I would like to welcome everyone to the Linamar Q1 2018 analyst conference 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, simply press star and 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 first quarter conference call. Joining me this afternoon are members of my executive team, Jim Jarrell, Mark Stoddart, Roger Fulton, and Dale Schneider, as well as members of our corporate finance and legal team. Before I begin, I will draw your attention to the disclaimer currently being broadcast. I will start off with sales, earnings, and content. Sales for the quarter were CAD 1.89 billion, a new record, up 14.4% from last year, which is fantastic to see, particularly given market declines in key regions. Light vehicle markets for the three regions we serve were down 1.1%, with the North American light vehicle market down 2.2%.
The access market experienced double-digit growth over last year in unit sales, driving great performance at Skyjack, particularly with our popular boom products, which continue to build market share. Of course, our newest acquisition, MacDon, made a great contribution to growth with two months of results in the quarter. Our growth is illustrative of the power of a significant backlog of launching business to offset soft markets. Earnings saw another strong level of performance in Q1. Net earnings normalized for balance sheet exchange impacts in each quarter increased 6.1% compared to last year to reach CAD 153.4 million. Growth was tempered by less favorable FX rates compared to last year. At constant currency, net earnings growth would have been in double digits.
Normalized net earnings as a percent of sales in Q1 were 8.1%, down from last year based on those currency changes. At constant currency, margins would have been similar to prior year. We continue to run at a solid margin level, thanks to sustained strong performance in both of our segments. We expect to see strong full-year net margin performance for 2018 and 2019, once again, in the range of 8%-8.5%, with a possibility of some margin expansion in 2019. Investing in our future continues to be a priority for us at Linamar. CapEx in the quarter was CAD 117.6 million, or 6.2% of sales, up from 5.6% in the same quarter last year.
We are expecting 2018 CapEx as a percent of sales to be higher than last year and at the higher end of our normal range of 6%-8%. 2019 will be similar, but slightly lower as a percent of sales. Our net debt level increased by CAD 1.3 billion in order to fund the acquisition of MacDon to take net debt to pro forma EBITDA to 1.79x. We expect to bring leverage back down under one within 18-24 months. In North America, content per vehicle for the quarter reached $170.02, up 9.1% from last year, thanks to launching business, offsetting a 2.2% decline in production levels.
Q1 automotive sales in North America, as a result, were up 6.9% over last year at $772 million. This is a great example of the importance of launching business to offset market cycles, a strategy Linamar has long employed. In Europe, content per vehicle for the quarter was $76.66, up 16.1% over last year, thanks mainly to a positive mix in the region and a market that was up 0.9%. Our Q1 2018 automotive sales in Europe therefore grew 17.2% compared to last year, reaching $453.2 million. In Asia Pacific, content per vehicle for the quarter was $9.80, up 7.6% from last year.
Our Q1 2018 automotive sales in Asia Pacific were up 5.9% compared to last year, reaching CAD 121.2 million in a market that was down 1.5% in production volume. Linamar continues to target doubling our current footprint in Asia within the next 5 years. We were thrilled to see another quarter of excellent content per vehicle growth in every global region to reach record levels in every region as well, given, content per vehicle is such an important part of Linamar's overall growth strategy. Our expanding content per vehicle reflects our increasing market share, thanks to large amounts of launching business. These launches are proving to be a key factor and differentiator for Linamar in, in times of softer vehicle production levels.
Other automotive sales not captured in these content calculations were CAD 59.1 million, up slightly from what we saw for the same quarter last year. Non-automotive sales were up 29.9% in the quarter at CAD 488 million, compared to CAD 376 million last year, thanks to the acquisition of MacDon, as well as a strong quarter for Skyjack and also continued recovery in our off-road vehicle business. Turning to a market outlook, we are seeing stability or moderate growth this year and next year in most of our markets. So the global light vehicle business, the forecast is for small increases in light vehicle volume this year globally to 17.3 million, 22.8 million, and 50.3 million vehicles in North America, Europe, and Asia, respectively, representing growth of between 1% and 2% approximately.
2019 is expected to see a similar picture, with growth ranging from fairly flat performance in Europe and North America to 3.8% growth in Asia. Industry experts are predicting on-highway, medium, heavy truck volumes to grow this year in North America at about 10%, see more moderate growth in Europe of about 2.4%, but see a decline in Asia. 2019 will see flat growth in North America, moderate growth in Europe of 4%-5%, but another decline in Asia. Off-highway, medium and heavy-duty volumes are continuing to show signs of improvement as well. Turning to the access market, we saw double-digit global volume growth this quarter, a trend which is expected to continue for the year and then dropping back to mid-single digit at most 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 plans for the next couple of years in every region, and an ARA forecast of 4.5% rental revenue growth for the rental business. Skyjack's backlog is substantially higher than it was last year at this time, and we've seen a solid start to the year. It's our goal to continue to drive market share growth, particularly in boom and telehandlers products. Our new agricultural business, MacDon, will benefit this year from an agricultural market that's at the early stages of a cyclical recovery. The industry expectation is for mid-single-digit growth in the ag market in 2018, and 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 win levels dramatically higher than last year at this time already. Q1 was another very 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 forecast to grow at a compound rate of 1.5%-2% over the next 25 years. Changing dynamics, new technologies are all having various impacts, some 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, and our suite of products for each continues to be developed and to grow. The total addressable market for us today is about CAD 130 billion, as you can see on this chart, growing to more than CAD 300 billion in the future. We have 212 programs in launch at Linamar today. Look for ramping volumes out of launching transmission, engine, and driveline platforms to reach 25%-30% of mature levels this year, which will add another CAD 600-700 million in sales for 2018. These programs will peak at more than CAD 4.4 billion in sales.
We saw a shift of about CAD 130 million of programs from launch to production in the quarter, which will add about CAD 60 million in incremental sales growth in 2018 as well, for total business launched this year of CAD 650 million-CAD 750 million. Launch programs grow quite steeply next year to more than double this year's level for incremental growth next year between CAD 1.3 billion and CAD 1.4 billion. In addition, as noted, Skyjack is targeting solid growth, driving out of growing markets in the double-digit range this year and mid to high single-digit range next year. MacDon, of course, will also be a key growth driver for us this year and next as well. MacDon was about CAD 600 million in sales on acquisition, and the market, as noted, is growing in mid-single digits.
I will remind you, we will have 11 months of results in 2018 for Linamar. Temper that growth, of course, 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 launch book continues to build to drive an organic growth level of high single-digit or low double-digit, depending on the market.
Sales growth with continued strong margin performance will result in strong double-digit earnings growth as well this year for us at Linamar, moderating in 2019 as we move to organic-only growth, but still at the low double-digit level. New business wins are, of course, also filling in growth for us in the midterm as well. Our current estimate is for CAD 8.5 billion-CAD 9 billion in booked business for 2022. That's based on current industry volume forecasts, layered with new business wins and adjusting for business that is leaving. I'd like to highlight a couple of our more interesting wins this quarter. First, we picked up another electric vehicle die-cast project in China. This is our third in this dynamic market, moving quickly towards launching a variety of new energy vehicles. Next, we were awarded a highly complex sliding camshaft project in China.
This is leading-edge technology in reducing emissions in internal combustion engine vehicles and technically an extremely challenging part, so we're very proud of this win. Next is a key program awarded in Europe for a significant drive line program. The total volume is 500,000 units per year, each of a PTU and an RDU program, which together create the all-wheel drive system in the vehicle. Start of production in 2022 for this significant program. We were thrilled also in the quarter to win our first complete camshaft module program based on a module design developed by Linamar. This program is also for Europe and will reach 250,000 units per year at peak volume. Here in North America, we received a massive gear package program of several different gears, which in aggregate will represent 4,000,000 units per year.
The program will launch in one of our North Carolina facilities next year, and at peak volume represents nearly CAD 100 million in sales. We are rapidly gaining a reputation as a preeminent supplier of gears globally. Finally, we had a huge quarter for wins in our light metal casting business. We won two major programs, one in Europe and the other in Mexico, which in aggregate represent nearly CAD 90 million in annual sales. Our Montupet group continues to do an excellent job of product design and work with customers to secure these exciting new opportunities. Overall, it's just been such an exciting quarter on new business wins, many of which, as you will have noted, are outside North America. In fact, somewhere around 77% of new business wins year to date are outside of North America.
Turning to a strategic update, we continue to work towards developing our strategies around our long-term markets that we target, such as food, agriculture, water, power, and age management, even as we continue to build our transportation and infrastructure businesses. Our key strategies for the transportation market are to continue to increase our content for vehicle potential in electrified vehicles as these products climb in volume, while at the same time mining an opportunistic internal combustion engine market as it declines in volume, but increases in addressable markets. Our key strategies in the access market are to continue to globalize the business and expand our product lineup in all regions. In the food and agriculture market, our strategy is to build on our MacDon acquisition as the foundation from which to expand our global ag business.
That means product development for the future of precision agriculture and developing a strategy encompassing our European operations and products to maximize product range and reach. For power, ag, and water, we continue to study the market to develop our best entry strategy over the next five to 10 years. Turning to an innovation update, we have lots of activity happening in all our global centers. Our innovation team continues to work with partners, bringing us interesting technology opportunities to enhance Linamar's product offering in the material development and product innovation areas. These are great opportunities to explore new markets as well. A great example of this is a manufacturing partnership recently established with Silicon Valley innovation company, Volute. Linamar will be Volute's manufacturing partner for their innovative carbon fiber tank storage system for hydrogen and fuel cell vehicles.
Volute's design is much slimmer than the traditional tank system and doesn't necessitate costly cooling of hydrogen that is required to fill the larger style tanks, which are more typically used. We are big believers in fuel cell vehicles for the future of propulsion, given the much higher fuel density of hydrogen, the greater availability of raw materials to build the systems, and rapid refueling in comparison to battery electric vehicles, which have particular challenges around some of these areas. We have finalized the design and plans for our innovation hub in Guelph to incubate interesting innovation ideas, such as Volute, to challenge existing markets and technologies, and our construction is due to start shortly.
We have a team working hard on several initiatives in the artificial intelligence and machine learning areas to develop in areas such as next-generation robotics and AGVs, including collaborative, collaborative robots and cells that can integrate seamlessly into our production lines. Automated visual gauging is another key area to focus on to enhance the quality and consistency of our products more efficiently. As well, digitization, data collection, and analytics is a key area of focus to create better efficiency, better equipment maintenance, and predictive maintenance to drive improved cycle times and maximize machine uptime on the shop floor. We're making great progress on this digitization, with impressive numbers developed already on systems implemented, as you can see, displayed here.
There's a huge amount of opportunity in these technologies to dramatically improve efficiency in our operations, both on the shop floor and in the back office as well, which we can deploy on a global basis. In terms of product innovation, our customers are working closely with us on our driveline products, with particular interest in e-axle opportunities globally, as we saw manifested in the past 12 months with 2 major e-axle gearbox wins. We have several other programs we're working on for e-axle gearboxes as well. We have done an enormous amount of work in developing a whole lineup of e-axle and disconnect systems for all-wheel drive in all variety of vehicles, from small car to large truck, and the results are certainly paying off for us. 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 a new casting facility currently under construction in China. 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 a location for a new facility we will be building to dedicate to our new e-axle gearbox program for Europe. We have two major plant expansions underway, one in Hungary as well, for our industrial facility there, which is expanding to accommodate business growth in the ag sector, as well as making space for Skyjack's European business, which will be transitioning to this facility over the next six months. The second addition is for our Monclova, Mexico facility, Montupet, to accommodate several new launches. All projects are proceeding very well.
Finally, a quick NAFTA update. Discussions have been intense over the past two months, both inside and outside of official negotiating rounds. We seem to be getting closer on the rules of origin discussions, although it is key for us to ensure the negotiators don't add too much complexity to the calculation, and in doing so, inhibit the competitiveness of North America-built products and scare off new investment. It's not clear what progress has been made on the other three areas of disagreement, such as the proposed sunset clause, the dispute resolution issues, and government procurement disagreement. If an agreement in principle is not attained, you know, basically within the next week, I suspect discussions could be suspended until post the U.S. midterm elections.
I think 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. Similarly, I think it's not a illogical argument to think that the $65 billion deficit that the U.S. has with Mexico, while covered by a trade agreement, would somehow shrink in the absence of one, particularly in light of the fact that no trade agreement exists between U.S. and China, and the U.S. has a $350 billion deficit with them, which, of course, the U.S. is rapidly moving on to address. It's also logical to make efforts to bring jobs back to the U.S., at this time, when the country is at an 18-year low in unemployment and labor shortages are rampant.
We need a balance of domestic and imported products in any economy to ensure we're manufacturing the best products with the best technology at the best price. With that, I'm going to turn it over to our CFO, Dale Schneider, to lead us through a more in-depth financial review of detail.
Thank you, Linda, and good afternoon, everyone. As Linda noted, Q1 was a strong quarter as sales grew by 14.4% and net earnings grew by 7.9% in an environment where the North American and Asian vehicle production reached down roughly 2%. For the quarter, sales were CAD 1.89 billion, up CAD 237.9 million, or CAD 1.6 billion- I mean, versus CAD 1.6 billion in Q1 2017. Operating earnings for the quarter were CAD 214.9 million. This compares to CAD 192 million in Q1 2017, an increase of CAD 22.7 million, or 11.8%. Net earnings increased CAD 11.5 million, or 7.9%, from the same quarter last year to CAD 156.6 million.
Normalized net earnings increased by 6.1%. As a result, fully diluted net earnings per share increased by CAD 0.17 or 7.7% to CAD 2.37. Normalized fully diluted EPS increased by 5.9%. Included in the earnings for the quarter was a foreign exchange gain of CAD 4.2 million, which related to a CAD 5.4 million dollar gain on the revaluation of operating balances and a CAD 1.2 million dollar loss on the revaluation of financing balances. The net FX gain impacted the quarter's EPS by CAD 0.05. From a business segment perspective, the Q1 FX gain due to the revaluation of operating balances of CAD 5.4 million was a result of a CAD 6.6 million dollar loss in transportation and a CAD 12 million dollar gain in industrial.
Further looking at the segments, sales for transportation increased by CAD 127.3 million, or 9.3% over Q1 last year to reach CAD 1.5 billion. The sales increase in the first quarter was driven by the additional sales from launching programs, favorable changes in foreign exchange rates since Q1 2017, and increased volumes from our on-highway vehicle customers.... Q1 operating earnings for transportation were lower by CAD 6.2 million or 4.2% over last year. In the quarter, transportation earnings were impacted by the net production volumes, the net production volume increases that I just described, which were offset by unfavorable products mix, changes to programs that are in early stages of launch, replacing mature business due to the market decline.
An FX loss from the revaluation of the operating balances since December, and unfavorable changes in FX rates since Q1 2017. On a constant currency basis, normalized earnings would have grown over Q1 2017. Turning to the industrial, sales increased by 38.6% or CAD 110.6 million to reach CAD 395.5 million in Q1. The sales increase for the quarter was due to additional sales as a result of the acquisition of MacDon, strong market share gains and increases in volumes for booms in all three sales regions, increased volumes for telehandlers, partially offset by unfavorable changes in foreign exchange rates since Q1 2017.
Lower volumes for scissors in Europe as a result of the shift in order timing from Q1 to Q2 for certain key customers, and lower market share for scissors in Asia due to sales increasing in countries which we do not participate in. Industrial operating earnings in Q1 increased CAD 28.9 million or 63.1% over last year. The primary drivers of the industrial operating earnings results were the additional earnings from MacDon, the net increase in aerial work platform volumes, and FX gain from the revaluation operating balances since December, partially offset by unfavorable foreign exchange impacts from the changes in rates since Q1 2017, and the increase in management and sales costs that are supporting growth. Normalized segment earnings would have grown more significantly on a constant currency basis.
Returning to the overall Linamar results, the company's gross margins percent was 16.7% in Q1 2018. Gross margin increased CAD 32.1 million due to the higher earnings as a result of the increased volumes in both segments, the additional earnings from the acquisition of MacDon, partially offset by lower margins from a mix change to programs in launch, replacing sales on mature programs due to the market decline, and the unfavorable foreign exchange impact from the change in FX rates since Q1 2017. COG S mortization expense for the first quarter was CAD 88.8 million. COGS amortization as a percent of sales decreased to 4.7%, compared to 4.9% in Q1 2017.
Selling, general, and administration costs increased to CAD 106.6 million from CAD 91.1 million in Q1 2017, but remained relatively flat as a percent of sales at 5.6%. The increase on a dollar terms basis is mainly due to the additional SG&A expenses at MacDon and higher management and sales costs incurred in the quarter supporting the growth. Finance expenses increased CAD 6.4 million from Q1 2017 to CAD 9.3 million, due to the increase in debt and spreads as a result of the MacDon acquisition. Higher interest rates due to the Bank of Canada rate hike since Q1 2017, partially offset by higher interest earned on the investment of excess cash and from long-term receivable balances.
Finally, the repayment of the private placement note in Q3 2017, which was replaced by lower interest rate debt. The consolidated effective interest rate for Q1 increased to 2.6% compared to 2.2% in the same period last year, primarily due to the new acquisition debt. The effective tax rate for the first quarter was unchanged at 22.8% compared to last year. Effective tax rate in Q1 was reduced due to the decrease in tax rates in foreign jurisdictions, offset by an increase due to the higher effective rate on income from our Q1 acquisition and an increase due to the net adjustments recognized in Q1 2017 that did not reoccur this year.
We are expecting that the effective tax rate for 2018 to be in the range of 22%-24%. Linamar's cash position was CAD 455.3 million on March 31, an increase of CAD 17.1 million compared to March 2017. The first quarter generated CAD 35.8 million in cash from operations. Net debt increased as a result of MacDon acquisition by CAD 1.2 billion. Net debt to pro forma EBITDA increased to 1.79x in Q1 as a result of the acquisition debt that was added in the quarter and is in line with the leverage expected on the close of the MacDon acquisition. We expect net debt to pro forma EBITDA to be back under 1x in the next 18-24 months.
Debt to capitalization increased to 45.1% from 36.1% in Q1 2017, as a result of the new acquisition debt. The amount of available credit on the credit facilities was CAD 542.1 million at the end of the quarter. To recap, Linamar had a solid quarter with sales, strong sales and earnings growth. Sales were up 14.1, 14.4% in an environment where North American and Asia vehicle production were each down by roughly 2%. The strong sales left a solid earnings performance, which resulted in net earnings improving by 7.9% in the quarter. This concludes my commentary, and I'd now like to open it up for questions.
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Please ensure your computer speakers are muted prior to asking your questions. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Mark Neville from Scotiabank. Go ahead, please. Your line is open.
Hi, good afternoon. First on the MacDon, it looks like it did, I guess, just north of CAD 80 million of sales for the two quarters. I think we were expecting a bit more, but I'm just curious if that's sort of as expected, and then maybe if you can help us out with how to think about the seasonality for the rest of the year?
Yeah, MacDon definitely has seasonality associated with the sales pattern. So Q2 is typically the highest quarter, kind of similar to Skyjack, but the other quarters tend to be a little more muted. So if you were taking last year's or acquisition sales and just sort of, you know, dividing it out equally, then that would for sure explain why you were expecting a little bit higher sales. So, they're right on track for what our expectation is for them, for the year. Again, we're expecting them to grow, you know, sort of in line with the market. And again, you know, a lot of months worth of sales in 2018.
Okay, so it's roughly in line with market. Were you expecting a bit better than that previously, or is it, or was it sort of always market growth?
Well, last quarter, we said low single digits. This quarter, we said mid single digits.
Okay.
You know, we feel pretty good about where the sales growth is coming in for MacDon.
Okay. Was there any one time sort of integration or acquisition costs in the quarter that, maybe worth calling out or worth mentioning?
There weren't any material acquisition costs. But as we complete our PPA, you will see that we do have to increase the assets to the fair market value, so there will be some additional depreciation going forward that didn't exist in when they were a private company.
Okay.
Mark, on the seasonality, to just expand on what Linda said. So really, quarter one and quarter four, basically the slowest quarters, you know, coming out of Christmas shutdown and, you know, people getting back in. Quarter two is definitely the strongest, as Linda mentioned, and some of that can bleed into quarter three, and that sort of depends on the export market, the U.S. market, and also the harvesting situation, which can be weather dependent. So really, second quarter, strongest, third quarter, not as strong, and then first and fourth quarters are usually the slowest.
Okay, that's helpful. And maybe just on the powertrain margins, down about 110 basis points year-over-year. Just curious if there's any particular programs or launches, again, worth mentioning, anything worth highlighting in the margin?
No. In fact, you know, the key factor between this year and last year on the margin is actually currency. So, as I think Dale mentioned, at constant currency levels, so last year, margins would have actually been only slightly down from what they were last year in the transportation segment. Which is really completely related to the fact that the North American and Chinese markets were down. So we had mature programs that have higher levels of profitability down in the quarter, replaced by launching business that has lower levels of profit. So, that really explains the difference. And as I say, the difference is actually pretty small when you look at it on a constant currency basis.
You're referring to, I guess, translation, transactional, not the operating balance adjustments? That's correct?
Correct.
Right.
Yeah. So if you look at normalized margins, this year we're 9.8%.
Yeah.
And last year, we're 10.9%. So you know, if you consider it on a constant currency basis, that's in more than half of the difference, and the rest would be associated with the, you know, the phenomena of mature business being-
Yeah
... a little softer with markets down, replaced by launching business.
Okay, and maybe if I can just sneak a higher level question in. Some of the North American OE is de-emphasizing sedans, I guess, a continuation of trend, but I think you're a bit overweight that market. Just some of your high-level thoughts on that and the ability to navigate it, and what you think it means for the business. Thanks a lot.
Yeah, on the split between car, crossover and light trucks were sort of 40% car, the balance light truck and crossover. However, that's on a global basis. If I look at our North American customers, we are much more heavily weighted towards light truck crossover and very lightly weighted towards cars. So the changes announced would have very minimal impact to us.
... Would your North American business sort of look similar, I guess, just to the overall market? Or would you actually be heavier in trucks and utility vehicles?
You mean in terms of the split, like what the market split is?
Yeah, your business versus what the market might look like. Similar in North America?
I'd say probably a little more weighted towards light truck crossover.
Okay.
Just when I look at our North American customers.
Okay.
I think their launches are very much more on the light truck side, for sure.
Right. All right. Thank you very much.
Our next question comes from the line of Matthew Page from Gabelli. Go ahead, please. Your line is open.
Hey, congrats on a nice quarter. I just had one question. You know, given some of the acquisitions in the, in the powertrain driveline space at Tenneco and Federal-Mogul, have you seen any changes in the, in the competitive landscape?
I wouldn't say so. I mean, I'd say that the, first of all, that the amount of opportunities out there has significantly accelerated. I mean, if I look at not just business wins, but also just the opportunities on the table, they're more than we've seen in the past. But I don't feel like the competitive landscape has really changed that much.
No, I would say that, as Linda said, it's really the opportunities out there for some consolidations. A lot of companies are doing that. I think it's opening up more opportunities. We're not seeing any new competitive threat from these in the market, in our quotes and things like that.
All right, well, thank you for the time, and goodbye.
Thank you.
Your next question comes from the line of Brian Morrison from TD Securities. Go ahead, please. Your line is open.
Hi, good evening. Just if I can follow up on Mark's question, can you just update us on the update, pardon me, update us on the margin outlook for the transportation segment? Are you still looking for above the 10% range? Because I would think that launches and FX are likely going to continue as we move forward here.
Yeah. So I mean, when you when you look at margins, there's really three key things that affect us, FX rate both from, you know, balance sheet adjustments, as well as if you're looking at it on a comparative basis with the transactional, translational, the level of launches and the product mix. So, I mean, obviously, FX rate is not really predictable, so I can't really give you a guidance around that. But I would expect margins in the transportation segment to stay at the high end of our range of 8%-10%. I mean, we delivered 9.8% this quarter, which is actually, I think, pretty fantastic, with some potential for mild margin expansion next year.
Above 10% next year is what you're guiding to?
Well, I'm guiding to the top end of our range, so-
Okay.
That's right.
If I look at industrial, can you maybe just talk about or estimate what the shift in the European scissor sales from Q1 to Q2 is? And then also, maybe if you can talk about what the currency impact was upon the industrial sales on the top line.
Yes. So, you know, the industrial division is obviously quite sensitive to exchange rates. So, given they're selling primarily in US dollars, pounds, or euros, and they have a good chunk of cost in Canadian dollars. So, they did see an impact both on the top line and on the bottom line in the quarter. At a constant currency, you know, the margins were still quite strong, and growth was actually quite strong as well, even notwithstanding the MacDon acquisition.
Right.
With respect to your question around scissors in Europe, I didn't quite understand what you meant in terms of a shift between Q1 and Q2 on scissors sales.
There was just some commentary in the MDA that there was a shift in timing, in sales-
Yes.
Scissor sales, Q1 to Q2. I wondered if that was material.
Yes.
Then also just following up, so Skyjack was up 10% on the top line in sales. What was it up on a constant currency?
So, we're not disclosing specifics on the changes in constant currency. But, the sales growth would have been reasonably similar. It was a little bit tempered by the currency.
Okay.
On your comment on the European sales, yes, we had a slower start with some of our customers over there, but it's not a big swing from Q1 to Q2.
Okay. And then just last question, obviously, you're coming through with strong orders, strong order intake. You have a comment within your prepared remarks, it's the greatest opportunity, greatest opportunistic sourcing opportunity ever. Can you maybe just elaborate on some of the key product areas or geographically, or is this simply across the board that this environment is evolving?
Yeah, I think what we're seeing is with our customers looking to invest in a variety of vehicle propulsions, you know, not just internal combustion, but hybrid and electric, autonomous vehicles, mobility more generally... They are having to look for ways to conserve their cash outlay, and a natural place to go to do that is to outsource more. So that is really the key driver is we're seeing an acceleration in outsourcing of powertrain products. So to be more specific, things like fully machined cylinder heads or fully machined transmission cases or fully machined engine blocks. These are, these are components that were never outsourced in the past, and we have won several programs of such in the last 12-18 months.
So, you know, definitely seeing an acceleration there and a move to outsource, even products that were never outsourced in the past. I think we're, we're definitely seeing big opportunities popping up in Europe and in Asia right now. In particular, as I mentioned in my comments, 77% of new business wins year to date, which are orders of magnitude bigger than last year, came outside of North America. So I think illustrative of the, the great opportunities in, those regions.
Yes, and I think the other key message there is, as customers expand globally as well, they don't have the same limitations on their traditional labor or infrastructure, so a lot more would be outsourced as well when they go into different geographic locations.
Okay, that's helpful. Thank you.
Your next question comes from the line of David Tyerman from Cormark Securities. Please go ahead. Your line is open.
Yes, good evening. My first question is just on the MacDon margins. So, are they very sensitive to volume? So, meaning, would we see a noticeable change in the industrial segment margins, according to the seasonal profile that you described?
I don't think you're gonna see, you know, huge shifts from quarter to quarter. I mean, margins are fairly consistent at MacDon. I mean, obviously, it's gonna be a little bit better in the second quarter, just given the strong level of sales. But, you know, I think they're maybe reasonably-
Yeah, and they also, David, have a level loading sort of system as well, that they, you know, try and keep the cost intact, and sort of go with the volume. So for sure that they have planned a lot of that out through the seasonality things at MacDon.
Right. Okay, that's helpful. Thank you. And then the second question: I see a new category on the statements in the cash flow statement, increase, decrease in long-term receivables, and I see the note, but I'm not sure I totally understand, what's going on there. But it seems to have sucked about CAD 50 million-CAD 60 million of, of cash flow out. So I was just wondering if you could provide a discussion on what's going on there.
Sure. Well, first of all, it's just a geographic movement on the face of the statement. It used to be lower down-
Okay
- in the investing area.
Okay.
The main driver of that is on the industrial side, specifically at Skyjack, on their independent sales to the smaller rental houses, where we provide financing to them, but we don't necessarily provide to national accounts.
Right.
So as those sales or AR grows, this is a significant sign that, that our sales independents are growing, and obviously, those have a much better margin on them than you do national accounts.
Right.
That's also what drives the interest earned.
Okay, that's helpful. Thank you. And the last question I had, you've done a fair amount of acquisitions in the last couple of years. I was just wondering what your appetite to do more M&A would be right now. Are you busy with what you've got, or if something good came along, would you be in a position, you think, to act on that?
We are busy with what we have, David, and a side note to Jim as well. So you know, obviously we want to focus on the integration of MacDon, which, by the way, is going really, really well. I mean, that doesn't mean we don't have our iron in the fire, and that if you know, something that really worked came along, that we wouldn't try and find a way to do it. But you know, really. We don't like to have too much debt on the balance sheet. Like you know, our primary goal would be to get leverage work down a little bit before we'd look to leap into anything else on the M&A side.
Okay, sounds good. It sounds like Jim needs to go home earlier tonight.
Okay. Thanks, David. I appreciate that. I'll do that now.
Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Michael Glen from Macquarie. Go ahead, please. Your line is open.
Hi, good evening. On the MacDon, the number that you provide for net earnings in the note is CAD 14.8 million. So if we wanted to try to determine, that's an after-tax number, to be clear?
Correct.
Okay. So if we wanted to try to figure out what the EBIT would be, it would just be a function of adding back what we think the appropriate tax amount is for that business, or would there be anything else to add back there?
Just you'd have to decide if you want to consider the extra interest related to the acquisition as part of Linamar or part of the MacDon. And you also have to keep in mind that, as I mentioned, we have to true up the fair value of the equipment, so there's extra amortization in there, too.
Oh, okay. Understood. And then, Linda, just circling back on the environment for new business wins. So, and you talked about the big win over the CAD 500,000, you know, per year win over in Europe. So, are you gonna have to—are we gonna see a step-up in CapEx related to, say, adding new plants for some of these new business wins, or do you have some existing space and existing plants that you can utilize?
Yeah, I mean, there's for sure space in facilities that, you know, these—some of these new jobs would replace, you know, existing work, for instance, or fill in space. But, you know, without a doubt, we need to add facilities. I mean, I've talked about 4, 2 new plants and two big additions that we've got going on right now. I mean, don't forget, we just finished building a brand-new plant in China, in Chongqing. We just added the casting facility in North Carolina and did some other additions here in North America as well. So, you know, we do need to do that.
But don't forget that the capital associated with building a new facility is actually, you know, much smaller than the capital that would be associated with actually tooling up the program. So, you know, a new plant might cost, you know, CAD 12 million-CAD 15 million, but the capital that's gonna go into it is gonna cost, you know, CAD 50 million-CAD 80 million. So, you know, whether you're fitting it into an existing plant or having to build a new plant, the capital expenditures is not gonna be dramatically different.
Okay, that's helpful. And to circle back on the long-term receivables, are you able to provide an outlook for that figure for the year, where we might see it balance out? I think last year it was CAD 152 million on the cash flow statement. I'm just wondering what we could expect this year.
We do expect that it will continue to grow, but it really depends on the customer mix of the sales of Skyjack on how much it will exactly grow. So we haven't provided any guidance on it yet.
Okay. And then are you able to provide just a quick comment on maybe some raw materials? Are you anticipating some potential headwinds, and are they, were they a headwind in any way in the quarter?
I think the pressure is up on raw materials for sure, the commodity side, and I would say we are covered off on the auto side pretty well. So there would be maybe a gap in how the indices are looked at. We may have one index, the customer, another, so you may have a gap there. And then the lag time as well would be another factor on the auto side. Both MacDon and Skyjack obviously have some headwinds with that as well. I think there's some opportunistic things going on from a demand and the, you know, the scarce scaring of the tariffs, but there is some pressure there.
We are working really individually with our suppliers, which we have contracts with, and also on deals with customers to ensure that we're not missing margins.
Okay. And do you have the ability to put through some price to capture some of the increased raw material at this point in time?
We basically make deals with customers that are, you know, for... If we're talking about MacDon and Skyjack, we make individual deals with customers that we, you know, want to grow our business, but keep margin.
On the auto side, as Jim was saying, we have, you know, automatic-
Yeah
- systems that pass through metal market changes. I mean, for aluminum, 100%, and on other metals, you know, the majority of it, not necessarily 100%, but a significant percentage is, you know, passed on to customers. So that's sort of a regular automatic process.
Okay. Thanks for taking the questions.
Your next question comes from the line of Todd Coupland from CIBC. Go ahead, please. Your line is open.
Good evening. I was wondering if you could just give us, you, you gave good color on the automotive margin or transportation automotive margin range, where you expect that to fall this year and next year. Could you just, give a similar commentary on the industrial side to true us up within those ranges and the, the outlook that you had in the past? Thanks.
Yeah, sure. So again, I'm making my comments exclusive of FX impact, because we can't predict, you know, where that's gonna be at. So ignoring such, I would expect to be at the high end of our suggested range of 12%-16% this year, with some potential for mild margin expansion next year in the segment as well.
Okay. You know, maybe this is getting a little too granular. I understand if it is, but is there any quarterly dynamic to call out on the transportation margin as we go through this year? I mean, do they drop a little bit harder in the second half of the year with seasonality?
Well, they, they always do, right? So, I mean, transportation segment is always stronger in the first half, and then we steer it in the back half, just as we get into a shutdown period. So that's sort of a normal, a normal cycle.
Okay, that's great. Appreciate it.
There are no further telephone questions at this time. I will turn the call back over to the presenters.
Great, thank you. Well, as always, I'd like to end with a few key messages. So first of all, we're thrilled with another quarter of record sales growing in double digits, and record levels of content per vehicle as well in every region, and of course, continued market share growth at Skyjack and MacDon. Secondly, we are particularly happy to see double-digit normalized OE growth as well, despite lower markets in North American and Chinese auto and unfavorable exchange rate changes to last year. And finally, we're excited about continued strong new business wins, which we are delivering on in spades in the most opportunistic sourcing environment in auto that we have ever seen. Thanks very much, and have a great evening.
This concludes today's conference call. You may now disconnect.