I would like to welcome everyone to the Linamar Q4 2018 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks , there will be a question-and-answer session. If you would like to ask a question during this time, press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I will now turn the call over to Linda Hasenfratz, CEO. You may begin your conference.
Thank you very much, and apologies for the late start. We had a few technical glitches. Good afternoon, everyone, and welcome to our fourth quarter conference call. Joining me this afternoon are members of my executive team, Dale Schneider, Roger Fulton, Mark Stoddart, as well as members of our corporate marketing, finance, and legal teams. Before I begin, I'll draw your attention to the disclaimer that is currently being broadcast, and hopefully you can see. Then I'm going to go ahead and get started with sales, earnings, and content. Sales for the quarter were $ 1.73 billion, up 10% from last year, which is fantastic to see. That takes us to another record year of CAD 7.62 billion in sales, up 16.4% over the prior year.
Operating earnings were CAD 158.9 million normalized for balance sheet exchange impact and any unusual items, which was up 8.2% over last year on a reported basis and down marginally after normalizing in each quarter. Net earnings were CAD 115.4 million normalized, down 5.4% over last year's normalized result. Full-year normalized operating earnings were CAD 807.6 million, up 10.8% over 2017. That makes nine consecutive years of normalized earnings growth at either the operating or net level, a record that few companies can boast of. A few factors that were key in driving our performance this quarter. First, MacDon continues to perform well and made a great contribution to growth this quarter. Number two, Skyjack growth from continued market share growth. And finally, launches in the transportation business are running strong and doing a great job of driving top-line growth in some challenging markets.
A few factors were a challenge this quarter and hurt our results. First, light vehicle markets for the three regions we serve were down 2.9% due to significant declines in the light vehicle market in Europe, thanks to both the ongoing WLTP situation as well as deteriorating demand for diesel vehicles. In addition, vehicle volumes were significantly down in China, affecting several key customers. We believe the WLTP situation and resultant high inventory levels will mainly resolve by the end of Q1 2019, but the European market is forecast to continue to underperform compared to the prior year through the first half, picking up in the latter part of the year. China volumes are also expected to be under some pressure through the first half of the year, as you can see from this slide.
The second key issue was higher commodity costs in our industrial segment, as we saw prior quarter as well. We are addressing such with price increases to customers, which were implemented January 1st of this year. Finally, continued pressure from launch costs due to heavy launch activity in the transportation segment, which we do expect to see normalize over the next quarter or two. Normalized net earnings as a percent of sales in the fourth quarter were 6.7%, down from last year due to these factors, but 7.7% for the year in line with our outlook. On the positive side, our industrial segment continues to perform well, thanks to MacDon, with normalized operating margins sitting at 17.1% for the year 2018 at the mid-high point of our target range of 14% to 18% as expected. We continue to expect moderate margin expansion in this segment this year.
Transportation segment margins were impacted particularly by the declines in mature high-profit programs in Europe due to those market declines described, being replaced by sales of launching business with lower negative margins. Thank goodness for the launching business to mitigate the top-level declines and also, of course, to position us for solid growth when the market starts to pick up. We target normalized operating margins for the transportation segment of 7% to 10% and delivered 8.4% in 2018, excellent performance given industry conditions. We expect to see margin expansion in this segment as well this year. As a result of improvements expected in both segments, we expect to see normalized net margin expansion in 2019 to reach between 7.75% and 8.25%. Investing in our future continues to be a priority for us at Linamar. CapEx in the quarter was $144.5 million, or 8.3% of sales.
That took us to a full-year spend of $537.3 million, or 7.1% of sales, the mid-level of our normal range of 6% to 8% as expected. We expect 2019 to see lower CapEx in both dollars and as a percent of sales and end up at the low end of our 6% to 8% range. Our net debt level continues to come down, now at $2.02 billion. Net debt to pro forma EBITDA is now 1.68 times. We expect to bring leverage back down under one by late 2019. In North America, content per vehicle for the quarter reached $160.33, up 1.7% from last year thanks to launching business in a market that was up 1.9%. Q4 automotive sales in North America as a result were up 3.6% over Q4 2017, at $699.2 million.
In Europe, content per vehicle for the quarter was $73.06, up 4.5% over last year thanks to launching business in the region in a market that was down 5.7%. Growth in Europe for us has really been fantastic. It's only five years ago that content in Europe was only $14.45. Our Q4 2018 automotive sales in Europe is slightly down to last year, mainly because of market issues, reaching $399.7 million. In Asia-Pacific, content per vehicle for the quarter was $8.85, down 6.6% from last year due to production declines with certain customers out of sync with the overall market. When combined with market declines of 3.9%, we saw Q4 2018 automotive sales in Asia down 10.4% compared to last year, reaching $117.6 million. Linamar continues to target doubling our current footprint in Asia in the next five years.
It's great to see continued content per vehicle growth in the quarter in most regions, despite lower production levels with key customers. I'll also point out that record levels of content per vehicle we're seeing on an annual basis for each region, as you can see in our chart. Our expanding content per vehicle reflects our increasing market share, thanks to large amounts of launching business, which, of course, is key to accelerating growth when volumes start to pick up. Other automotive sales not captured in these content calculations were $74.4 million, up significantly over last year, due mainly to increased sales to other parts of the world. Commercial and industrial sales were up 45% in the quarter, at $441 million compared to $303.7 million last year, thanks to the acquisition of MacDon, which had another good quarter and continued market share growth at Skyjack.
Turning to our market outlook, we are seeing stability or moderate growth this year in most of our markets. For the global light vehicle business, the forecast is for small or flat to small increases in light vehicle volumes globally to 17 million, 22.2 million, and 50.7 million vehicles in North America, Europe, and Asia respectively, noting pressures on the first half volumes in the latter two, as I mentioned earlier. Industry experts are predicting on-highway, medium, heavy truck volumes to be flat this year in North America, up 6.5% in Europe, but decline again in Asia. Off-highway, medium, and heavy-duty volumes are continuing to show signs of improvement. Turning to the access market, the industry is expecting mid- to low-single-digit growth in the global aerial work platform market this year. Performance is being driven by growth in most global markets and each product line.
We continue to see positive industry metrics with significant infrastructure spending plans for the next couple of years in every region and an ARA forecast of 4% to 5% rental revenue growth for the rental business. Skyjack's backlog is strong. The issue has become keeping up with market demand and managing the supply base. It is our goal to continue to outperform the market through market share growth this year. From a timing perspective, please note that some key North American customers have delayed equipment purchases until the second quarter of the year, meaning we expect a bit of a softer start to the year than we normally see, followed by a stronger Q2 and Q3. Overall outlook for Skyjack for the year has not changed. It is just timing that has shifted somewhat.
Turning to the agricultural market, the industry expectation is for low single-digit growth in North America overall, but a flat combine market and a declining combine market in Canada. MacDon's product lines track more closely to the combine market specifically than overall agricultural industry, so do expect some pressure on MacDon this year as a result. Europe and Asia are also expected to be flat to slightly down, although for MacDon, this is really still a market they're trying to break into. The key issue for the ag market right now is tariffs, which are hitting farmers in North America in particular and therefore restricting cash flows and equipment purchases. On the positive side, we've launched our Oros corn head branded MacDon, which is getting a solid reception with our U.S. dealers.
A reduction in soybean planting, thanks to tariffs, is likely to be replaced by corn, which would go well for this industry. Turning to an update on growth and our outlook, we continue to see solid levels of new business wins and a strong book of business being quoted in our transportation business, with win levels significantly higher than last year at this time. Q4 was another strong quarter for us, with quite a few notable strategic wins driven by continued acceleration of powertrain outsourcing and new opportunities in new propulsion vehicles, which is very exciting. Our addressable market across a range of vehicle propulsion types continues to look excellent. Global vehicle growth is forecast to grow at a compound rate of 1.5% to 2% over the next 25 years.
Each type of vehicle propulsion offers excellent and growing potential for us, and our suite of products for each continues to be developed and to grow. The total addressable market for us, as you can see in this chart today, is $125 billion, growing to nearly $325 billion in the future. We have 202 programs in launch at Linamar today. You should look for ramping volumes on launching transmission engine and drivelines platforms to reach 40% to 50% of mature levels this year, which will add another $900 million to $1.1 billion in sales for 2019. These programs will peak at nearly $4.4 billion in sales. We saw a big shift of about $400 million of programs that moved from launch to production last quarter. Total business launched in 2018 was nearly $650 million.
In addition, as noted, Skyjack is targeting growth above market this year, so expect high single-digit to low double-digit growth for 2019. And again, a little less growth in Q1 and a little more in Q2 than you might normally see. MacDon will face a little market pressure, as noted, particularly in Canada where the market is down and MacDon market share is high. But of course, we've got that extra month of sales this year as our acquisition was February 1 last year, which should balance out to result in flat to somewhat increased sales for the year compared to 2018. Temper that growth with the loss of business that naturally ends each year, noting to expect such at the high end of our normal range of 5% to 10% in 2019, as well as normal productivity give back.
Our strong backlog of launching business and growth in our industrial sectors will do a great job of offsetting market softness in Europe and China, so we still expect to drive mid-single-digit top-line growth for us at Linamar this year. Sales growth with expanding margin performance in both segments will result in high single-digit normalized operating earnings growth this year, an excellent expectation driving from organic-only growth in a little softer market. New business wins are, of course, also filling in growth for us in the midterm as well. Our current estimate is for between $8.5 billion to $9 billion in book business for 2022, based on current industry volume forecasts layered with new business wins and adjusting for business leaving. I'd like to highlight a few of our more interesting business wins for you this quarter.
First, we won two significant balance shaft assembly programs, one in Mexico and the other in Europe. In aggregate, they're going to contribute more than $45 million in annual sales at peak. Our significant expertise in gear manufacturing is really the key to these wins. We also picked up several programs for our French plants, representing more than $25 million in annual sales. Programs are for both the passenger car and commercial truck market, where we're starting to see some quoting activity pick up after a few quiet years. On that front, we saw another package of commercial vehicle components, this time for North America, that in aggregate are worth more than $20 million in annual sales. So great to see that market starting to show some life.
We saw two important cylinder head casting wins for our light metal casting business, which in aggregate are more than $60 million a year in annual sales. Still on the engine side, we saw an important camshaft win for a key Japanese customer. Again, this is for our Canadian operations, where we are rapidly gaining significant market share. Finally, we saw another important structural component win for a shock tower, again at one of our Guelph plants. We're rapidly gaining a solid reputation in these products that are key to vehicle lightweighting and used, of course, in any type of vehicle propulsion. Turning to an innovation update, we made significant progress in the last quarter and last year with our Linamar Manufacturing Monitoring System, also known as LMMS, which was our major connected machines initiative in 2018.
In essence, our goal with LMMS was to take unstructured data gathered in our facilities and really turn it into business intelligence. To do this, we designed LMMS in-house as a global standardized data platform. We're really proud of the work that our team did, which we've been told is leading edge in terms of its capabilities. LMMS is a modular system. It assesses system function in terms of productivity with real-time data gathering, as well as modules that will look at quality, tooling usage, and machine health. The productivity module is really the baseline for all the other modules, and it's the piece that we were really focusing on getting implemented to date. So in 2018, we connected almost 3,000 machines in 50 facilities and 11 countries with all the requisite system upgrades completed as well.
In 2019, we're going to continue our rollout of the productivity module across another 300 programs, which will mean thousands more machines, and we will also begin development of the next module of the system. Of course, LMMS is part of a broader digitization initiative that is better summarized on this slide. There's a huge amount of opportunity in these technologies, which if you have been tracking it, every single one of these indicators is ticking up significantly every quarter. Turning to an operational update, our plants continue to perform extremely well, both on mature business metrics and in terms of launch. Our launch systems are excellent and plant controls world-class. The recent increase in launch costs is really more related to volume of launches than any system issue, and we're confident to see normal launch costs resume in a quarter or two.
The pressure on margins from launch is also related quite simply to the transition of older platforms ramping down and newer lower margin due to their ramp phase programs taking their place. There's always a temporary impact to margins when this transition occurs, which rectifies when launching programs reach mature levels of profit, which they typically do within two years of being launched. In terms of new plants, we have three projects underway at the moment. First, we're building a new state-of-the-art facility in Hungary, you can see pictured here, to house our new eAxle gearbox program, which launches late next year. Secondly, we are expanding our fabrication facility also in Hungary to accommodate growing corn head sales and also to house the European requirements of Skyjack. And finally, we're significantly expanding a facility in China, again that's to take on a major eAxle program, which also launches next year.
Finally, a quick trade update. Despite the signing of USMCA, the industry is unfortunately still suffering under the imposition of significant tariffs on metal and, of course, products from China. The additional costs are taking a toll on our customers, and we're hopeful we will see their elimination very soon to avoid impact to current production forecasts. On the positive side, the impact of tariffs to Linamar, although not zero, is certainly not even close to material. On the China side, we are seeing impact mainly in our industrial business and cost increases from material suppliers in the U.S. that are buying from China, again not at material levels. And on the metal side, no direct impact to U.S. facilities because they're not purchasing any foreign metal.
A small direct impact to Canadian facilities for metal that they are purchasing in the U.S., but it is 100% reclaimable through our duty drawback program here in Canada. On the indirect side, we have a small handful of suppliers that have increased their costs based on increased metal prices, again not at all at material levels. With that, I'm going to turn it over to our CFO, Dale Schneider, who will lead us through a more in-depth financial review.
Yeah? Thank you, Linda. Good afternoon, everyone. As Linda noted, Q4 was a solid quarter as sales grew by 10% and operating earnings grew by 8.2% in an environment where European and Asian light vehicle markets were down by 5.7% and 3.9% respectively. For the quarter, sales were CAD 1.73 billion, up CAD 158 million from CAD 1.57 billion in Q4 2017. Operating earnings for the quarter were CAD 171 million.
This compares to $158 million in Q4 2017, an increase of $13 million, or 8.2%. Normalized operating earnings for the quarter were $159 million. Net earnings decreased by $11 million, or 7.8%, in the quarter to $124.5 million. On a normalized net earnings basis, earnings were $115 million. As a result, fully diluted net earnings per share decreased by $0.16, or 7.8%, to $1.18. Normalized fully diluted EPS decreased by only $0.10, to $1.75. Included in earnings for the quarter was foreign exchange of $17.5 million, which related to an $18.4 million gain on the revaluation of operating balances and a $900,000 loss on the revaluation of financing expenses. The net FX gain in the quarter impacted EPS by $0.21.
From a business segment perspective, the Q4 FX gain due to the revaluation of operating balances of $18.4 million was a result of a $17.7 million gain in industrial and a $700,000 gain in transportation. Further looking at the segments, industrial sales increased by 70%, or $145 million, to reach $353 million in the quarter. The increase in the quarter was due to additional sales from the acquisition of MacDon, the strong volume increases in scissors as a result of market share gains, and favorable changes in foreign exchange rates since Q4 2017. Normalized industrial operating earnings in the quarter increased by $17.3 million, or 62%, over last year. The primary drivers of the industrial operating results were the additional earnings from MacDon, the increased scissor volumes of Skyjack, and the favorable impact of FX rates since Q4 partially being offset by increase in commodity prices.
Turning to transportation, sales increased by CAD 12 million over Q4 last year to reach CAD 1.4 billion. The increase in the fourth quarter was driven by higher sales from our launching programs, favorable impact of the changes in FX rate, partially offset by market declines in Europe, largely due to continued WLTP and diesel inventory issues, in addition to the market declines in Asia. Q4 normalized operating earnings for transportation were lower by CAD 19 million, or 15%, over last year. In the quarter, transportation earnings were impacted by the European and Asian sales declines on higher margin mature programs that were only partially compensated by the sales from launching programs that naturally have lower margins.
It was additionally impacted by the heavy launch cost activity that was globally incurred and one-time restructuring costs that were incurred in the quarter, partially offset by the favorable impact of changes in FX rates since last year. Returning to the overall Linamar results, the company's gross margin increased by $9 million due to the acquisition of MacDon, the favorable changes in FX rate, and the increased volumes in both segments, partially offset by additional costs related to heavy launch activity globally within the transportation segment and the increased commodity costs in the industrial segment. Cost of goods sold amortization expense for the fourth quarter was $85 million. COGS amortization as a percent of sales was relatively flat at 4.9% of sales. SG&A costs increased in the quarter to $109 million from $92 million.
The increase is mainly due to the additional SG&A costs at MacDon and the one-time restructuring costs that incurred in the quarter. Finance expenses increased $10 million since last year due to the increase in debt levels and spreads as a result of MacDon acquisition. Higher interest rates due to the Bank of Canada and rate hikes partly offset by higher interest earned on the investments of excess cash and the long-term receivable balances. The consolidated effective interest rate for Q4 increased to 2.8%, primarily due to the new acquisition debt and the impact on spreads in addition to the Bank of Canada and rate hikes. The effective tax rate for 2018 came in at 22.1% and in line with the expected tax rate as discussed at the Q3 conference call. The effective tax rate for the fourth quarter increased to 19.2% compared to last year.
The effective tax rate in Q4 was increased due to the one-time future tax rate reductions last year and the increase due to less favorable mix of foreign tax rates, which was partially offset by 2017 tax adjustments that related to prior periods that did not reoccur in 2018. We are expecting the effective tax rate for 2019 to be in the range of 22% to 24%. Linamar's cash position was $472 million on December 31st and an increase of $33 million compared to December 2017. The fourth quarter generated $260 million in cash from operating activities, which was used to fund CapEx, debt repayments, and interest payments. Linamar generated $109 million of free cash flow in the quarter.
Net debt to EBITDA decreased to 1.68 times since the acquisition of MacDon, and we expect net debt to EBITDA to be back under one times by the end of 2019. The amount available credit on our credit facilities was $722 million at the end of the quarter. To recap, Linamar had another solid quarter to complete another record year with annual sales growing 16% and annual operating earnings growing at 16%. The strong sales increase in the quarter led to solid earnings performance despite the issues in the European and Asian light vehicle markets. That concludes my commentary, and I now like to open up for questions.
At this time, I would like to remind everyone, in order to ask a question, press star one on your telephone keypad. To withdraw your question, press the pound key. We'll pause for a moment to compile the Q&A roster. Your first question comes from Peter Sklar from BMO Capital Markets.
Thanks. Linda, you were talking about the negative impact on your business from the take rates of diesel engines in Europe. I was always under, I guess, the mistaken impression that you had pretty modest exposure to diesel and you were largely gasoline exposure in Europe. Was I incorrect?
No, you are correct. We don't have a significant exposure to diesel, but we do have some diesel programs. So if we had a significant exposure to diesel, you would have seen a much bigger issue. So we do have a few diesel programs that obviously we're running a little soft. Much bigger issue was WLTP in the quarter.
Okay. In the transportation segment, there was a $6.2 million restructuring charge, I believe. Could you tell us what that related to?
Yes. We are doing some restructuring, mainly in our Light Metal Casting group. So changing up a little bit accountabilities to shift more into plants and away from sort of the group level office. So we had some restructuring costs associated with that.
So it was like people costs, termination costs?
Correct.
Okay. And when you say Light Metal Casting, that's aluminum die casting? Sorry.
It's the former Montupet.
Okay. I believe you said that in terms of business falling off in 2019 in the transportation group, you're looking for the high end of the 5% to 10% range. Is that correct? Did I hear that correctly?
Yeah. So I've got a backup on the screen, the outlook, so you can see what our expectations are around margin for the various segments. So I don't think I gave you a number for transportation sales other than to talk about the launch book and business leaving. Sales book overall for overall Linamar for the year, we're expecting mid-single digit. Was that your question?
No, just the amount that usually you give, like the negative impact of the business falling off in the transportation segment.
Oh, yeah. Yeah.
I just want to confirm you said at the high end of the 5% to 10% range.
That's right. You can see it there at the second last row of the chart.
Just to confirm the calculation, the 10% is on the transportation segment revenues, not consolidated sales?
No, it's on consolidated sales.
Okay. And just lastly, this little spike we're having in, or I shouldn't say we, you are having in launch costs that you expect to settle down over the next couple of quarters. What did that relate to? Because when I look at the, like you usually disclose the number of programs that you're in launch with, and it's usually 200 programs plus, and it hasn't changed. I'm just wondering, was there anything that caused this particular spike in launch phase and launch costs?
I wouldn't say that it's spiked in Q4 in comparison to others. Like we were already in Q3 talking about higher launch costs. So I don't think that I wouldn't say it's materially changed from Q4 to Q3. I mean, obviously, while we're launching over 200 programs and we're in a big ramp phase right now with, we're kind of getting to much more significant volumes on the new programs, which obviously there's going to be a negative impact for the programs that they're replacing if indeed they are replacing something that's in place. So there's always a bit of a temporary impact to margins when that happens. So there's higher launch costs and then a little bit of impact on the margin size if you've got these new programs that are launching that have lower margins, obviously, during their ramp phase.
They're replacing mature programs that are running at a higher volume. So you always have a little bit of a balancing issue. So I'd say we're seeing a bit of that and just launch costs because we're really in a significant ramp phase right now. I wouldn't say I wouldn't call it a spike. I mean, it's been, it's part of the scenario here, and it's something we talked about last quarter as well. So I wouldn't lead too much into that. And we do expect it to settle down over the next one to two quarters.
Okay. Thank you for your comments.
No problem.
Your next question comes from Michael Glen from Macquarie.
Hi. Good evening. Linda, can you just talk a little bit about the eAxle plants that are in China? And I think I can't remember the location of the other one that you mentioned, but can you just talk about when the expected production is and the CapEx that you're outlining for those facilities?
Yeah. So the two plants are in China and in Hungary. I'm going to let Mark talk about the launch from a production volume perspective in a minute. But in terms of capital expenditures, we would not normally disclose that on a program-by-program basis. So I mean, I can tell you in general a new plant's CapEx for a new plant, which is primarily the cost of equipment as opposed to the plant itself. The plant itself might be $10 million or $15 million, maybe a little more. And then the capital for that plant might be anywhere from $60 million to $100 million, depending on the level of sales.
Michael, both plants will start production in 2020.
Okay. Are you able to, given I mean, this is a newer product for you? Are you able to give some thoughts on the margins coming out of these programs? Do you expect them to look similar to what you've seen on traditional programs for yourself?
I would expect them to look similar. They may be a little lower on the margin side because they're assemblies. So there's purchased components that are going to be in them. But I mean, these assemblies are primarily gears and shafts and housings, and all of which we would make ourselves. So whereas an assembly might normally be a little lower on margin, I think these ones will be reasonably similar to what we would be used to normally.
Okay. And when you're looking at the European business overall, obviously, there's quite a few headlines as to various directions being taken in that market. The way your product is lined up there, do you see any? Are you well positioned as they transition into more electric and hybrid offerings?
Well.
For sure. I mean, we've got a full suite of hybrid and eAxle product in regards to our various designs that we've done to date for actual eAxles, but also our eAxles for hybrids and in any of our PTUs, RDUs for the hybrid markets. We've got a full suite of capabilities, not just also from the passenger car, but also we've got a fair bit of product that we're looking at around commercial vehicles that would be suitable globally, not just in Europe.
So I mean, in summary, I'd say we're very well positioned. I mean, if you look at we've won two major eAxle gearbox programs globally that in aggregate represent over 1 million units at full volume. When they hit full volume, which will be in the, let's say, early 2020, early to mid-2020 timeframe, the current forecast for electric vehicle production globally is around 5.5 million to 6 million units. That means we've got 20% market share globally for gearboxes, which is pretty fantastic. So we're clearly in a leadership position around those products in particular. And then all the other pieces that Mark was talking about, it will only add to that.
Did you give the total program size for that peak volume, like in dollar figures for the 1 million units?
No, we haven't.
Okay. Then just one additional question. The working capital that we see on the cash flow statement, do you expect the last year was about CAD 314 million draw. Do you expect that to normalize in 2019?
Yeah. That is absolutely a key focus for us, is reducing non-cash working capital. I think there's some good opportunities to do that, particularly in our industrial businesses.
Okay. That's all my questions. Thank you.
Your next question comes from Mark Seiff from Parkhouse Holdings.
Thank you for taking my questions. I have a number of questions. Let me go through them one by one. First of all, on Skyjack. In the last recession, Skyjack's revenues plunged over 50%, and they showed a significant loss. Can you tell us the steps you've taken over the last decade, if any, to enhance those results when the next recession comes for a cyclical business like Skyjack?
Yeah. I would say, first of all, that the last cycle down was hardly a characteristic recession, right? I mean, what happened in 2009 was not anything remotely close to what happened in any other cycle down. So I don't think you should expect anything close to that for Skyjack. So we do expect the market this year to be up, as I described. They are forecasting that we'll see some tailing down in the market out in the 2020, 2021 timeframe. So what are we doing to respond to that? Several things. Number one, we're growing our product line. So we are increasing market share in booms and telehandlers. So that's a real key to offset market softness. If you can be growing your market share, then you have a great tool to offset market decline. So that's something we've been very active in in the last decade.
Also, expansion internationally for the same reasons. So again, growing global market share is a key element in offsetting market softness. Finally, on the telehandler and boom side, as we have launched new programs, we have put in more flexible production systems in the sense that we are outsourcing bigger chunks of what we may have traditionally done in-house in the past. And that is very important for positioning for potential cycle downs because it means we're not sitting on all that investment and capital as something that's sitting at a supply base to be spread it out. So quite a few things.
That was very helpful. Thank you. If I can ask one, did you, if I understood you correctly, you took down your net margin guidance for 2019 by 50 basis points relative to what you said on last quarter? Did I hear you correctly? And what is the reason for that?
Yes. We did trim up the margin expectation somewhat. Really, three key things were driving that softer outlook for European and Asian, notably China production levels than what was forecast a quarter ago, and a little less growth at MacDon than originally expected because of the tariff situation that I described. So we're still expecting to see significant growth, high single digit in soft to declining markets, I think is pretty fantastic growth. And 7.75-8.25 margin, I think, is actually also a pretty fantastic level of performance.
But if your operating margin is going to be up high single digits, as you said, and interest expense will come down because you're paying down debt and your tax rate is pretty similar in 2019 versus 2018, I'm not sure why I mean, that other guidance seems very good. I'm not sure how that jives with taking down your net margin guidance.
Yeah. I mean, I said that operating margins would expand moderately on the industrial side and that they would expand on the transportation side. I didn't give an indication of exactly how much. All of that is going to change. But you're right. Interest costs will be down a little. And we will have margin expansion in both segments. And when you translate that all down to the bottom line, you see high single digit growth.
Okay. If I could just ask about the comment about bringing leverage under one times by the end of 2019. Right now, you have $2 billion in net debt. EBITDA estimates next year are 2019 at CAD 1.25 billion. That means you'd have to pay down about $700 million to $800 million in debt this year. Is that what you're really expecting to do?
Yes, that's correct. It'll be through a combination of obviously higher earnings, as noted, high single-digit earnings growth, a lower capital spend. As I also mentioned in my formal comments, capital spending is going to be down. As just noted in the last question, we've got a big focus on non-cash working capital. It is our expectation to see some good cash flow generation this year.
That's terrific. Dale, if I can ask you one, on the last call, you said because of the accounting changes about writing off new equipment in Canada, you'd give some commentary on the first quarter, on the year-end call, about what that might mean to Linamar. Could you make any comments about that?
Yes. This was in relation to the U.S. tax changes that we were talking about in Q3. We've gone through our homework and have a better understanding of how those will impact. It won't, from an accounting point of view, it won't change our accounting income or the accounting tax. It will mean a better taxable income from filing a tax return point of view. From our point of view, it's more of a cash flow issue than it'll be an earnings issue.
Okay. And just the last question. I read recently that several OEMs are closing factories in China because they just can't compete with the local manufacturers. Is that what you're seeing in China? And is that hurting you because you do business with Ford or GM?
I mean, I haven't seen certainly any of our customers shutting facilities. So we certainly don't have any impact from any OEM closures. The market's down, as we discussed, so that has an impact, but none of our customers have shut their facilities.
Okay. This really is my last question. Is there any reason financially why you guys tend to report later in the quarter than many others? Is there some Canadian regulation or something I'm missing?
No. No. No specific reason.
Okay. Thank you so much for answering the questions. I appreciate it.
No problem.
As a reminder, to ask a question, press star one on your telephone keypad. The next question comes from Carlos Isapour , private investor. Your line is open.
Hi, guys. So my first question is about what I would call the Linamar platform. So you bought the Skyjack for $ 30 million in 2022, and today it has like an operating margin of like $ 220 million. You did a small Canadian company and took it all over the world. You seem to apply the same playbook with MacDon. So my question is, could you please explain how your auto market know how helped you get these companies around the world? What are you seeing with MacDon? What are the opportunities?
Yeah, absolutely. So we feel that our three businesses have very strong relation to each other by virtue of the fact that they're all based in metallic manufacturing. So we've been able to bring a lot of cost-saving ideas to both Skyjack and now MacDon in terms of how we can reduce costs from a lean manufacturing perspective. That's been a hugely successful strategy at Skyjack and also at MacDon. We also bring a lot of strength from a purchasing perspective and also economies of scale and leverage in terms of just a bigger buy. So certainly, we were able to do that with Skyjack, and we're in the process of doing so with MacDon as well. So as they become part of our global buy, we can trim up the costs.
So lean manufacturing, purchasing, access to a global footprint, money to invest to expand the product lineup, and the global footprint of the two businesses, I would say, would be the key benefits that we can bring to the table for them.
Okay. That's great. So my second question is about the market perception of Linamar. I mean, during that, in several interviews, you have been pointing to the fact that Linamar is not an auto market company anymore. It's more like a diversified industrial. However, the market values you like, I mean, you are an auto market company, and you have like 40% of your operating income coming from Skyjack and MacDon. So I was curious about your opinion about this, and if you have any plans of how you can change the market perception and get the stock properly valued.
Yeah. I acknowledge your frustration and can tell you that I am equally frustrated at the level of valuation. I do believe that sum of the parts valuation is a more appropriate approach. We do have some analysts who do value us in that way, and I think it makes a lot more sense to do so, particularly as you point out with the high level of earnings performance from our industrial segment. So it's a story we continue to talk about and illustrate to our shareholders. And I'm confident that with time, we will see a shift in terms of that valuation.
Great. Thank you.
And there are no further questions at this time. I will now turn the call back over to the presenters.
Okay. Great. Well, thanks very much. To conclude this evening, I'd like to leave you, as we always do, with three key messages. First, we are thrilled with another record year of sales and earnings at Linamar, and particularly with achieving our ninth consecutive year of double-digit earnings growth. I think that is pretty impressive, and we're very proud of that record. Number two, we are very optimistic in our outlook to see margin expansion this year and high single-digit earnings growth. Again, that's something that not every manufacturing company can say today with soft markets out there. So we're pretty proud of our ability to deliver that. And finally, we are very focused, as discussed, on continuing to significantly reduce debt and improve our leverage in 2019 through earnings growth, a reduction in CapEx spending, and carefully managing our non-cash working capital.
Thanks very much, everybody, and have a great evening.
This concludes today's conference call. You may now disconnect.