Ladies and gentlemen, thank you for standing by, and welcome to the Linamar Corporation First Quarter Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Linamar's CEO, Linda Hassenfratz.
Thank you. Please go ahead.
Thanks very much. Good afternoon, everyone, and welcome to our first quarter conference call. Joining me this afternoon are members of my executive team, Jim Gerald, Dale Schneider, Roger Fulton, Mark Stoddard, as well as members of our corporate IR, marketing, finance and legal team. Before I begin, I will draw your attention to the disclaimer currently being broadcast. I'll start off with an overview on Linamar's approach to the COVID-nineteen crisis that currently is top of mind, of course, for all of us.
At Linamar, we approached dealing with this pandemic as we would any crisis. Step one, assemble a team with all the right resources to drive decision making. We established our COVID-nineteen task force in early March. Next step, gather data. We're constantly gathering the latest in data globally, both broadly around the pandemic and more specifically for Linamar in terms of our own workforce and the impact on our team.
Next step, make a plan, which you follow-up and execute on daily. Our plan at Linamar was named Linamar Health First. That meant the health of our people, of course, but also our health as a company financially, our customers' health, our communities' health. And finally, and most importantly, communication, often and fact based to our employees first and foremost, but of course also to our investors and customers. We've communicated weekly or even more frequently at points to our employees with the latest information.
We held a series of shareholder meetings over the past few weeks to make sure you knew what we knew and could have confidence in our plans and outlook. And of course, connection with customers to understand their needs and help them solve their problems and challenges as they arise as well. Our focus right now is very much on recovery. First and foremost, to create a work environment where people feel and are as safe or safer coming to work than not coming to work. We need to shift from fear to hope, which isn't easy to do when there's lot of fear around.
We need to take some lessons learned from other countries ahead of us on this curve, both in terms of safe work protocol and what has worked to realize that as well as what we can expect from them on economic and consumer behavior perspective. And we all need to play a role in trying to focus on rebuilding confidence to spur our economic recovery. Confidence obviously in our ability to work safely in the economy to weather the storm, confidence in our governments to manage the debt incurred to try to mitigate that personal and economic impact and confidence that the lockdowns and isolation will end. So let's take a quick look at each of these. Our safe work protocol is based on five key principles, screening of people before they enter the building to ensure they are healthy and not a risk to others.
PPE for them once they're inside to further mitigate the risk and masks are key element in this. Distancing of six feet between people once inside at all times with revised seating for meetings or lunch rooms, dividers in common areas are examples of how we can do that. Cleaning and hygiene are ramped up and tracing has been established where possible. So for instance, we have assigned seating in our lunch rooms, so we know exactly who was within what radius of each person in the event of a positive case. We've been running in China for thirteen weeks using this protocol and we have had not one single positive case of COVID-nineteen in that entire time.
These protocols work. We have been back for a week in Europe and we expect to come back in North America next week. Although some plants of course are already running on light shifts here and some have been lightly running throughout. So let's take a look at how the consumer has reacted to this situation. Now first China, obviously pretty big declines, the first month of lockdowns with a big drop of 80%, coming back to about a 42% drop in March and finally a little bit of growth in April.
And notably, the last week of April actually showed double digit growth over prior year. Now Europe was hit a little later than China, meaning we started seeing the impact to vehicle sales a month later in March and more so in April, but of similar sort of magnitude to what we saw in China. We're keeping a close eye on May and more so June as many European countries are contemplating launching vehicle purchasing incentives in June, which should help them bring sales back. But note that the fact that these measures are being discussed, but not implemented yet means with certainty May is going to be a very tough month as consumers hold off on purchases waiting for incentives to be put in place. So we should be prepared for low vehicle retail sales in May in my opinion in Europe.
In The U. S, we've seen a much more resilient consumer with markets dropping less than 50% in March and April despite lockdown starting really only a week or two after Europe in most areas. That last week in April actually saw a 56% increase in vehicle registrations and marked the third consecutive week of week over week improvements, which is a very positive sign and may mean a quicker ramp back up as customers look to fill rapidly emptying pipelines of vehicles. On the access side, you can see the impact of COVID-nineteen on forecasts in each region. The orange bar is the pre COVID market forecast for each of those regions and the gray bar is the latest market forecast, all now significant double digit declines in all three regions.
You can also see the Q1 actual market declines in that blue bar, which are all in the kind of low to mid 30% decline range. For agriculture on the right hand side, you can see market declines in combine retail for the first few months of the year. Combine retails were down 22% through March in North America, but the gap narrowed in April to just 16% decline. Notably, Canada is down 37% on combined retails in the first quarter compared to The U. S.
Being down 18%. So Canada definitely getting hit harder. Markets are down based on a tough harvest due to weather last fall and trade issues mainly between The U. S. And China.
Outlook for that market has not shifted materially from pre COVID estimates, but of course we're continuing to keep a close eye on that. Our financial action plan is comprehensive with cost control and cash conservation, of course, top of mind. We have moved rapidly to cut costs in a variety of areas, workforce adjustments, of course, cutting or deferring any non mission critical spending, cutting travel, in person meetings for the balance of the year, not just this timeframe where we do so. We've also established a dedicated global cost team to come up with additional cost and wage reduction ideas. Cash conservation is also a key focus.
We immediately scaled back on capital spending, put our highest level cash payment controls in place and have established the system and cadence for efficiently adjusting our financial forecast and cash flow estimates for the next two quarters on a weekly basis to make sure we're staying on top of things. Looking at the results, you can see that in less than two months, nearly $12,000,000 in cost reductions have been implemented just out of that global cost team. And you can also see here the 25% cut to capital spending in the first quarter. Our balance sheet is strong and we're keeping it that way. We came into the year with $1,100,000,000 in available cash and we have grown that to $1,200,000,000 at the end of the first quarter.
We are carefully stress testing our latest estimates every single week and we are confident that even in the event of a more extended shutdown and slower ramp up than currently contemplated, we will continue to show twenty twenty full year results profitable with a positive free cash flow and not reaching any covenants. This slide gives you a sense for what that stress scenario looks like. We have conservatively estimated earnings to drop to less than half of pre COVID expectations for the year. And in the stress scenario, we have cut that in half again. Of course, outlook is changing constantly and the future right now is unfortunately very hard to predict.
But the key is keeping on top of the changes, revising our outlook and taking required actions rapidly and that is exactly what we were doing on a weekly basis. Another key area of focus right now is community work. We have four different ventilator projects on the go right now. The first one is for Thornhill Medical, a great innovative Canadian company to make a product, which is actually much more than a ventilator. It's basically an ICU in a box.
You can see the unit pictured here, which is actually made up of more than 1,700 different parts in the bill of materials. Our line is set and ready to roll. You can see a picture here to fully assemble these units and production is starting in another week or so. I'd like to point out that we assess this product, we got involved with supply chain procurement issues we tooled up to make these units in about six weeks. In fact, we were ready to produce earlier than that, but have had to wait for the delivery of testing equipment before we can begin production.
We're often asked how easy it would be for Linamar to pivot to make parts and systems for electric vehicles, which differ from those used in traditionally powered vehicles. And I think this project is great evidence of just how quickly, efficiently and effectively Linamar can pivot and be production ready on something that is literally completely different to the products that we have traditionally made. Manufacturing is manufacturing and it is something that we are proud to say we are very good at regardless of the product. We are also making components for a variety of other ventilator companies. OT Medical is another innovative Canadian company with this ventilator product, which is designed to be simple, easy to use and transportable.
We are responsible for 43 different components for the O2 units and are currently in production. For GM Bentech, we are making 15 different components and also are currently in production and have been for over a month now. The first completed ventilators was shipped to hospitals by GM on April 17, only about a month after they started the project. We're also making a part for a ventilator made by ZOLL, who is an associated company to our customer Honda. Lastly, we are currently tooling up another exciting community support project, which is a UV based disinfection unit, you can see pictured here to rapidly clean mobile phones and other electronic devices for use in hospitals and other places of business, including retail operations.
In another extremely rapid project, we are going from purchase order from our customer Clean Slate to production in less than four weeks, and we will make up to 3,000 units for them over the next few months. And finally, we've been involved in a whole variety of other community support initiatives from donations to innovative three d printed PPE like the masks you can see here, door closers to stop people from touching doors, helping our communities and many other ways that they need us to as well. I think it's really fantastic the way that companies and individuals around the world have found ways to collaborate together and solve problems during this pandemic. Okay. With that, let's jump into some of the specifics about the quarter and we'll start off with sales, earnings and content.
Sales for the quarter were $1,550,000,000 down 21.5% from last year. The pandemic, of course, was a key driver of our results having cost us $275,000,000 in sales and $80,000,000 in operating earnings for decremental margins of 29% at the OE level. Adjusting out this impact would have meant sales would have only declined $150,000,000 or 7.6% on already declining markets such as access and ag as well as unfavorable exchange rates. OE would have only declined $11,600,000 from normalized Q1 twenty nineteen OE levels for decremental margins of 7.7% and that's thanks to margin improvement, driving out of cost reduction initiatives and higher volumes on launching programs. So the underlying business is performing much more strongly than it was a year ago.
Normalized net earnings as a percent of sales in Q1 was 4.4%. On the positive side, our overall normalized EBITDA performance remained strong at 13.8% of sales for the quarter despite the pressures that we felt. In North America, content per vehicle for the quarter was $171.06 down a little from last year, but up from twenty nineteen full year levels. In Europe, content per vehicle for the quarter was $88.68 and in Asia 11.05 both up nicely despite volatile market. Production levels were down dramatically in each market, most significantly, of course, in Asia, which felt the brunt of the lockdown in Q1.
Global content per vehicle was up 14% over last year. It's great to see that kind of market share growth playing out for us. Remember, when volumes pick up as they are expected to do next year, that means growth really accelerates for us. Commercial and industrial sales were down 37.3% in the quarter due to lower Skyjack sales on global markets down in the double digits as I showed you as well as softer MacDon sales on those soft markets as well. As we saw the draper header market was down in double digits over last year in North America and most heavily in Canada where MacDon has strong market share.
These declines were partially offset by great market share growth for MacDon in Europe and CIS. In fact, MacDon sold in Europe 70% of the Draper header sold in all of 2019 in just the first quarter of this year. So great acceleration for MacDon in Europe. This has been a key strategy of MacDon since we acquired them and it is great to see them delivering on it so strongly. Rapidly cutting back on CapEx was clearly a key priority in the quarter given the headwinds faced by the pandemic.
We cut CapEx 25% compared to last year and intend to finish the year targeting CapEx down a third from last year. In another strong quarter of free cash flow, we saw another $147,000,000 of cash generated to take our liquidity to $1,200,000,000 reduce debt further and bring leverage to 1.57 times. Free cash flow is something Linamar is quite good at managing. We have seen strong free cash flow over the last five years and we target to see positive free cash flow this year as well. In addition, we are seeing strong levels of free cash flow yield as you can see on this chart.
Our strong balance sheet and liquidity means we have the ability to weather the financial impact of this pandemic over the next couple of quarters in a way that many suppliers simply do not have. This means we will have the ability to take on takeover work and other opportunities as they will rise and drive even more market share growth to mitigate soft markets and accelerate future growth. Turning to our market outlook, we are seeing down markets across the board this year, which shouldn't be a surprise. Industry experts are predicting steeply declining light vehicle volumes globally this year. The latest estimates are for $12,200,000 $15,900,000 and $37,500,000 units in North America, Europe and Asia respectively.
It's expected that each market will see strong double digit recovery in 2021. On highway medium heavy truck volume was also expected to be down significantly this year with growth in most regions next year. Turning to the access market, the industry is expecting significant declines while in the double digits as you saw for the access market globally this year, driving out of the COVID-nineteen pandemic. That is adding significant pressure to an already soft year in terms of demand. Next year should see demand steady out, although it is difficult to predict at this moment.
Turning to the agricultural market, the industry expectation is for a declining combine draper header market in the double digits this year in North America, thanks to that tough harvest last year and the tariff and political backlash issues I described. Europe and CIS are also expected to decline this year, but Australia may see some improvement and South America is looking to stay fairly flat. The ag market seems to have not been adversely impacted by the current pandemic. Our market expectations are basically unchanged from our last update. Macron continues to build market share in international markets, most notably in Europe as I described to partially offset market declines.
But nevertheless, we will see sales down in double digits for 2020. As noted, almost all of these markets bounce back in 2021. The decline in light vehicle production from peak to trough at this time represents a drop of about 19,600,000 vehicles globally. This is higher than the drop back in 02/2009. However, at that time, we did not see the drop in Asia that we had this time around given the global nature of the pandemic.
Also different is the fact that for ten long years heading into 02/2009, production levels in North America had declined year after year after year. That has not been true for the last ten years where we saw year over year increases right through 2017. That means that the industry went into this downturn a lot healthier than they did last time, which is a real positive. 2020 is expected to be the trough for global production levels with increases across the board starting next year. Q2 will of course be the low point in production.
You can see on this chart the drops to both Q1 and Q2 production levels compared to pre COVID forecast with the big hit in Q1 being Asia, of course, and in Q2 a hit expected to all three regions. This slide also illustrates where volumes are coming out globally for both 2020 and 2021, which in both cases is again primarily Asia, but of course meaningful hits to North America and Europe as well. In terms of patterns of correction in North America, this does now fit a fairly standard level of reduction, which is good news. Although COVID-nineteen did accelerate this change painfully for us, it does mean we can now look forward to volume starting to build again. Turning to an update on growth and outlook, you'll be pleased to know that new business wins have knocked ground to a complete halt.
We did see some solid business wins in the quarter. I'm going to highlight a couple of them for you in a moment. Electrified vehicles continue to provide great opportunities for us. You can see a build in both our global content per vehicle for both battery electric vehicles and hybrids as a result of recent wins. The lines of internal combustion, battery electric vehicle and hybrid global content per vehicle are converging, which of course is our goal.
In fact, hybrid vehicle content per vehicle this year is already where we were in internal combustion engine vehicles only five years ago, which is great to see. Our addressable market across the range of vehicle propulsion types continues to look excellent with our total addressable market for us today around $100,000,000,000 growing to $300,000,000,000 in the future, an increase of nearly three times. Our launch book is solid expected to peak at more than $4,100,000,000 in sales. We did shift more than $85,000,000 of programs from launch production last quarter. Programs will continue to launch and replace existing, although some delays and ramp ups have been announced.
This is still an area that is shifting and we will have a better update for you on the level of business launching and leaving this year in the coming weeks. In addition, as noted, we're looking at significant declines at Skyjack this year with performance setting out next year. MacDon will see double digit declines to sales this year, but we do expect to see things picking up next year. Obviously, it's difficult at this time to be very specific about what this year and next year will look like. What we can say is we expect significant double digit declines in both sales and earnings this year, but do expect to be profitable overall and in both segments.
2021 should see us growing on rallying markets with of course better margins. We expect to maintain leverage levels well under 2.5 times for the year and improve significantly from such in 2021. And we expect to generate positive free cash flow both years. Looking specifically at Q2, the single biggest impact will be plant and customer shutdowns and the accompanying revenue declines associated with the COVID-nineteen pandemic. Impacts from the COVID-nineteen outbreak are currently not fully understood or determinable in terms of their impact to all segments at this point.
But what is clear is after four to six weeks of complete plant shutdowns globally outside of China in the quarter and a slow ramp back up to three shifts, Q2 will be a very challenging quarter financially. Expect a significant loss likely higher than the profit of Q1 for a negative first half. I'll finish up on a more positive note, highlighting a couple of our more interesting wins this quarter, which were notable for electrified vehicles. First, we picked up a package of e axle components for a battery electric vehicle in the quarter worth in aggregate nearly $25,000,000 in annual sales. This job is for a new entrant into the battery electric vehicle space headquartered in The U.
S. With a great and innovative vehicle design and concept. We are excited to expand portfolio of battery electric vehicle customers. Secondly, we were awarded an assembled battery tray again for a battery electric vehicle, this time for a European based OEM. This is a new product to Linamar focused exclusively on battery electric vehicles.
The intricate passageways for cooling in these housings makes based the design perfectly suited for Linamar's light metal casting expertise in thin walled highly complex coring. We were excited by this win, which we have been working on for some time. With that, I'm going turn it over to our CFO, Dale Schneider to lead us through a more in-depth financial review. Dale?
Thank you, Linda, and good afternoon, everyone. As Linda noted, Q1 was significantly impacted by COVID-nineteen in terms of sales and earnings. Despite these impacts, it was a great quarter for cash generation as we did generate $147,100,000 of free cash flow in the quarter, which represents an increase of over 570% from last year. Additionally, we're able to increase the amount of liquidity that's available to Linamar to $1,200,000,000 compared to December 2019. For the quarter, were $1,550,000,000 down 4 and $24,700,000 from $1,970,000,000 in Q1 twenty nineteen.
Earnings were normalized for FX losses related to the revaluation of the balance sheet and any unusual items such as those in Q1 twenty nineteen. Normalized operating earnings for the quarter were $103,500,000 This compares to CAD197.7 million in Q1 twenty nineteen, a decrease of CAD94.2 million or 47.6%. Normalized net earnings decreased CAD71.5 million or 51.3% in the quarter to CAD67.9 million. Fully diluted normalized EPS decreased by CAD1.07 or 50.7% to CAD1.04. Included in earnings for the quarter was a foreign exchange gain of $14,100,000 which was the result of a $14,400,000 gain related to the revaluation of our operating balances and a $300,000 loss due to the revaluation of our financing expenses.
The FX net FX gain in the quarter represented $0.16 to EPS. From a business segment perspective, Q1 FX gain due to the revaluation of operating balances of $14,400,000 was a result of $11,500,000 gain in Industrial and a $2,900,000 gain in Transportation. Further looking at the segments, industrial sales decreased by 35.7 or $166,100,000 to $299,000,000 in the quarter. The sales decrease for the quarter was mainly due to the sales declines associated with COVID-nineteen pandemic, reduced access equipment volumes for certain key customers that were impacted greater than the general market declines. And finally, expected agricultural sales declines due to the ongoing issues in the market such as the poor crop conditions, segment commodity prices and ongoing trade disputes.
Normalized industrial operating earnings in the quarter decreased $46,500,000 or 59.7 percent over last year. The primary drivers of the industrial operating results were impacted by the lower volumes as I just discussed, which were lessened by the cost savings initiatives that were a key focus in the quarter. Turning to transportation, sales decreased by $258,600,000 over Q1 last year to $1,250,000,000 The sales decrease in the first quarter was driven by the impacts of the COVID-nineteen and the result in customer shutdowns that incurred in the quarter. Additionally, we had an unfavorable FX impact due to the changes of rates since last year. Q1 normalized operating earnings for transportation were lower by $47,700,000 or 39.8% over last year.
In the quarter, transportation earnings were primarily impacted by COVID-nineteen and partially offset by the targeted cost savings that were achieved. Returning to the overall Linamar results, the company's gross margin was CAD200.5 million, a decrease of CAD103.4 million, primarily due to the volume decreases in both segments as a result of the COVID-nineteen pandemic offset by partially offset by the targeted cost savings. Cost of goods sold amortization expense for the first quarter was CAD108.7 million. COGS amortization as a percent of sales did increase to 7% due to amortization from launching programs and the significant decline in sales revenue. Selling, general and administration costs decreased in the quarter to CAD97.5 million from CAD110.2 million last year.
The decrease is mainly due to the cost reductions to help offset the COVID-nineteen impact to our sales and earnings. Financing expenses decreased by CAD4.8 million since last year as a result of the impact of lower debt levels from last year and this year in Q1 and also the underlying market interest rates are lower. The consolidated effective interest rate for Q1 declined to 2.5% from 2.9% last year. Effective tax rate for first quarter increased to 24.6% compared to last year, which was mainly driven by the impact of benefiting tax losses in The U. S.
At a lower U. S. Tax rate. We are expecting the twenty twenty full year effective tax rate to be in the midpoint of a range of 23% to 25%. Nerimar's cash position was CAD413 $200,000 on March 31, a decrease of $72,300,000 compared to March.
The first quarter generated $232,600,000 in cash from operating activities, to fund CapEx and debt repayments. This also resulted in a free cash flow generation of $147,100,000 in the quarter. Net debt to EBITDA increased to 1.57 times in the quarter as a result of the strong cash generation in addition to the impacts of FX rates as a result of COVID-nineteen had a significant impact on our on the leverage for the quarter. Net debt to EBITDA on a constant currency basis to rates as of December 31 actually declined to 1.48% times. Our goal is have net debt to EBITDA to be under 2.5 times by the end of twenty twenty.
Based on our current estimates, we are expecting to be well under 2.5 times by the end of the year subject to any COVID-nineteen impacts that currently may not be known or fully understood. The amount available credit on our credit facilities was CAD739.3 million at the end of the quarter. Our available liquidity at the end of Q1 was approximately CAD1.2 billion. And as a result, we believe we have sufficient liquidity to satisfy our financial obligations throughout 2020. To recap, sales and earnings for the quarter was the story of COVID-nineteen.
But the dramatic impact that the pandemic is having, the critical story for the quarter is one of cash and liquidity. Lemma had a remarkable cash generation quarter and has generated $147,100,000 in free cash flow in the quarter and has increased our liquidity to 1,200,000,000.0 That concludes my commentary and I'd now like to open it up for questions.
Your first question comes from Mark Neville with Scotiabank. Your line is open.
Hi, good afternoon. Maybe I just want to start just
with the sort of
the restart of your production. Maybe just give us sort of an update or Linda, you did mention earlier in the call, but I'm just curious that, I guess, by the end of next week, is it sort of the expectation is that sort of all facilities globally are up and running give or take?
Well, I mean, as I noted, we had our China operations have been running back for thirteen weeks. So they're all going at 100%. Europe started coming back last week. So it's not a zero to 100 kind of return as you might expect. So they're coming back on one shift and slowly building their way back up to three shifts.
In North America next week, some plants are coming some customers are coming back on one shift, some on two shifts. So it kind of depends customer to customer. But again, plants starting back next week, but not at 100%, right? So it'll take several weeks to get there.
Yes. Maybe some other information. It's sort of customer by customer based and inventory based as well. So as Linda said, like the shift patterns are going to be a little bit different at each plant, just depending on what the pull is coming in through the EDI systems. But certainly, I think actively all plants will be sort of up and going next week in Canada.
Certainly all plants in Europe are up and going just at different rates. And what we're doing is every Tuesday, we're monitoring every single plant, every single program of when they're coming back per shift and things like that. And the other thing that's been out there, which was our customers going to change up their tack times and for some of these things. And the feedback we've got is no, they're not going to slow down. They've got to come back, run a shift at sort of the rate that they had because they can't really change that up because you'd have to coordinate the paint plant, the stamping plant and you'd have to do all that.
So really when they go back to a shift, they're going to go back to a full shift, two shifts to full shift. So we'll be following that protocol.
Right. Okay. That's very helpful. Yes. Okay.
Maybe, Linda, you mentioned earlier as well, just with decrementals, maybe just by the business segment, transportation versus the industrial, sort of what kind of decrementals you you just sort of help for modeling purposes, sort of what you've sort of built in or sort of what you could expect, what we could expect for decrementals?
Yes, I mean, have generally suggested just a blended number. So we've never really given you decremental margins different for industrial versus the transportation. I mean, the industrial side is more profitable at the OE level. So they're going to be a little higher in the range. So I mean, we've talked about kind of 20% to 25% at the net level.
So if you take that up to the OE level and you assume, let's say, 5% for tax and a bit of interest, that takes you to kind of 27% to 33. So that's a good range to use for both segments.
Okay. So 27% to 33% on EBIT combined?
Yes.
Okay. Maybe just one question. Just around the dividend. Just again, I can appreciate sort of the thoughts around conserving cash, especially when you're in just cost reduction mode. But I mean, again, it's I guess the cut would save you roughly $15,000,000 per year.
So I guess I'm just curious, this is sort of maybe why sort of you made that decision. Again, I can appreciate, I guess it's I guess the answer is probably fairly simple, but I just have your thoughts on that. Thanks.
Yes, absolutely. Mark, we did grapple with the decision about the dividends, because as you correctly point out, it's not a significant number. So it's not moving the dial very much. We do feel we're in a strong position to withstand even longer ramp delays than we're currently expecting without impacting our covenants. But we also recognize there's a lot of uncertainty around us.
Sure, we could elect the dividend where it was, but I have to say frankly, it just didn't feel right when we have thousands of people laid off and not working. We're all kind of sacrificing something and so we decided it was the appropriate thing to make a cut. We were careful not to cut it completely, but I believe that taking it to half is prudent action and appropriate in this environment.
Understood. Thank you.
Your next question comes from Peter Sklar with BMO Capital Markets. Your line is open.
Dale, when you talked about the $14,100,000 foreign exchange gain, Where is that below the operating income line? Where do you take that?
It's split. So there's a portion that goes to operating as I talked about and yet there is a small there is only like a $300,000 loss that hit the financing expenses.
Okay. So when you give kind of these operating income segmented operating income numbers, which are adjusted for foreign exchange movements, the 72,100,000.0 for powertrain driveline and the CAD31.4 million for industrial. Those are kind of the adjusted operating incomes. Like that's different adjustments than this CAD14 million. This CAD14 million is something different, is it not?
No, that's what it's adjusting for. In this case, only adjust for that gain or loss and we or if we had any unusual items, which we didn't Q1 this year. So the whole normalizing impact is that number.
So the $103,500,000 of operating income, that's taking out this $14,100,000 foreign exchange gain. Is that right?
Yes.
Okay.
Reported, reported we were $17,117,900,000.0 and we back out that gain and it takes down to 103,500,000.0
Okay, got it. On the CapEx, I believe you said you're taking down your CapEx like a third. I think it's a third year over year. Can you talk about how you do that? Because is that because programs are deferred?
Because if the programs are moving forward, you need to have the capital in place. So how do you take your capital down by that magnitude?
Yes. I mean, Peter, part of it is reallocating capital where we can. So as you know, we utilize flexible equipment that if volumes are down, we can reallocate for a temporary time period and that gives us a little bit of breathing room to push out receipts of new capital equipment for a few months or six months in order to be able to push out the capital cost.
Okay.
And you gave some interesting numbers. You said that the pandemic had a negative impact of $275,000,000 on sales and $80,000,000 on operating income for I guess a decremental margin Is that correct? Did I hear that correctly?
Yes.
Yes. So when you calculate that, is that like after you've sent like that 80,000,000 change in operating income, is that after you've sent all the labor home and you're not incurring the labor costs?
Sorry, can you say that last piece again?
Well, I'm just trying to figure out is that when you calculate that loss of $80,000,000 of operating income that you would have otherwise gained, like is that with the employees in the plant? Or do you still like lose $80,000,000 even after you send the employees home and you're no longer paying them?
Yes. I mean, that's the resultant impact to earnings. So obviously, we're not including in that figure wages that we're not paying. I mean, if we've got people laid off, we're not paying them.
Right. That's the contribution impact. So I was looking at the revenue less the variable costs.
And
so if you're talking about people on the On the floor. Product lines, they would be considered variable because the requirement goes with volume.
Right. And like in Canada, the people that are on layoff, do they fall into any government programs or do they go on unemployment insurance?
They go on to a wage subsidy program or cert with their at their choice. So we basically when this came to the subsidy program, we basically laid out to all of our employees what would be the impact be if you went on CERT, what's the impact if you go on to the wage subsidy and what's the impact if you're on EI. And so every employee would get that data, Peter, and understand the impact to them and then they would make their decision which subsidy program they would choose.
Yes. So I mean, basically depends on what somebody is earning per hour at there's a break point at which the SERP program is more beneficial to them. So they may decide to be on SERP. And if but over a certain wage level, it makes more sense for them to be on the subsidy program.
Yes. Okay. And then finally, just on working capital, you made good progress in terms of generating cash by reducing your accounts receivable and inventory balance. The accounts like the is this reflect lower volumes? Or does it also reflect the program you've been involved in where you realize on your receivables from a third party?
This is there is a bit of financing in there. But to be honest, the amount of financing is going down as the revenue goes down because you have less to finance. So really the decrease is volume related, but also the team is being really driven on making sure that we're collecting every penny we can and minimizing anything that's overdue and watching very carefully that they're not buying anything that's going to go into inventory that we don't absolutely need.
Yes. I think from the inventory standpoint, we have to sort of hedge what we're doing, Peter, right? Like we have to plan out what the customers are doing. So right now, we're saying, hey, if you don't have clear cut understanding of the production level, you've got to hold off on bringing inventory in. So we've got basically weekly, we're watching cash every week and really every day.
Right. Okay. That's everything I have. Thank you so much.
Thanks Peter. Your next question comes from the line of Kevin Chiang with CIBC. Your line is open.
Hi, good evening and thanks for taking my question here. Maybe just on the net working capital, should I assume that that turns it becomes a bit of a, I guess, headwind to free cash flow as you ramp up production so that Q1, positive net working capital is kind of a high watermark for the quarter? Or do some of the initiatives that I guess Peter was mentioning that you're taking to improve working capital efficiency provide at least a buffer as you start ramping up your plants again?
Well, generally speaking in a normal year, you would find that we would build non cash working capital in Q1 and further into Q2 as those are our peak selling quarters typically. And then in Q3 and Q4 as you have summer shutdowns, Thanksgiving weekends in The U. S. And Christmas break, those two quarters tend to be the lighter ones. Obviously, in this year, Q2, given the shutdowns is going to be the lightest quarter as a result because you're not going to have as much AR.
So for sure, as we start to ramp up volumes, you're going to see AR come back and that will be a bit of a drag. But we will be focused on our inventory levels just to make sure that we minimize any investment we have to do to restart the company.
Would your expectations be for the year that it still ends up being an absolute tailwind? Or was it too difficult to tell at this point in time?
I'd say it's a little early to predict that at this time.
Okay. And just on your market outlook, at least for 2021, I noticed that there wasn't one for agriculture and I get the long term thesis around, you know, the replacement cycle and the need to replenish and you've been hit with a number of, a lot of unexpected events whether it's trade friction and obviously COVID-nineteen here. I'm just wondering like how much more buffer do you have when you look at the goodwill that sits on your books from MacDon? Like if you have continued challenges in 2020 and 2021, like is there a way to frame a potential write down here or are you pretty confident earnings are going to bounce back fast enough to not have to take that hit?
Yes. We actually in the quarter reassessed our goodwill test that we did in Q4 for exactly that issue. And you'll see disclosures in the MD and A around that. And have to keep in mind that a goodwill test is a long term test. It's not a one year or two year or three year test.
So if you look at from a long term evaluation on the way the impairment tests are done, there's no permanent impairment to any of our markets. It is a temporary issue. You are all the markets, as Linda already talked about, are showing significant growth for next year and we expect them to normalize over the long term. So we are not currently anticipating any impairments.
That's helpful. And then just last one for me. I applaud Linamar for a lot of the initiatives that's taken here to help with a lot of the manufacturing of essential medical equipment. Strategically, you're looking to also get into the medical field and you've made some investments there. Just wondering what's happened over the past, I guess, two to three months here.
Has that opened up new opportunities that might not have been obvious pre COVID-nineteen? Does the strategy to get into this segment accelerate now because of COVID-nineteen and some of the experience and some of the products you're producing today opens those windows. Just wondering how you think about that opportunity longer term.
Yes. Good question, Kevin. I think that we have learned an enormous amount about the medical device market over the last couple of months, which has been fantastic. I mean, as you know and have said, it is an area we are already looking to expand into. And although ventilators weren't on the list and probably aren't going to be on the list, what it's done is just bring us more insight into how the markets work into some of the players that are there.
We've made connections with players in the space that I think can be very helpful. And it's just given us a much better understanding of the overall market, which is absolutely helping to inform our strategies into a market that we were already looking to expand into and given us some ideas around strategies that we can employ.
I think one other thing that we've also learned is that we can really bring our manufacturing efficiency to this market. It's very interesting. The customers that we have O2, Thornhill, excellent companies to work with. And we I think we can really enhance their efficiencies and that type of thing in this marketplace. And that's something that we've seen pretty clearly that our expertise and who would have known about this, what Linda showed, this Clean Slate product, an ultraviolet system that you put your cell phone in and twenty seconds later, you've got 93% of the bacteria that comes off, right?
Who imagined this? To me, that market could be massive. And you think about every plant, every office, every airport, every store might have to have these, right? I mean, we don't know. But so there's been a lot of things that have opened up and I think there'll be more I that are
agree. I think that this whole area is one that people are going to be taking a very close look at, what do we need in terms of these types of products. And it's exciting that we're at the forefront of it.
That's super helpful. And I have a three year old who's always touching my phone, so I think I'll be needing one of those.
So we'll sign you up for a unit, Kevin.
Thank you very much.
Have a great evening.
Thanks, Dan.
Your next question comes from Brian Morrison with TD Securities. Your line is open.
Hi, good evening. I just have one follow-up housekeeping question if I can. I'm just if you could just explain to me the decremental margin that you've pulled out, the 29%, the $80,000,000 on the $275,000,000 Can you just tie together for me explain to me the difference between the decremental margin reported and that decremental margin that you pulled out in the slide?
I believe that we called out both. So the $275,000,000 and the $80,000,000 are the impact of COVID in the quarter. So what I did then was strip out the COVID impact from the first quarter of last year and say, okay, if we didn't have COVID, what would our results have been? So basically, I added that back. And when I did so, you'll see that sales and earnings were still down, but dramatically less obviously.
So they would have been down $150,000,000 and around $11,000,000 for a decremental margin in that case of less than 8%. And I wanted to point that out because to me it is illustrative of the fact that our underlying performance is much stronger this year than it was last year. There was a positive improvement to margins that offset where decremental margins would normally have been. So normally, you would have $150,000,000 decline and that would hit you at around that, let's say 30% or $50,000,000 but we only came down $11,000,000 So the difference is the improvement on the cost side that has come from ramping projects on the powertrain side as well as cost reductions that we've implemented.
I appreciate the clarification.
No problem.
There are no further questions at this time. And I'll turn the call back to Linda for closing remarks.
Okay, sounds good. Before I conclude with my final message, I'd like to announce some changes as it relates to our Annual General Meeting. Our AGM is scheduled for Wednesday, May 27 at 10AM. And clearly, we are unable to hold a public gathering due to COVID-nineteen. So an in person meeting is not possible this year.
We will instead host our AGM virtually online. We noted this as a possible contingency in our infosurf when we sent it out and are now acting on it. So I just wanted to draw that to your attention. For more information, you can refer to the COVID-nineteen update section of our website for some more details on the virtual AGM format, which is at linamar.com/coronavirus/shareholders. So be sure to do that.
So to conclude this evening, I'd like to leave you with three key messages. First, we are thrilled to have again driven a strong performance in the quarter on free cash flow of $147,000,000 to drive liquidity up to $1,200,000,000 which is obviously key to thriving in these challenging times. Number two, we are really proud of the work of our global team to rapidly mobilize to build ventilators and parts thereof as well as launching a myriad of other initiatives to support our communities. And finally, Lindamar is a strong, responsive, agile team with a culture perfectly suited to handle crisis. We are laser focused on cost reduction, cash generation, finding new business opportunities and supporting our global team and communities.
Tough times don't last, but tough teams do and we're one tough team. Thanks everybody and have a great evening.
This concludes today's conference call. You may now disconnect.