Asia, respectively. It's expected that each market will see a strong recovery in 2021 at 22.3%, 15.9% and 9.2% respectively. On-highway medium-heavy truck volumes are predicted to be down significantly in North America and Europe this year, with solid growth next year.
Asia will see small declines this year and bigger declines next year. Ag and access markets are similarly down this year in most regions, but expected to grow next year. Looking at a little more detail on the auto side, you can see an increase for 2021 in every region globally after a very tough 2020. Not surprisingly, 2020 is expected to be the trough for global production levels, now at 73 million, up a little, by the way, from expectations last quarter. Production recovery, of course, thrives from consumer demand. You can see here how the consumers have bounced back in the different regions. Very different curves in each, in fact. China was sharp and deep and now back up well over last year consistently every month.
Europe's curve is deep but broad, with low levels of demand lingering for much longer, although finally back up over prior year two of the last three months. The U.S. is shallow but broad and notably back up over prior year for the last two months. Not nearly as big a drop in North America, which is great to see and a big reason why production is pulling so strongly here. Inventory levels dropped quite low after two months of shutdown and a shallower drop in demand, particularly for popular pickup trucks. October had the highest monthly sales volume of 1.35 million units seen since the start of the pandemic. It's great to see all three regions globally profitable again in comparison to prior year, which bodes well for continued strength in production.
You can see here the changes to both Q3 and Q4 from what was predicted last quarter in global light vehicle production. I think it is highly notable that for the first time in literally two years, we are seeing the forecast improving versus prior quarter forecast. Growth in both Q3 and Q4 drove mainly out of Asia, but Europe is notably running hotter for Q4 as well. Similarly, we are also seeing a positive change in comparison to prior quarter estimates for full year production levels, now expected to be 3.5 million units higher this year and 4 million units higher next year with gains in every region. In terms of patterns of correction in North America, this correction fits a standard level of reduction seen historically, which is good news.
Although COVID-19 did accelerate this change painfully for us, it does mean we can now look forward to volumes starting to build again, which is absolutely what we are seeing in the forecast. Looking at the access markets in more detail, industry experts expect significant declines well into double digits for the access market globally this year, driven out of the COVID-19 pandemic impact, adding significant pressure to an already soft year in terms of demand. We are finally seeing some positive market indicators, which suggest next year should see demand improve in double digits in North America and Europe in particular. Equipment utilization levels are increasing, with levels of 95% and 98% of last year seen consistently over the last couple of months. Q3 was down less than half in North America and Europe in another positive sign.
In the agricultural business, the industry expectation is for a moderately lower combine draper header market this year in Canada, thanks to a tough harvest last year, as well as tariffs and political backlash hurting farmers and therefore dampening demand, particularly in soybean and canola. The combine draper header market in the U.S. will be up moderately for the year, offsetting the drop in Canada to result in North America being recently flat. The European market is still expected to decline this year. Australia is also expected to decline. South America and CIS show more positive signs to more than offset the decline in Australia for an overall positive outlook for rest of world.
After a rough first half across the North American market, most notably in Canada, where MacDon market share is strong, we're seeing a positive trend in the back half, which is helping to offset earlier declines. Combine retails in both Canada and the U.S. were both up in double digits in Q3 over prior year. MacDon continues to build market share in international markets, most notably in Europe, to offset market declines. Nevertheless, we will see sales down in 2020 as a whole, with market improvements in the back half not enough to offset a tough first half in Canada. We are seeing positive signs indicating market growth for 2021 here as well, with the fall order intake running well above last year at this time. Turning to an update on growth and outlook, you'll be pleased to know that we had another solid quarter in new business wins.
I'll highlight a few of our more strategic wins in a moment. Electrified vehicles continue to provide great opportunities for us. You can see a steady build in our global content per vehicle for battery electric vehicles as a result of recent wins. The lines on internal combustion engine and battery electric vehicles global content per vehicle are converging, which of course is the goal. Our content per vehicle in electric vehicles is now predicted to surpass that of hybrids within a couple of years as we see more and more BEV wins. Also importantly, our global content per vehicle for BEVs in only three years out is equivalent to our global content per vehicle for internal combustion engine vehicles three years ago, which is fantastic news.
Our addressable market across a range of vehicle propulsion types continues to look excellent, with our total addressable market for us today around $80 billion, growing to more than $300 billion in the future, an increase of more than three times. As you can see, the market potential for each type of vehicle, internal combustion, hybrid, battery electric, fuel cell electric, are all starting to even up. This is largely driven from the higher potential content per vehicle we now have in the battery electric, fuel cell electric, and hybrid vehicles, thanks to continued product development efforts such as assembled battery trays or hydrogen fuel tanks and other products. Our potential content for all vehicles is now equivalent, in fact, just exceeding the current potential of internal combustion engine vehicles at roughly $3,200 per vehicle, which is great to see.
I think it's also critically important to point out that the type of equipment utilized to machine parts for electrified vehicles is literally identical to the equipment used to machine parts for internal combustion engine vehicles. Electric vehicles use gears, shafts, structural parts, and a variety of housings, just like internal combustion engine vehicles. A gear grinder or a shaper used to make a gear for an internal combustion engine vehicle is the very same equipment we would use to make a gear for an electric vehicle. I highlight this point as it means we will not have significant levels of stranded assets to deal with as the world transitions into electric vehicles. Our launch book is solid and expected to peak at more than $4.1 billion in sales at this time.
W e saw a shift of about $140 million of programs moving from launch into production last quarter. We should be hitting somewhere around a third of mature levels on launches this year and expanding that towards half of mature levels next year. As usual, we are summarizing all of these expectations of market changes on our outlook slide that you can see now showing. We continue to expect significant double-digit declines in both sales and earnings this year, but do expect to be profitable overall and in both segments. Neither segment will be in a normal range on normalized operating margins, but they will be within a few percentage points of that. Net margins should be between 4% and 5% for the year. 2021 should see strong growth on rallying markets in the double digits for both top and bottom line.
Clearly, that means expansion towards or into normal operating margin ranges for each segment and a net margin that is moving closer to our normal range of 7%-9%. We expect to maintain leverage levels under 1.25 for the year and improve significantly from such in 2021. Free cash flow both years will be strongly positive, as already demonstrated. Looking specifically at Q4, you should expect to see auto dial back from Q3, given our customers in North America basically did not shut down in Q3, but are expected to have their normal seasonal shutdown in Q4. In addition, there are some key customer platform changeovers planned for Q4, which will also impact volumes in the auto business. MacDon should see a similar performance to Q3, noting there could be seasonal slowdowns, as we often see, and Skyjack will definitely dial back from Q3 as it normally does seasonally.
In addition, Q4 is not currently expected to have significant levels of government subsidies in comparison to Q3 and Q2, as the calculation has changed significantly from the original rollout of the wage subsidy program as we return to more normal levels of business. We're still assessing what the impact will be in Q4, given still-pending government guidelines around such. What all that means is you should expect to see a material earnings and dial back in Q4 in comparison to Q3, but still looking positive in comparison to prior year. I will add, as the lawyers insist that I do, that impacts from the COVID-19 outbreak are currently not fully understood or determinable in terms of their impact to all segments at this point, so of course, risks remain. In particular, we are conscious of the fact that potential customer shutdowns are always a risk and should be considered.
I am going to finish off highlighting a few of our more interesting wins this quarter. First, we picked up multiple wins again in the quarter for battery electric vehicles, many of which were in China, where, of course, battery electric vehicles are predicted to more quickly penetrate the market. In aggregate, they're more than $ 11 million a year of sales, and they will start production in a couple of years. Notably, electric vehicle programs have represented nearly one-third of total wins this year. Great to see for these vehicles of the future. Secondly, we are seeing a pickup in quoting activity in the commercial vehicle space. We had quite a successful quarter in that regard, securing several wins representing more than $90 million a year in sales.
We saw multiple driveline business wins for our Canadian plants, helping us to continue to drive our growing chassis business. In aggregate, these programs represent nearly $ 30 million in sales. Finally, we saw another meaningful driveline system win for a full RDU system. The volume for this system, fully designed and assembled by Linamar, by the way, is more than 40,000 per year. This job will also be housed in one of our Canadian plants. 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.
Thank you, Linda, and good afternoon, everyone. Linda noted Q3 was a strong recovery from the COVID shutdowns that occurred earlier in the year. It was a great quarter for cash generation, as we generated $ 445.1 million in free cash flow, which brings the year-to-date total to $ 762.7 million. Additionally, we were able to maintain our strong level of liquidity and increase it to $ 1.3 billion. For the quarter, sales were $ 1.6 billion, down $1 02.6 million from $ 1.7 billion last year. Earnings are normalized for FX losses related to the revaluation of the balance sheet and any unusual items that occurred in the quarter. In Q3, earnings were normalized for the cost impact of announcing the closure of our Eagle Manufacturing facility in Kentucky during the quarter.
Under IFRS, we are required to accrue the closure costs of the plants on announcement, even though the plant is not scheduled to close until May 2021. The closure costs impacted the quarter by $13.8 million, of which the majority of the cost related to the impairment of fixed assets in the amount of CAD 11.7 million. The impact on EPS from the plant closure announcement was $ 0.15 per share. Earnings were further normalized for FX losses related to the revaluation of the balance sheet, which impacted EPS by CAD 0.08 per share. Normalized operating earnings for the quarter were CAD 197.4 million. This compares to earnings of CAD 139.2 million in Q3 2019, an increase of CAD 58 million or 41.8%. Normalized net earnings increased CAD 44.3 million or 46% in the quarter to reach CAD 140.5 million.
Fully diluted normalized EPS increased by CAD 0.68 or 46.3% to CAD 2.15. Included in our earnings for the quarter was a foreign exchange loss of CAD 6.6 million, which resulted from a CAD 7.5 million loss from the revaluation of operating balances and a CAD 900,000 gain from the revaluation of financing balances. As I mentioned, the net FX loss impacted the quarter's EPS by CAD 0.08. From a business segment perspective, the Q3 FX loss due to the revaluation of operating balances of CAD 7.5 million was fully associated with the Industrial segment. Further looking at the segments, Industrial sales decreased 21.6% or CAD 82.2 million to CAD 298.4 million in Q3. Sales decrease for the quarter was due to the access equipment sales declines associated with the COVID-19 pandemic, which were partially offset by growing agricultural sales at MacDon.
Normalized Industrial operating earnings in Q3 increased CAD 9.5 million or 24.2% over last year to CAD 48.7 million. The primary drivers impacting industrial were the government support programs, the increased agricultural sales, which was tempered partially by the softer access equipment markets. Turning to transportation, sales decreased by CAD 20.4 million over Q3 last year to CAD 1.3 billion. The sales decrease in the third quarter was driven by the impact of COVID-19, as the transportation markets have not fully recovered, which was lessened by a favorable FX impact due to the change of the rate since last year. Q3 normalized earnings for transportation were higher by CAD 48.7 million or 48.7% over last year.
In the quarter, transportation earnings were primarily impacted by government support programs, the continued ramp-up of launching programs that are adding to earnings, the targeted cost reductions achieved in the quarter, and the favorable FX impact due to changes in rates since last year, all of which was partially offset by the lower volumes in the transportation markets. Returning to the overall Linamar results, the company's gross margin was CAD 273.5 million, an increase of CAD 43.4 million compared to last year, primarily due to the utilization of government support programs, the added margins from launching programs, the favorable FX impacts, the targeted cost reductions achieved, all of which was partially offset by the lower earnings from the impact of COVID-19 on volumes in both segments. COGS amortization expense for the third quarter was CAD 109 million.
COGS amortization as a percent of sales increased to 6.7%, primarily due to the impact of launching programs in the quarter. Selling General Administration Costs decreased in the quarter to CAD 89.8 million from CAD 94.3 million last year. The decrease is mainly due to the targeted cost reductions and due to the impact of government support programs. Finance expenses decreased CAD 9.6 million since last year due to reducing our average daily debt level by CAD 655 million since Q3 2019 and reducing our effective interest rate by 100 basis points. The consolidated effective interest rate for Q3 declined to 1.8% from 2.8% last year. The effective tax rate for the third quarter increased to 26.3% compared to last year, mainly due to an unfavorable mix in foreign tax rates.
As a result, we're now expecting the full year 2020 effective tax rate to be in the range of 24%-26%, which is up slightly from our Q2 expectations. Linamar's cash position was CAD 570.1 million on September 30th, an increase of CAD 175.3 million compared to September 2019. The third quarter generated CAD 518.4 million in cash from operating activities, which was used mainly to fund CapEx and debt repayments. This also resulted in free cash flow generation of CAD 445.1 million in the quarter. As a result, net debt to EBITDA decreased significantly to 1.1 x i n the quarter. Based on our current estimates, we are now expecting to remain under 1.25 x by the end of the year due to the seasonality impact of Q4, which has in the past caused the usage of cash.
This is subject to change as the impact of COVID-19 is still very fluid and not currently fully understood. The amount of available credit on our credit facilities was CAD 757 million at the end of the quarter. Our available liquidity at Q3 increased to CAD 1.3 billion as a result. We currently believe we have sufficient liquidity to satisfy our financial obligations during 2020. To recap, sales and earnings for the quarter was a story of recovery and rejuvenation.
With the dramatic impact of the pandemic has had on Linamar this year, the critical story still remains one of cash and liquidity. Linamar has had a remarkable cash generation quarter as we generate CAD 445.1 million in the quarter and CAD 762 million year to date in free cash flow, while maintaining strong liquidity above December 2019 levels to reach CAD 1.3 billion. That concludes my commentary, and I'd now like to open up for questions.
Ladies and gentlemen, just as a reminder, if you'd like to ask a question at this time, please press star and then the number one on your telephone keypad. Once again, that is star and the number one. Your first question comes from the line of Mark Neville with Scotiabank.
All right. Good evening. Excuse me. First, impressive results, so great job.
Thank you.
Linda, I just wanted to clarify the comment on Q4. Sorry. The guide was earnings would be down sequentially, but still up year-over-year. Is that right?
That's correct. Yeah. We'll be down from Q3
Yeah
Based on basically, strip the subsidy out, dial back on auto and Skyjack and we're going to be a lot lower than Q3, but we do expect to be above Q4 2019.
Okay. In the Q3, I didn't catch, but did you quantify the amount of the support programs?
Yes, that's in the financial statements.
Okay. All right. I'll look for that. On the cost improvements, is there sort of any way at this point for you to quantify sort of how much is temporary, how much is structural? Just trying to think as we go forward, I guess what comes back and sort of what margins look like as volumes continue to ramp.
Yeah. It's a bit tough to quantify. I can't really give you a specific dollar figure or percentage. I will say that we've always learned from being forced to do things differently. Of course, we're going to try and retain anything that we can in terms of where costs were trimmed. I think an obvious area is travel, for instance. Quite outside of the pandemic, we found we can avoid some of the travel that we were doing to some extent by utilizing technology that we've all become very accustomed to now to do remote face-to-face, to some extent, meetings. That's obviously going to help us to save on time and cost, and there's other things as well that we think we can retain.
Yeah, I think we've ratcheted back maybe on some software things and subscriptions and things like that would probably stay in place now, Mark. It's just, again, the things that Linda was saying, like travel. Who knows, right? We're going to start traveling again, but as we know, we're going to work more potentially remotely. Do we always have to go somewhere for that meeting and stuff like that? We're watching everything. We have a log on this every week of the cost savings that we've implemented, and we talk as a group operationally to see, maintain them or loosen up things.
In terms of margin expectations, I would encourage you still to reference the normal margin ranges that you can see right here on the outlook slide that we would normally have, both from a net perspective as well as in terms of the individual segments. I think those are still good margin levels. I am not expecting a massive change from those levels.
Sorry, if I could just ask one last question. Just on the free cash flow. Obviously great quarter. I guess we would've thought, just given the restart of operation, there would be maybe bigger or some investment in the working cap. I'm just trying to understand sort of what happened in Q4 or sort of how you managed to do that, and just any commentary on that. Very impressive.
Yeah. It was a variety of things. Some of the receivable sale programs we have out there that we were able to tap into g reat management of non-cash from both Skyjack and MacDon, I think, made big differences as well. We also continued to be extremely cautious in terms of our overall cash spending, just in light of continued uncertainties. You can see the results. I will say Q4, as we've noted on the slide here, is likely to see neutral to a small decline on non-cash. We normally do see neutral to a small decline in terms of cash generation. In other words, a small use of cash in Q4 is a good estimation. That's just sort of a normal seasonal change from Q3 to Q4 to see non-cash increase a little bit.
Sir, use of cash. Oh, sorry. Go ahead.
I was just going to say, for the industrial side, we do build up a little bit in Q4, right, for expectations coming along. That's just another thing to keep in mind.
On the industrial side.
Industrial.
Yeah.
Then on the financing programs that Linda referred to, keep in mind that we weren't even close to being at full sales at the end of Q2. Those programs weren't fully utilized. Obviously, with the markets recovering in auto and MacDon, we've been able to utilize those more effectively in Q3. Sorry, on the use of cash from there at LV for Q4, that was strictly on non-cash working capital, not operating cash flow.
Not, sorry?
It was for the working capital. You weren't speaking to operating cash flow being negative in Q4.
Yeah. We expect to see non-cash use in the fourth quarter. As noted, we'll still be profitable, but you should expect CapEx to start to tick up a bit again.
Yeah. All right. Thanks again. Appreciate it.
Your next question comes from the line of Kevin Chiang with CIBC.
Hi. Thanks for taking my question. Good afternoon, everybody. I'll ask a Q question differently. I think, in your disclosure, if I'm reading it correctly, CAD 47 million, I guess a CAD 47 million contribution to earnings. If I were to think of the contribution up to your operating income line, is it as simple as taking an effective tax rate in the quarter, which I guess is 26%, and tax adjusting that CAD 47 million, or is there anything else I should be thinking about?
No, that's basically it. It does all flow through operating earnings.
Perfect. You happen to have a split between your two divisions in terms of how that CEWS was, I guess, netted against the earnings across your two segments?
I don't think we disclose that specifically, but obviously the lion's share of the people are in the transportation segment, so you can safely assume that, 70%-75% there at least.
Okay. No, that makes sense. Maybe just looking at your shareholder return program, you raised the dividend with this quarter. If I kind of go back and listen or think about your presentation you just went through, leverage at 1.1 times, I think you have a pretty optimistic outlook for your business outstanding. Obviously, the fluidity of the situation with COVID-19, your effective interest rate is 1.8%. Just wondering how you decided that the dividend, which I know is not a huge cash outflow, but why the dividend versus maybe looking at a share buyback program, just given where your balance sheet sits today and the cash generation you're seeing for the business?
Yeah, I think that both dividends and share buybacks are effective means by which to return cash to shareholders. We had cut the dividend, so we thought it was a prudent first step to restore that to our shareholders. Of course, we will continue to assess dividend levels and buyback potential in the context of ongoing cash needs and leverage levels. I think it's prudent to be conservative right now, just given there are some uncertainties in the road ahead and the current wave of the pandemic, et cetera. We're going to be cautious, but it's for sure a topic that we discuss at every single board meeting.
Okay. I didn't catch this in your presentation. We happen to mention it. In terms of some of the challenges in the access equipment market, you walked through how the market is performing. In terms of Skyjack specifically, is that outperforming the market, or is the sale performance similar to what the overall market is seeing right now?
Yeah. We're still seeing market share growth for Skyjack in targeted areas. A great example is booms in Europe, where we've seen good continued market share growth and the trend is positive. When the overall market's down 30, 40%, obviously you're going to be down in that territory as well.
I think the other thing is we've got, at Skyjack, a lot of excellent product launches coming up with vertical masts. There's also micro scissors and refreshed RTs that are coming out, rough terrains, right? There's a lot of good product launches that are coming.
Well, that's helpful. Just last one from me, I think you were planning or were looking to eventually put in some sort of third-party financing within MacDon, similar to what you do at Skyjack, so that financing doesn't sit on your own balance sheet. Is that something you're still looking to push forward here?
Actually, we implemented that in Q4 2019.
For MacDon?
For MacDon, yes.
Okay.
We now have financing programs in the auto side, in MacDon, and Skyjack has been in it a number of years ago.
Okay. Oh, I'll make take it offline maybe, in terms of some of the moving parts with working capital, in terms of how that financing flows through into your balance sheet. I can take that offline. Thank you very much, and good quarter, everybody.
Thanks, Kevin.
Your next question comes from the line of Peter Sklar with BMO Capital Markets.
Back on the wage subsidy program, the amount you articulated in the note, the CAD 47 million, that's for the Canadian wage subsidy program, the CEWS program. The subsidy programs you would have benefited from in other jurisdictions, were those amounts substantial, or were they minor compared to the Canadian program?
To be honest, the Canadian program is a world-class example of government support. No other country in the world has a program even similar to the Canadian one. Generally, in other countries, it is a reimbursement of wages as we're paying for employees that are laid off. It's almost like we are the country's EI, and the country's just reimbursing us. There's no impact to our results from those programs. The Canadian program does provide subsidy to working and non-working employees.
Okay. In terms of the fourth quarter outlook, I know, Linda, in your comments, you said you're still working on the numbers, but just maybe qualitatively, do you assume that there will be some recovery from the wage program, but it's going to be substantially less than Q3? Is that what your thinking is?
Yeah, absolutely. I mean, substantially less, right? The way that the program is designed, it drives off of comparisons to prior years. Now that the sales are becoming more normalized, the levels of subsidy will come back. The problem is that the rules aren't all out yet for how to calculate what the subsidy is gonna be. We're still waiting to see what they exactly will be. It makes it a little more difficult to predict specifically, which is exactly what happened last quarter, frankly.
Right. What are you hearing in terms of a replacement program? Because I understand this program winds down in the third week of December, are you anticipating a replacement program in 2021, or it will likely not be relevant because you'll be back to more normal levels and you won't have that much eligibility?
In the Throne Speech, the government did talk about extending it into 2021. There will be a benefit. Currently, they have only described up to the first claim period, which is a two-week period up till first claim in October. We don't really have any insight on what that extension's gonna be or how it's going to impact us. Obviously, as the markets continue to recover in 2021, as we've seen so far in Q3 and expect in Q4, even if that program extends, Linamar's ability to utilize it will diminish.
Right. Okay. Shifting gears here. On the industrial segment, can you talk a little bit about MacDon and Skyjack, and what is the normal seasonal pattern, like in a typical year, from Q3 to Q4, and how does that change this year because of all the volatility we've had because of COVID?
Yeah, Skyjack would normally dial back pretty significantly seasonally in Q4. We've seen anything from 20%, 30%, 35% dialing back from Q3 levels in Q4. That's a normal level seasonally. MacDon can be a little more changeable. That's why we're suggesting flattish to Q3, but potentially a bit of seasonal dial back, because sometimes they can be flat, sometimes they can be down a little, but you don't see the same kind of big change like you do with Skyjack..
Okay. Skyjack, how is the order book? Is the order book picking up, or is it stable, or is it declining?
I would say the backlog, if you look year-over-year, is down compared to year-over-year, and the take rate now is showing that we'll meet plan for next year and increase for next year, right? We're getting a little bit more sense of increasing into next year.
Right. Okay. Linda, lastly, you showed a chart that was very interesting in your presentation. It's slide 31. That's where you showed the content potential for electric, hybrid, internal combustion engine. I don't know if you have quick access to the chart.
Yes. We're just pulling it right back up.
Okay. Could you?
Now, that's not
A little more
Yeah. Sorry, Peter, go ahead. Ask your question.
Yeah. Could you just spend a little more time, that's an interesting chart, just explaining it. I assume it's based on your order book and assumed volumes. ICE is growing very quickly, notwithstanding that BEV is growing quickly. Could you just reflect a little more on the chart?
Sure. First of all, this is not charting potential. It is charting actual booked content. This is based on booked business. We are not putting anything in here that is speculative that we haven't won yet. We're taking actual booked sales for programs that we've been awarded by internal combustion, battery electric, and hybrid, and then we're just dividing them by the current forecast for number of vehicles to be produced in those years for each of those propulsion types, pulling it right out of IHS.
When you show a content per vehicle in 2024 for, I'm looking at electric, the black line, of CAD 50, the numerator would be your anticipated revenue, and the denominator, that's the total number of battery electric vehicles produced or total global vehicle production of all propulsion types?
It's dividing by the total number of battery electric vehicles forecast to be produced globally.
Okay. Just lastly on that, this growth that you're having in the electric, is that mostly the eAxle systems that you've been marketing, or there are other significant areas?
There's other areas as well. Battery trays are a very high content potential and assembled product, as well other chassis components, structural components.
Yeah. Chassis, structural components, gear to gear assemblies, differentials, battery trays.
Electric motor housing.
Coolers. Yeah. A wide variety of components and systems.
Right. Okay. Thank you, Jim .
As I mentioned in my comments, our total content potential in electric vehicles, if we add up all the different components and sub-assemblies and systems that we can produce, is approximately CAD 3,200.
Right.
That's our potential in electric vehicles.
The other exciting part too, Peter, is that it's not just with traditional customers, it's with new customers that are well established that are coming online, too. It's pretty diversified that way.
Okay.
I also just wanted to make one last point with regards to your earlier questions on the wage subsidy. I know that that caught all of your attention. I do want to point out that even if you strip those subsidies out, our results this quarter were significant and higher than last year overall and certainly in the Transportation segment. There's a lot more going on here than just wage subsidy in terms of what we delivered in the quarter.
Yeah, no, I see that in the numbers. Thank you.
Your last question comes from the line of Brian Morrison with TD Securities.
Thank you. Just clarifying that last comment, Linda. The allocation that you mentioned earlier, it's fair to say that transportation would've been a low 8% operating margin, industrial would've been mid-thirteens. Is that fair?
You mean if you strip the subsidy out?
Exactly.
Where would we have landed in terms of margins?
Correct.
Yeah. The transportation segment had a strong showing even if you strip the margins out in the neighborhood of what you talked about.
Excellent. The discretionary cost savings, obviously, you've done a very good job there, but specifically on the transportation side, when you look at 2021 global production volumes compared to that of 2019, they are going to be down based on the forecast. You've got an operating margin target that's essentially flat. Is this sustainable cost savings that are flowing through, or is this product mix? Is this better launches or a combination?
It's a combination, but I would say primarily the launches. As our launches reach more mature levels of volume, their margins get up to more normalized levels. A year ago, we were at our worst point, in 2019, where the launches were at a volume that was suboptimal in terms of margin delivery, so not nearly filling capacity. At the same time, our mature programs were coming down in volume and were also running at suboptimal levels of volume and capacity utilization. It was the worst possible point, in 2019, where we had the worst of both worlds. Now we're seeing launching programs continuing to pick up, and that's been a big driver of what is driving those better margins and will continue to do next year.
Helpful. Thank you. One last question. Maybe for Jim or for Mark, actually. On the industrial side, I think if you take a look at it right now, it really looks underappreciated within your share price. When I take a look at Skyjack, even though we've got some positive or stable trends now, utilization rates improving, fleets are aging. Just wondering, how quickly you can adjust the various upward trajectory levels? At MacDon, also looks like industry trends are improving with commodity prices, et cetera. Maybe just comment on the state of inventory at your North American dealers, if you could.
MacDon, they're in the order intake time right now, and we see that ramping up. We're, from a production perspective, very well prepared for that increase. Dealers are good. The farmers actually have had a great season, I would say, in both Canada and the U.S.A. On MacDon's side, I think we're ready to roll with that increase. Skyjack the same, we're planning on it. Again, with our suppliers, production side, and for us it's really going through with distribution to the rental companies, and those are going to flow through well.
Inventories on the ag side, dealers been chipping away at inventories, they are dropping. That is also another good sign. I think on Skyjack's side, as Jim mentioned, with a lot of new product, we've got a lot of prototypes that are just finishing up the prototype testing and everything. We're actually, as 2021 increases production and sales requirements, we've got a lot of new models out there also. I think we're in a good position for Skyjack.
Yeah. One other thing on the Skyjack side is, you know the rental companies, a lot of them are selling off used right now, which is another indicator for us that there should be some pull on new.
Thank you all.
There are no further questions at this time. I'd like to turn the call back over to Linda Hasenfratz for any closing comments.
Thank you very much. Well, to conclude this evening, I'd like to leave you with three key messages. We are thrilled to have generated an outstanding CAD 445 million in free cash flow this quarter. Liquidity has reached CAD 1.3 billion. We have reduced debt more than CAD 1 billion from a year ago and refinanced next year's debt to mitigate risk further. Our balance sheet looks fantastic. It's great to see despite challenges around restarting and lingering impacts of COVID-19 on demand, that Linamar's business increased margins in the transportation sector. Finally, it's great to see those green shoots starting to pop up in terms of market growth at both MacDon, where market growth has already begun, and at Skyjack, where market growth is now expected in 2021. Thanks very much and have a great evening.
Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.