I would like to welcome everyone to the Linamar Q2 2018 Analyst call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Linda Hasenfratz, CEO, you may begin your conference.
Thank you. Good afternoon, everyone, and welcome to our second quarter conference call. Joining me this afternoon are members of my executive team, Jim Jarrell, Mark Stoddart , Roger Fulton, Dale Schneider, and some members of our corporate finance and legal teams. Before I begin, I will draw your attention to the disclaimer currently being broadcast. So I will start off this evening with sales, earnings, and content. Sales for the quarter were CAD 2.16 billion, a new record, up 22.1% from last year, which is fantastic to see. Earnings saw another strong level of performance in Q2 as well. Net earnings normalized for balance sheet exchange impact and any unusual items in each quarter increased 15.1% compared to last year to reach CAD 193.6 million, also a new record. Another quarter of double-digit normalized net earnings growth achieved in six out of eight of the last eight quarters.
Just look at all those stars. A few factors were key in driving this solid performance. First, our new acquisition, MacDon, made a great contribution to growth with solid performance. Second, the access market experienced double-digit growth over last year in units sold, driving great performance at Skyjack, particularly with our popular booms and telehandler products, which continue to build market share. And finally, launches in the transportation business are running strong and doing a great job of driving top-line growth in some challenging markets. It's exciting to see the growth of our industrial segment. Our diversification has led us to a couple of excellent technology-driven businesses, which are leaders in their fields, growing market share and generating solid returns. In fact, earnings from our industrial segment represent half of our operating earnings this quarter, a huge benefit to us in some more challenging times on the auto front.
I see this as a real differentiator for Linamar in our ability to generate consistent, sustainable earnings growth and returns for our shareholders. A few factors were a challenge this quarter and hurt our results. First, light vehicle markets for the three regions we serve were up 4.1%, but the North American light vehicle market was down 1.7%, and key customers were down as much as 12% in North America this quarter. Secondly, a key customer experienced a serious production disruption due to a fire at one of their suppliers. The resultant shutdown of a key vehicle platform had a negative impact on our results as we have heavy content on that platform. Finally, FX compared to last year provided some headwinds for both segments, but in particular, the industrial segment. Normalized net earnings as a percent of sales in Q2 were 9%, down a little from last year.
Both production issues that I noted above impacted margins overall and, of course, in the transportation segment particularly, as declines in these mature high-profit programs were replaced by sales of launching business with low or negative margins. Thank goodness for the launching business to mitigate these declines and also to position us for solid growth when the market starts to pick up. This has been an ongoing theme over the past year as some of our customers have seen production setbacks in a flat to declining market. Until the production levels start to pick up a little, we can expect to continue to see this impact on margins, although notably, we remain within targeted levels. We target normalized margins for the transportation segment of 7%-10% and expect to be at mid-range this year with expansion next year.
On the positive side, our industrial segment is performing very strongly despite FX headwinds, in no small part thanks to MacDon. In fact, we are revising our target margin range for this segment from 12%-16% to 14%-18%. We expect to be at the midpoint of this new range this year with expansion next year as well. The adjustment to targeted margins in the industrial segment also impacts our overall net margin target range, which moved from 6%-8% to 7%-9%, more reflective of recent experience as well as forecast levels. We expect to see strong full-year net margin performance for 2018 and 2019, once again in the range of 8%-8.5%, noting first-half results will pull us to the low end of the range this year, but we do expect to see good margin expansion next year.
Investing in our future continues to be a priority for us at Linamar. CapEx in the quarter was $119.7 million, or 5.5% of sales. We are expecting 2018 CapEx as a percent of sales to be higher than last year and reach the mid-level of our normal range of 6%-8%. 2019 will see a similar result. Our net debt level was, of course, higher than Q2 last year given our Q1 investment in MacDon, but down a little from where we sat at the end of Q1. Net debt to pro forma EBITDA is now 1.7x, and we do expect to bring leverage back down under one within 18 months.
In North America, content per vehicle for the quarter reached $165.44, up 2.9% from last year thanks to launching business, offsetting a 1.1% decline in production levels and much more significant declines, as described, with key customers. Q2 automotive sales in North America as a result were up 1.8% over last year at $748.7 million. This is a great example of the importance of launching business to offset market cycles and strategies that we have long employed. In Europe, content per vehicle for the quarter was $80.02, up 15.2% over last year thanks to launching business in the region in a market that was up 5.1%. Growth in Europe for us has really been fantastic. It was only five years ago that content in Europe was only $14.45.
Our Q2 2018 automotive sales in Europe therefore grew 21% compared to last year to reach $480.8 million. In Asia-Pacific, content per vehicle for the quarter was $9.11, down 15% from last year due to production declines with certain customers out of sync with the overall market. Our Q2 2018 automotive sales in Asia-Pacific were down 10.1% versus last year, reaching $110.7 million in a market that was up 5.7% in production volume. 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 most regions despite lower production levels with key customers. Our expanding content per vehicle reflects our increasing market share thanks to large amounts of launching business, key to accelerating growth when volumes start to pick up.
Other automotive sales not captured in these content calculations were CAD 71.6 million, up 23% from what we saw the same quarter last year, mainly on higher tooling sales. Commercial and industrial sales were up 64.8% in the quarter at CAD 745.7 million versus CAD 452.4 million last year thanks to the acquisition of MacDon, which also had a strong quarter, and a strong quarter for Skyjack, with markets up nicely and continued market share growth, as well as continued recovery in our off-road vehicle business. Turning to a market outlook, we're seeing stability or moderate growth this year and next year in most of our markets. For the global light vehicle business, the forecast is for small increases in light vehicle volume this year globally to 17.2 million, 22.7 million, and 50.9 million vehicles in North America, Europe, and Asia respectively.
Next year is expected to similarly generate small amounts of growth ranging from small increases in North America and Europe to 3.3% growth in Asia. Industry experts are predicting on-highway medium-heavy truck volumes to grow this year in North America and Europe at 13.7% and 5.2% respectively, but see a decline in Asia. Next year, we'll see fairly flat markets of ±2% in North America and Europe, but another decline in Asia. Off-highway medium-duty and heavy-duty volumes are continuing to show signs of improvement at last, which is great. Turning to the access market, as noted, we saw double-digit global volume growth this quarter, a trend which is expected to continue for the year, dropping back to mid to low single digits next year. Performance is being driven by growth in each global market and each product group.
We continue to see positive industry metrics with significant infrastructure spending planned for the next couple of years in every region and an ARA forecast of 4%-6% rental revenue growth for the rental business. Skyjack's backlog is substantially higher than it was last year at this time. The issue has really become keeping up with market demands. It is our goal to continue to outperform the market through market share growth, as we have so successfully done in the last several quarters. Our new agricultural business, MacDon, will benefit this year from an agricultural market at the early stages of a cyclical recovery. The industry expectation is for mid-single-digit growth in the agricultural market in 2018. It is our goal at MacDon to also outperform the market with our industry-leading harvesting equipment.
Turning to new business, we continue to see solid levels of new business wins and a strong book of business being quoted, with levels dramatically higher than last year at this time. Q2 was another strong quarter for us with quite a few notable strategic wins driven by continued acceleration of powertrain outsourcing, which is very exciting. Our addressable market across a range of vehicle propulsion types continues to look excellent. Global vehicle growth is forecasted to grow at a compound annual rate of 1.5%-2% over the next 25 years. Changing dynamics and new technologies are having various impacts on driving demand up, others driving demand down, but the drivers for growth are expected to exceed the drivers for contraction on a global basis. Each type of vehicle propulsion offers excellent and growing potential for us in our suite of products for each.
Continue to be developed and to grow, and we'll see some examples of that in the highlights this quarter. The total addressable market for us today is CAD 130 billion, growing to more than CAD 325 billion in the future. We have 207 programs in launch at Linamar today. Look for ramping volumes on launching transmission, engine, and drive lamp platforms to reach 25%-30% of mature levels this year, which will add another CAD 600 million-CAD 700 million in sales for 2018. These programs will peak at nearly CAD 4.5 billion in sales. We saw a shift of about CAD 70 million of programs moving from launch to production in the last quarter. Programs moving to production from launch this year will add about CAD 75 million in incremental sales growth to 2018, so total business launched in 2018 of CAD 700 million-CAD 800 million.
Launch programs grow quite steeply next year to more than double this year's level for incremental growth in 2019 of between $1.2 billion and $1.3 billion. In addition, as noted, Skyjack is targeting solid growth, driving out of growing markets in the double-digit range this year and high single digit to low double-digit range next year. MacDon will be a key growth driver for us this year and next as well. MacDon, if you recall, was about $600 million in sales on acquisition. The market is growing in mid-single digits, and remember, we will have just 11 months of results in 2018 for Linamar. Expect mid-single digit growth for MacDon this year and low double-digit growth next year. It's important to note that both Skyjack and MacDon's seasonal peaks are in Q2, meaning you should expect a seasonal dial-back in Q3 and much more so in Q4.
Temper that growth with the loss of business that naturally ends each year, noting to expect such at the low end of our normal range of 5%-10% in 2018 and the high end 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 driving strong double-digit top-line growth for us this year. Next year, the strong launch book continues to build to drive an organic-only growth level at the high single-digit level. Sales growth with continued strong and expanding margin performance will result in double-digit normalized net earnings this year and next. New business wins are, of course, also filling in growth for us in the midterm as well.
Our current estimate is for $8.5 billion-$9 billion in booked business for 2022 based on current industry volume forecasts, layered with new business wins and adjusting for business leaving. I would like to highlight a couple of our more interesting wins this quarter. First, we won an important program strategically for a structural cast component for our Montupet group. This program is significant in volume and revenue, as you can see, but also important strategically as it adds to our content in the body of the vehicle, which we have targeted as a key growth area to build content for alternatively powered vehicles. Next, we picked up another win for our business in China, this one a transmission component due to launch in 2020. Third, we were awarded a commercial off-highway vehicle cylinder head program that's due to start production right away.
It is great to see a win in this area, which has had very little opportunity in the last few years due to a sluggish market. Next is another quick start program, which is kicking into production right away, this one for a takeover project for a turbine shaft. We were thrilled to win another camshaft program based for an Asian OEM right here in Canada. We have done a great job of building market share with our Japanese customers in these types of critical components in the last few years. So great to see that growth continue. Finally, several projects were won for our plants in Mexico: two cylinder heads and a block and a balance shaft assembly. Despite obvious political issues, we are still seeing opportunities in Mexico, which is a positive.
Turning to a strategic update, we continue to work towards developing our strategies around long-term markets that we target, such as food and agriculture, water power, and age management, even as we continue to build our transportation and infrastructure businesses. Our strategies are to develop flexible strategies that allow us to succeed in a variety of outcomes, whether through developing a strong portfolio of products for every type of vehicle in our transportation business or through the product and regional expansion that we focus on in our industrial businesses. In all cases, however, innovation is at the heart of our strategy. We have launched several key innovations for Skyjack this year, and I'd like to share a few of them with you. First, they launched an excellent and user-friendly telematics tool to help our customers access the real-time data they need to help them run their business.
Our focus has been on getting them the right information at the right time. Where's their equipment? Is it being operated safely? When is it due for service? Is it being appropriately utilized? Our customers are loving this optional feature. We expect even this year and the year of launch to already be at more than a quarter of machines telematics equipped this year. Secondly, they launched a new mechanically driven CVT transmission for our popular Telehandler series. This is the first of its kind in the industry, and it is great leading-edge technology. It's easier to operate and reduces damage and repair costs to the transmission. Lastly, working with a key partner, we launched a great innovative VR training simulation tool to help train newcomers on how to operate a Skyjack.
The technology is unique in that it has motion feedback to create a very realistic training experience, and our customers are loving it. On the transportation side, we've just installed a new gear lab in our technology center here in Guelph. This lab is key to us growing our gear and electric vehicle gearbox business, where we are seeing many opportunities. We can produce prototypes and evolve both our gear design as well as processing for those gears. Our new iHub tech center is finally about to start construction in September, which we are very excited about. A key element of work, which we will ultimately transition to the iHub on completion, is our Factory of the Future work centered around collaborative robotics and digitization of information. We are making great progress on this digitization with impressive numbers already in terms of systems implemented as well as the robotics.
There's a huge amount of opportunity in these technologies to dramatically improve efficiencies of our operations, both on the shop floor as well as in the back office, which we can deploy on a global basis. In other areas of operations, our plants continue to perform well, both on mature business metrics and in terms of launch. In terms of plant launches, we have our new casting facility in China almost complete. This will be our first casting facility in China, for which we have already secured three programs, one for a domestic Chinese OEM. The facility will be ready to run initial samples this fall. In Hungary, we have finalized the location for a new facility dedicated to our new eAxle gearbox program and are about to start production. Finally, a NAFTA and tariff update. Lots of that in the news these days.
Discussions have resumed in the months since the Mexican election, which is positive. I think the key is to focus on the facts. At its simplest, the argument that more than $500 billion of U.S. exports to Canada and Mexico are at risk in the absence of NAFTA is very powerful. That represents millions of U.S. jobs. In terms of next steps, I think that it is very positive that discussions have resumed. We are close to a deal on autos that is workable. 70% regional North American content that has been proposed by the Mexicans can be done, I believe, with minimal disruption. 40% high labor-value content is also doable, given 40% of the content of Mexican vehicles on average already comes from the U.S. Two key issues remain to be resolved: the proposed sunset clause to bring us back to the table every five years and dispute resolution.
These are the areas to focus on in the coming weeks. If an agreement can be reached before the end of August, it can be tabled to the existing sitting Mexican government for its 90-day consultation period before the new government is put in place on December 1st. This is in everyone's, including President Obrador's best interest. Of course, the key issue on the table right now are the tariffs that are in place and proposed. At the moment, we have the metal tariffs on steel and aluminum imposed on a whole series of countries, Canada being hard hit given the high level of exports overall. So what has the impact been? While certainly companies are starting to feel the impact of the metal tariffs, several automakers have cited higher costs and warned of escalating impact from such. Pain is slowly building and will ultimately take its toll.
For Linamar, happily, the impact has been minimal. From a direct impact in terms of tariffs on metal, we are buying ourselves directly. The impact is only on metal we're purchasing from the U.S. and importing to Canada. But happily, because 100% of such is subsequently exported again, we can claim all of those tariffs back under the Canadian duty drawback program. No impact other than to cash flow. In terms of indirect impact, meaning suppliers of ours who are levying price increases based on their own higher input costs resulting from tariffs, again, the impact thus far has been really quite minimal. Only a handful of suppliers have demonstrated legitimate cost increases to justify their request.
We're in general using a very disciplined process on receipt of any price increase to cleanly identify which costs have increased, how much, and then dealing with that supplier and where appropriate our customers. Regardless of tariffs, although certainly related to them, steel prices are in any case on the rise, which is an issue our OEM businesses, Skyjack and MacDon, are having to strategize around from a pricing perspective. All of the above has been considered in the outlook that I gave to you earlier. Meanwhile, a bigger issue looms, which is the proposed auto parts tariff. So let's explore that a little bit. Parts tariffs are different from metal tariffs in two important ways. First, the cost impact of the auto parts tariffs would be massively bigger to the industry than that of the metal tariffs. Auto parts cross borders on average seven times.
Simple math says that's a 175% price increase. More sophisticated analysis has been done and estimates the additional cost per vehicle at between $5,000-$9,000. That is a $126 billion cost penalty for the industry, which is enormous. The second important point is auto parts cannot be quickly moved or resourced to the U.S. to avoid these tariffs. The lead time to tool up a new line, whether to enable a move or if resourced to a new supplier, is a minimum 12 months -18 months. Equipment lead time is significant, and all machines in a line must be validated and parts retested prior to being assembled into a vehicle. That means it's a $126 billion problem for 1 year -2 years. Clearly, this is not a sustainable situation, which in an odd way is really what I believe will stop it from happening.
The good news is if these dire consequences are ignored and the tariffs imposed, it'll be quite short order before the fall of this storm events as to lead us to a ceasefire on the trade war. I estimate 2 months -4 months at most. I think it is also worthwhile to point out that the concept of moving work to the U.S. or resourcing it to a U.S. supplier in itself is simply not feasible due to a lack of labor. There are 6.6 million open positions right now in the U.S. that can't be filled. The last thing we should do or try to do is to add to that.
I'll also remind you that Linamar was somewhat unique in that virtually 100% of any auto parts we import are subsequently exported, meaning any tariffs incurred on import will be 100% reclaimed under our duty drawback system in Canada. I see this as a key differentiator and advantage for us in this situation. With that, I'm going to 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, Q2 was another strong quarter as sales grew by 22% and net earnings grew by 21.7% in an environment where North American light vehicle market was down by almost 2%, driven primarily by lower production at Ford and GM. For the quarter, sales were CAD 2.2 billion, up CAD 391 million from CAD 1.8 billion in Q2 2017. Operating earnings for the quarter were CAD 272 million.
This compares to CAD 215.6 million in Q2 2017, an increase of CAD 56.7 million or 26.3%. Included in operating earnings was an unusual item related to one-time restructuring costs. Normalizing operating earnings for the unusual item and the net FX gain from revaluing the balance sheet resulted in normalized operating earnings increasing by CAD 44.6 million or 20%. Net earnings increased CAD 35.2 million or 21.7% from the same quarter last year to CAD 197.1 million.
Normalized net earnings increased by 15.1%. As a result, fully diluted earnings per share increased CAD 0.53 or 21.6% to CAD 2.98. Normalized fully diluted EPS increased by 14.9%. Included in earnings for the quarter was a foreign exchange gain of CAD 8.8 million, which related to a CAD 9.1 million gain on the revaluation of operating balances and a CAD 300,000 loss on the revaluation of financing balances. The net FX gain impacted the quarter's EPS by CAD 0.10.
From a business segment perspective, Q2 FX gain due to the revaluation of operating balances of CAD 9.1 million was a result of a CAD 5.1 million gain in transportation and a CAD 4 million gain in industrial. Further looking at the segments, sales for transportation increased by CAD 101.7 million or 7.2% over Q2 last year to reach CAD 1.5 billion.
The sales increase in the second quarter was driven by higher volumes on launching programs, additional sales from our European light vehicle customers, increased sales from our medium heavy truck and off-highway vehicle customers, and partially offset by two issues that impacted high-margin mature programs. First of all, we had lower production volumes for key North American customers, and we were impacted by the production disruption at Ford due to the fire at one of their suppliers. Q2 normalized operating earnings for transportation were lower by CAD 23.4 million or 14.6% over last year.
In the quarter, transportation earnings were impacted by the increased volumes driven by the items such as launching programs and the light vehicle volumes in Europe, which were offset by the loss of volumes on high-margin mature programs due to the two production issues that we could not offset fully with the increase in low-margin launch programs. Furthermore, operating earnings were impacted by the increase in management, R&D, and sales costs, and finally by an unfavorable impact from the changes in FX rates since Q2 2017. Turning to industrial, sales increased by 80.2% or CAD 289.5 million to reach CAD 650.6 million in Q2.
The sales increase for the quarter was due to additional sales as a result of the acquisition of MacDon, the strong volume increases in access equipment in addition to market share gains in scissors, booms, and telehandlers in certain regions, and partly offset by unfavorable changes in FX rates since Q2 2017. Normalized industrial operating earnings in Q2 increased CAD 68 million or 108.5% over last year. The primary drivers of the industrial operating earnings results were the additional earnings from MacDon, the increase in access volumes partially offset by unfavorable FX impacts from changes in foreign exchange rates since Q2 2017, and the increased management, R&D, and sales costs supporting the growth. Returning to the overall Linamar results, the company's gross margin percent increased 17.9% in Q2 2018.
Gross margin increased by CAD 72.8 million due to the additional earnings from the acquisition of MacDon, the higher earnings as a result of the net increase in volumes partially offset by lower earnings due to the sales declining on high-margin mature programs related to the two issues that I already outlined. And finally, the unfavorable foreign exchange impact from changes in rates since Q2 2017. COGS, cost of goods sold, amortization expense for second quarter was CAD 91 million.
COGS amortization as a percent of sales decreased to 4.2% as compared to 4.5% in Q2 2017. Selling general administration costs increased to CAD 122.7 million from CAD 90 million in Q2 2017 and increased to 5.7% of sales. The increase on a dollar basis is mainly due to the additional SG&A costs at MacDon, the higher management, R&D, and sales costs, and the one-time restructuring costs that occurred in the quarter.
Normalized SG&A was CAD 118.4 million or 5.5% of sales. Finance expenses increased CAD 9.7 million from Q2 2017 to CAD 12.6 million due to the increase in debt spreads as a result of the MacDon acquisition. Higher interest rates due to the Bank of Canada rate hike since Q2 2017 partially offset by higher interest earned on the investment of excess cash and on the long-term receivable balances, in addition to the repayment of the private placement debt in Q3 2017, which was replaced with lower interest rate debt. The consolidated effective interest rate for Q2 increased to 2.8% compared to 2.2% in the same period last year, primarily due to the new acquisition debt and the Bank of Canada rate hike. The effective tax rate for the second quarter was relatively unchanged at 23.3% compared to last year.
The effective tax rate in Q2 was reduced due to the decreasing tax rates in foreign jurisdictions and offset by an increase due to higher effective tax rate on income from MacDon. We are expecting that the effective tax rate for 2018 will be in the range of 22%-24%. Linamar's cash position was CAD 417.1 million on June 30th, a decrease of CAD 93.5 million compared to June 2017.
The second quarter generated CAD 171 million in cash from operating activities, which was used to fund CapEx debt repayments and interest payments. Net debt to pro forma EBITDA decreased to 1.75 times since Q1 2018, and we expect net debt to pro forma EBITDA to be back under one times in the next 18 months. Debt to capitalization also decreased since Q1 2018 to 43.4%. The amount of available credit on our credit facilities was CAD 591 million at the end of the quarter.
To recap, Linamar had another strong quarter of sales and earnings growing over 20% each. The strong sales increase of 22.1% led to solid earnings performance resulting in net earnings improving by 21.7% for the quarter. That concludes my commentary, and I would now like to open up for questions.
At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad. Our first question comes from Mark Neville with Scotiabank. Your line is open.
Hi, good afternoon. Just first on the guidance, just some puts and takes by segment, but just, I guess, just to clarify, it sort of sounds like consolidated guidance is essentially unchanged. I mean, am I sort of reading that right? Just the double-digit growth both years?
Well, I mean, we're still seeing double-digit growth, but I think what's changed is a bit lower on the margin side based on what's come down in the first quarter or the first half. So we've been talking 8-8.5 net margins, and I'm suggesting you should be at the low end of that range based on what's gone down there.
Yeah, okay. That's what I meant. Okay. That's fine. Thanks. Just on the transport, sorry, the industrial margin, I think it's 14%-18% midpoint this year. I'm just sort of looking at what you did sort of first half and where it's tracked, I guess, last year at Skyjack. It just feels fairly conservative. So I'm just trying to, I guess, understand sort of the rationale or the thinking for the second half. Is it really just the seasonal component, or is there something else that you're sort of factoring into the guidance on the margin for industrial?
Yeah. I mean, seasonally on the industrial side, both Skyjack and MacDon will see pretty big declines, right? I mean, Q3 can be down 25%-30% top line compared to Q2, and Q4 could be down another 30%-40% compared to Q3. So those are pretty big declines that generally have associated with margin compression. So I'm just trying to take that into consideration.
Just on the metal tariff, the 100% that you can reclaim, was that just on the auto, or would that include Skyjack and MacDon as soon as you move on your field?
That includes anything. Canada's duty drawback program has been in place for many, many years, so it's not at all tied to one sector or another. Anything that you import, if you pay duty, if you subsequently export it, you can reclaim.
Okay. So really, I guess the only real impact the business is seeing from metal tariffs is just higher prices just generally. Again, it's not really just from the tariff.
Well, from the tariffs, there is some indirect impact, right? So from some suppliers who are passing on higher metal costs that we're unable to utilize duty drawback for, there is some minimal impact from that. It's literally a handful of suppliers, and it's quite a small impact that we are expecting. At the same time, however, we do have higher metal costs that Skyjack, for instance, would be seeing just based on pressure on metal prices as a result of the tariffs, right? So obviously, people are being opportunistic. American companies, they know that their competition has 25% higher price, so they're the only game in town. They're jacking the prices up. That happens.
Right. So I guess if I'm just taking those indirect costs as well as the local suppliers raising prices as well, even if I think about that impacts, I mean, is that a material amount?
It's not a material amount on the indirect side. On the metal costs for Skyjack, I mean, it's a more important number. I don't think it would reach our levels of materiality, but it's something we do need to deal with.
Yeah. I think on the transportation side, I think we've always talked about any increases on metal. We have surcharge agreements with our customers, so we're pretty tight on that. And as Linda said, the duty drawback covers us back and forth there. On the industrial side, we're an OEM, so the exposure to us is if we're buying in the U.S., what stays in Canada, domestic sales. And then secondly is now working with each customer to mitigate those cost increases, okay? So we are very careful on that. We are growing market share in the booms and the telehandlers and actually increasing a little bit on scissors as well. So we're very calculating on what we want to pay to a customer and when. So we try and mitigate first on the supply side, and then secondly, if we can, we will talk with our customers.
Mark, I just wanted to come back to your question around the margins for the industrial segment, the normalized margins. First of all, I'm taking exchange out of that, right? So balance sheet exchange. And also, when I say midpoint of 14%-18%, I'm talking about the full year, not individual quarters, right? So I mean, if you're comparing to this quarter's normalized margin of 20%, yeah, it sounds low, but when you think about a low back half, mid of 14%-18% is actually better than last year. I mean, last year's normalized margin in the industrial segment was 15.5%.
Yeah. And again, I guess that's sort of where I was getting there because I thought MacDon was about a mid-20% EBIT margin business on an annual basis. So just, again, mathematically, it just felt like the 16% was low, but again, I appreciate your commentary around just the seasonality and how significant it could be. So thanks. I'll turn it over.
Okay. Thanks.
Your next question comes from David Tyerman with Cormark Securities. Your line is open.
Yes. Good evening. My first question is I wonder if you could outline the one-time charges and the FX revaluation just so I can get my numbers right on this, please.
Yes. So you mean the restructuring charges that we?
Yes.
Do you want to hear that by segment?
Yes, please.
Sure. So starting with transportation, the restructuring was CAD 3.1 million, and the balance sheet exchange was CAD 5 million. So CAD 5 million gain and then CAD 3.1 million loss, obviously, on the restructuring. And then on the industrial side, the balance sheet impact was a CAD 4.1 million gain, and the restructuring, CAD 1.3 million loss.
Okay. So the net of all this is that the earnings were quite close on an adjusted basis to the actual reported. Okay. Second question. I was just wondering on the CPV side, the Meridian fire and the industry volume issues you ran into Q2, what's the status at this point?
Well, the fire situation was resolved, and F-150 is back in production. Thank goodness.
Yeah. I mean, they talked a lot about making up the volume later, but we have not seen those flow through at this time.
Okay. And then on the industry side, are we kind of back to normal?
Well, it's hard to say what normal is for the last four quarters. We've been experiencing some higher production caps at Ford and GM than at the industry overall. So I mean, it's all going to depend on levels of inventory and levels of sales. And I mean, I believe the forecast is for their production levels to normalize. But I mean, obviously, it's going to depend on those other issues.
I think they also, David, react when they see some inventory that takes weeks out, right? And that just happens as it comes, right? We saw that in the last quarter. And it's just as inventory decreases, they then take the action immediately and cut a week out here and a week out there, and then we just deal with that. I think too, David, the product changes in regards to seeing what's Chrysler and Ford's done on passenger car and that. I think we're now seeing sort of an overall restructuring of the OEMs in regards to their product mix.
Right. So based on what you see right now for Q3, are you back to whatever normal is, but better than Q2? Or are we still seeing these setbacks here and there? And so the drag on CPV continues.
Well, I mean, first of all, don't forget Q3 is seasonally a low quarter. I mean, we're going to have shutdown. And whether we see additional shutdowns on certain platforms is going to totally depend on their levels of inventories and levels of sales.
Yeah. The only thing that we would see openly right now is in maybe Europe, which is really around, I would say, one of the key customers there, Volkswagen, which is what they call the WLTP, which is, I think, the Worldwide Harmonised Light Vehicle Test Procedure, which was started, I think, last year. And so I think they are struggling with that side, which is basically took over from the old standard. And I think it's around CO2 emissions.
Certification.
Certification. I think they are under a little bit of a challenge with some of those. I think we're seeing a little bit of a softening around that.
Yeah. That's a very good point.
Okay. So very, very strong CPV. Maybe be a bit careful, it sounds like, in Europe. In Asia-Pacific, do you expect that to continue to be based on your platform orientation?
Yeah. It looks okay. Really no disruption there or no hesitation there that we've seen.
Again, the crystal clear vehicle in a region like Asia where it's a pretty small number, it's not unusual to see a lot of volatility because a customer decides to rationalize some inventory, and it has a big impact even though it's a small dollar value of sales change.
Right. Okay. And just finally on Skyjack and MacDon, so it sounds like you're having some challenges, and maybe not super large on margins because of tariffs or whatever. I'm still not clear. Can't you source most of your steel locally?
You know, we.
You're not able to get it back anyway from the drawback?
If it's a tariff, then yes, you could get that back through duty drawback. But the problem is this is not necessarily tariff. It's tariff-related, but it's not a tariff, right? It's opportunistic steel companies knowing they're the only game in town, increasing their prices. So can we resource? We're certainly going to try to do so. So to a Canadian source, for instance. But meantime, the industry is dealing with it. So as Jim has outlined, it's something we're going to have to deal with our customers, right? So there's a pricing issue at hand there. I have to say our competitors increased their prices months ago. We have tried to be a little more disciplined about it and work more closely with our customers, which I believe they appreciate. And they understand the situation. So we're dealing with it in that sense.
I would not say that we're experiencing margin pressure in the industrial segment. As noted, the guidance that I gave you is higher than the normalized margin range for last year. So I wouldn't say that there's really margin pressure at hand. There's a bit of margin pressure from the cost, but we're hoping to offset on the pricing side. And we're heading into the back half of the year. It's seasonally a low point. I mean, margins are going to be up from last year. That's not pressure.
Right. Just to clarify, Skyjack and MacDon, are they in any different position related to costs than your competitors? I wouldn't think so, but.
I would look at, I think, all of us in that industrial sector. Take MacDon for a second, but in the aerial work platform, are definitely experiencing cost pressure from the supply side. And actually, the supply side of getting enough parts into the system, I think, is part of what's going on because we're at a high watermark for that industrial business. But Skyjack, MacDon certainly does not have that pressure like Skyjack or aerial work platform businesses would.
Okay. Okay. So you're all in the same boat here, it sounds like. So it's just a matter of the industry dealing with it. Okay. That's fine. Thank you.
Yeah.
Your next question comes from Michael Glen with Macquarie. Your line is open.
Hi. Good afternoon. Linda, can you maybe just go back to the tariff dynamic? Within your—you have those forging businesses down in the U.S. Some of those products, I believe, are getting sent up into Canada to get machined. Are those subject at all to the tariffs or the retaliatory tariffs in Canada?
No. The tariffs that are in place right now are strictly on metal, not products made from metal, right? So we're talking about steel or aluminum that's being purchased from the U.S. or if we were in the U.S. from outside of the U.S. So they would not at all be captured in the current tariffs. If tariffs are imposed on auto parts, then yes, they would be in. But the current tariffs are strictly on metal, not parts made from metal.
Okay. So that forged item itself is not considered to be an auto part in any way?
Yeah. Right.
Or it's considered to be an auto part then?
Yes.
Yes. Yeah. Once it's forged, yeah.
Yeah. That's right. Tariffs are strictly on steel bar, sheets of steel, ingot. We buy very, very little of that. Most of what we buy is castings and forgings, which use those types of metal but are not classified as metal.
Okay. In a situation where auto parts came into a tariff situation, theoretically, then there would be a double tariff type situation where that comes into Canada and then gets shipped back into the U.S. engine assembly plants?
Yes. So in the instance of an auto parts tariff, then we would pay a tariff for the castings and forgings that we bring into Canada. We would pay that to the Canadian government. When we export it back to the U.S. or wherever, we would claim back that tariff. So we would be fully reimbursed for that. However, our customers on importing it into the U.S. would have to pay the tariff that the U.S. imposed that would be paid to the U.S. government.
Okay. And in general, outside of the steel inflation that you're seeing as well, the ability for, I think, Mark, you touched on the surcharge in place. You're having no problem passing that through to the OEM as you incur that higher steel price?
Yeah. On the transportation side, we have surcharge agreements set up with customers, and we go in and basically do a calculation based off weight and increase of cost or decrease of cost. That's how the system works.
Okay. Switching over to MacDon, when you acquired the business, the top line indicated was about CAD 600 million. Is there any sort of change? Is that sort of what we're still working with? Just trying to get a sense of the seasonality that we might have in that business in the back half of the year.
Yeah. So it seasonally slows down in the back half for sure, just like Skyjack. So very similar kind of a pattern that Q2 is normally its strongest quarter. So you can expect to see it starting to dial back in Q3 and Q4.
Okay. And are you able to help us in any way? You provided a net earnings number for MacDon in and around CAD 46.1 million for the quarter. To work that back into an EBIT type number, how would we do that exercise? What would be the tax rate on that business? Would that just be a 27% type tax rate?
That's the statutory tax rate in Manitoba, yes.
Okay. Then would there be an interest expense add back there to consider?
For sure. That would include the interest on the acquisition debt.
On the acquisition debt? Okay. And then one clarification. On the cash flow statement, the interest payment was about CAD 37.5 million versus the—which was meaningfully different than the finance expense. What was the—can you—the variance between those two numbers? This quarter, usually, they're a lot closer.
Well, the difference is that we're paying a lot more interest on the new acquisition debt, but also because our debt levels are up, our covenants are up, and hence our spreads on our overall debt is up. So pre-purchasing MacDon, yes, our interest earned on our excess cash and on our long-term receivables for a couple of quarters only tended to offset each other or come close to it. But that'll be gone until we delever back under 1x.
Which we do believe will happen within 18 months.
Okay. Thank you for taking my questions.
Pleasure.
Your next question comes from Peter Sklar with BMO Capital Markets. Your line is open.
When you said you're seeing cost pressure in terms of underlying steel, is that from Canadian steel suppliers or U.S. steel suppliers or both?
Both.
Okay. And on the reported operating income number of CAD 272.3 million, I just want to make sure I understand. Is that net of the restructuring charges?
Yes. So to get the normalized earnings, you start at the reported operating of CAD 272.3. You would take out the CAD 9.1 million of balance sheet revaluation, and you would add back CAD 4.3 million of restructuring, and you should come out with CAD 267.5.
Okay. I get that. And then, Linda, I'm sorry. At the beginning of your presentation, you gave, it came very quick and furious, but you gave some revised margin guidance. Do you mind going through that again? That was right at the beginning.
Yes. Sure. I said that we thought this year net margins and next year would be 8%-8.5%, and that we would be at the low end of that range this year just based on a bit of a lower margin in the first half than had originally been expected with expansion next year. Were you also looking for the segments?
Yes, please.
Yeah. So the segments on the Transportation, we suggest a normal margin range of 7%-10%. We expect this year we'd be sort of mid-range. Then on the Industrial side, we increased the margin range. We used to say 12%-16%. But as you know, we've been running above the top end of that and expect to see continued strong performance. So we revised the margin range to 14%-18% and said that we would expect to be at the mid-ish level of that this year with expansion next year.
Okay. And then one just last question. When you look at your transportation segment, the operating earnings, I believe, are down year-over-year. And there's a lot of moving parts that you brought up, can you just talk in order from largest to smallest? What are the major components of that?