Linamar Corp

TSX:LNR

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Linamar Q1 2018 Analyst Conference Call. [Operator Instructions] Linda Hasenfratz, CEO, you may begin your conference.

[Linda S. Hasenfratz, CEO & Non]

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 teams. 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 $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 3 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 units sold, driving great performance of Skyjack, particularly with our popular boom product, which continued to build market share. And of course, our newest acquisition, MacDon, made a great contribution to growth with 2 months of results in the quarter. Our growth is illustrative of the power of the 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 $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% to 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 $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% to 8%. 2019 will be similar but slightly lower as a percent of sales. Our net debt level increased by $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 1 within 18 to 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 $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 times of softer vehicle production levels. Other automotive sales not captured in these content calculations were $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 $488 million compared to $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. For 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 volume 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, we'll see flat growth in North America, moderate growth in Europe of 4% to 5% but another a 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 telehandler products. Our new agriculture 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% to 2% over the next 25 years. Changing dynamics, new technologies are all 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, and our suite of products for each continues to be developed and to grow. The total addressable market for us today is about $130 billion, as you can see on this chart, growing to more than $300 billion in the future. We have 212 programs in launch at Linamar today. Look for ramping volumes on launching transmission, engine and driveline platforms to reach 25% to 30% of mature levels this year, which will add another $600 million to $700 million in sales for 2018. These programs will peak at more than $4.4 billion in sales. We saw a shift of about $130 million of programs from launch to production in the quarter, which will add about [ $60 million ] in incremental sales growth in 2018 as well for total business launched this year of $650 million to $750 million. Launched programs grow quite steeply next year to more than double this year's level for incremental growth next year of between $1.3 billion and $1.4 billion. In addition, as noted, Skyjack is targeting solid growth, driving out a growing market 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 $600 million in sales on acquisition, and the market, as noted, is growing in mid-single digit. I will remind you, we will have 11 months of results in 2018 for Linamar. Temper that growth, of course, was the loss of business that naturally ends each year, noting to expect such at the low end of our normal range of 5% to 10% in 2018 and the high end in 2019 as well as normal productivity givebacks. 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 will continue 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 $8.5 billion to $9 billion in book to 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 [ dip case ] 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 were very proud of this win. Next is a key program awarded in Europe for a significant Driveline 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. Our start of production is 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 million units per year. The program will launch in one of our North Carolina facilities next year, and at peak volume represents nearly $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 2 major programs, 1 in Europe and the other in Mexico, which, in aggregate, represent nearly $90 million in annual sales. Our Montupet group continued 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 in 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 per 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 market. 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 agricultural 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, our precision agriculture and developing a strategy encompassing our European operations and products to maximize product range and reach. For power, age and water, we continue to study the market to develop our best [ exit ] strategy over the next 5 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 in 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 system 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 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 uptimes 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. We have a huge amount of opportunity in these technologies to dramatically improve efficiencies 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 product 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 cars to large trucks, 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 3 programs, 1 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. And we have 2 major plant expansions underway, 1 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 6 months. The second addition is for our Montupet Mexican facility, Montiac, to accommodate several new launches. All projects are proceeding very well. Finally, a quick NAFTA update. Discussions have been intense over the past 2 months, both inside and outside of official negotiating round. 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 3 areas of disagreements, such as the proposed sunset clause, the dispute resolution issues and government procurement disagreement. If a degree on a principle is not attained 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 logical 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 effort 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 product 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. Over to you, Dale.

[Dale Schneider, Chief Financial Officer]

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 [ median ] vehicle production reached down roughly 2%. For the quarter, sales were $1.89 billion, up $237.9 million or $1.6 billion -- versus $1.6 billion in Q1 2017. Operating earnings for the quarter were $214.9 million. This compares to $192 million in Q1 2017. It's an increase of $22.7 million or 11.8%. Net earnings increased $11.5 million or 7.9% from the same quarter last year to $156.6 million. Normalized net earnings increased by 6.1%. As a result, fully diluted net earnings per share increased by $0.17 or [ 7.7% ] to $2.37. Normalized fully diluted EPS increased by 5.9%. Included in the earnings for the quarter was a foreign exchange gain of $4.2 million, which related to a $5.4 million gain on the revaluation of operating balances and a $1.2 million loss on the revaluation of financing balances. The net FX gain impacted the quarter's EPS by $0.05. From a business segment perspective, the Q1 FX gain due to the revaluation of operating balances of $5.4 million was the result of a $6.6 million loss in transportation and a $12 million gain in Industrial. Further looking at the segments. Sales for transportation increased by $127.3 million or 9.3% over Q1 last year to reach $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 $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 product 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 an unfavorable change 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 $110.6 million to reach $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 3 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 a shift in order timing from Q1 to Q2 for certain key customers; and lower market share for scissors in Asia due to the sales increasing in countries which we do not participate in. Industrial operating earnings in Q1 increased $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; an FX gain from the revaluation of operating balances since December; partially offset by unfavorable foreign exchange impacts from the change 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 margin as a percent was 16.7% in Q1 2018. Gross margin increased $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. COGS amortization expense for the first quarter was $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 $106.6 million from $91.1 million in Q1 2017, but remain 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 the higher management and sales costs incurred in the quarter supporting the growth. Finance expenses increased $6.4 million from Q1 2017 to $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 hikes since Q1 2017, partially offset by higher interest earned on the investment of excess cash and from long-term receivable balances; and 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. The effective tax rate in Q1 was reduced due to the decreasing tax rate in foreign jurisdictions, offset by an increase due the higher effective rate on income from our Q1 acquisition, and an increase in -- 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% to 24%. Linamar's cash position was $455.3 million on March 31, an increase of $17.1 million compared to March 2017. The first quarter generated $35.8 million in cash from operation. Net debt increased as a result of the MacDon acquisition by $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 within 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 to 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 $542.1 million at the end of the quarter. To recap, Linamar had another solid quarter with sales -- strong sales and earnings growth. Sales were up 14.1 -- 14.4% in an environment where North American and Asian vehicle production were each down by roughly 2%. The strong sales led to 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.

[Operator]

[Operator Instructions] Your first question comes from the line of Mark Neville from Scotiabank.

[Mark Neville, Analyst]

Just first on the MacDon. It looks like it did, I guess, just north of $80 million of sales for the 2 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.

[Linda S. Hasenfratz, CEO & Non]

Yes. 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 tends to be a little more muted. So if you were taking last year's -- or acquisition sales and just sort of dividing it out equally, then that would for sure explain why you were expecting a little bit higher sales. So they were right on track for what our expectation is for them for the year. Again, we're expecting them to grow sort of in line with the market, and again, 11 months' worth of sales in 2018.

[Mark Neville, Analyst]

Okay. So it's roughly line with the market. Were you expecting a bit better than that previously? Or is it -- or was it sort of always market growth?

[Linda S. Hasenfratz, CEO & Non]

Well, last quarter, we said low single digit. This quarter, we said mid-single digit. So we feel pretty good about where the sales growth is coming in for MacDon.

[Mark Neville, Analyst]

Okay. Was there any onetime sort of iteration or acquisition costs in the quarter that may be worth calling out or worth mentioning?

[Dale Schneider, Chief Financial Officer]

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 their fair market value. So there will be some additional depreciation going forward that didn't exist in -- when they were a private company.

[Jim Jarrell, President & COO]

Mark, on the seasonality, to just expand on what Linda said. So it's really just in quarter 1 and quarter 4, basically the slowest quarters coming out of Christmas shutdown and people getting back in. Quarter 2 is definitely the strongest, as Linda mentioned, and some of that can bleed into quarter 3. 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.

[Mark Neville, Analyst]

Okay. That's helpful. And maybe just on 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?

[Linda S. Hasenfratz, CEO & Non]

No. In fact, 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 to last year, margins would have actually been only slightly down from what they were last year in the transportation segment, which was 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.

[Mark Neville, Analyst]

And you're referring to, I guess, translation transactional, not the operating balance adjustments, correct?

[Linda S. Hasenfratz, CEO & Non]

Correct. Yes. So if you look at normalized margins, this year were 9.8%, and last year were 10.9%. So if you consider it on a constant currency basis, that's more than half of the difference. And the rest would be associated with this phenomenon of mature business being a little softer with markets down replaced by launching business.

[Mark Neville, Analyst]

Okay. And maybe if I can just sneak a higher-level question in. Some of the North American OEs deemphasizing 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 ability to navigate it and what you think it means for the business?

[Linda S. Hasenfratz, CEO & Non]

Yes. On the split between car, crossover and light truck we're 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 car. So the changes announced would have very minimal impact to us.

[Mark Neville, Analyst]

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?

[Linda S. Hasenfratz, CEO & Non]

You mean in terms of the split, like what the market split is?

[Mark Neville, Analyst]

Yes. Your business versus what the market might look like, similar in North America?

[Linda S. Hasenfratz, CEO & Non]

I'd say probably a little more weighted towards light truck, crossover, just when I look at our North American customers.

[Jim Jarrell, President & COO]

I'd say our launches are very much more on the light truck side, for sure.

[Operator]

Your next question comes from the line of Matthew Paige from Gabelli.

[Matthew T. Paige, Research Analyst]

I just had one question. Given some of the acquisitions in the Powertrain/Driveline space, so Tenneco and [ Zed Mobile ], have you seen any changes in the competitive landscape?

[Linda S. Hasenfratz, CEO & Non]

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 are more than we've seen in the past. But I don't feel like the competitive landscape has really changed that much.

[Jim Jarrell, President & COO]

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 opportunity. We're not seeing any new competitive threat from these -- in the market in our quotes and things like that.

[Operator]

Your next question comes from the line of Brian Morrison from TD Securities.

[Brian Morrison, Research Analyst]

If I can follow up on Mark's question. Can you just update us on the update -- primarily 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.

[Linda S. Hasenfratz, CEO & Non]

Yes. So I mean, when you look at margins, there's really key -- 3 key things that affect us. FX rates, both from balance sheet adjustments as well as if you're looking at it on a comparative basis, that's the transactional/translational, the level of launches and the product mix. So I mean, obviously, FX rates aren't 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% to 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.

[Brian Morrison, Research Analyst]

So above 10% next year is what you're guiding to?

[Linda S. Hasenfratz, CEO & Non]

Well, I've guided to the top end of our range, so that's right.

[Brian Morrison, Research Analyst]

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.

[Linda S. Hasenfratz, CEO & Non]

Yes. So the Industrial division is obviously quite sensitive to exchange rates. So given they're selling primarily in U.S. dollars, pounds or euros, then they have a good chunk of costs 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, the margins were still quite strong, and growth was actually quite strong as well, even notwithstanding the MacDon acquisition. 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 there.

[Brian Morrison, Research Analyst]

There was just some commentary in the MD&A that there was a shift in timing in sales, scissors sales Q1 to Q2. I wondered if that was material. And then also just following up, so Skyjack was up 10% on the top line in sales. What was it up on a constant currency?

[Linda S. Hasenfratz, CEO & Non]

So we're not disclosing specifics on the changes in -- with -- at constant currency, but the sales growth would have been reasonably similar. It was a little bit tempered by the currency.

[Dale Schneider, Chief Financial Officer]

And 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.

[Brian Morrison, Research Analyst]

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 that 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 it simply across the board that this environment is evolving?

[Linda S. Hasenfratz, CEO & Non]

Yes. I think what we're seeing is with our customers looking to invest in a variety of vehicle propulsion, 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 has their fully machined transmission cases or fully machined engine blocks. These are components that were never outsourced in the past, and we have won several programs of such in the last 12 to 18 months. So definitely seeing an acceleration there and a move to outsource even products that were never outsourced in the past. I think we're definitely seeing big opportunities popping up in Europe and in Asia right now, particularly, 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 great opportunities in those regions.

[Jim Jarrell, President & COO]

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.

[Operator]

Your next question comes from the line of David Tyerman from Cormark Securities.

[David Bruce Tyerman, Analyst of Institutional Equity Research]

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?

[Linda S. Hasenfratz, CEO & Non]

I don't think you're going to see huge shifts from quarter-to-quarter. I mean, margins are fairly consistent at MacDon. I mean, obviously, it's going to be a little bit better in the second quarter just given the strong level of sales, but I think they're -- [ they'd be recently ... ]

[Jim Jarrell, President & COO]

Yes. And they also, David, have a level loading sort of system as well that they try and keep the cost intact and sort of go with the volumes. So they're sure that they have planned a lot of that out through the seasonality things that come at them.

[David Bruce Tyerman, Analyst of Institutional Equity Research]

Right. Okay, that's helpful. 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. I mean it seems to have sucked about $50 million, $60 million of cash flow out. So I was just wondering if you could provide a discussion on what's going on there.

[Dale Schneider, Chief Financial Officer]

Sure. Well, first of all, it's just a geographic movement on the face of the statement. It used to be lower down in the investing area. The main driver of that is on the Industrial side, specifically at Skyjack, on their independent sales to those smaller rental houses where we provide financing to them, that we don't necessarily provide to national accounts. And so as those sales or AR grows, that's just a sign that our sales independents are growing, and obviously, those have a much better margin on them than do national accounts. And that's also what drives the interest earned.

[David Bruce Tyerman, Analyst of Institutional Equity Research]

Okay. That's helpful. 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?

[Linda S. Hasenfratz, CEO & Non]

We are busy with what we have, David, and a side note to Jim as well. So 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 something that really worked came along that we wouldn't try and find a way to do it. But really, our -- we don't like to have too much debt on the balance sheet. Our primary goal will be to -- debt leverage, worked down a little bit before we'd look to leap into anything else on the M&A side.

[Operator]

[Operator Instructions] Your next question comes from the line of Michael Glen from Macquarie.

[Michael W. Glen, Analyst]

The -- on the MacDon, the number that you provided for net earnings in the note is $14.8 million. So if we wanted to try to determine a -- that's an after-tax number, to be clear?

[Dale Schneider, Chief Financial Officer]

Correct.

[Michael W. Glen, Analyst]

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?

[Dale Schneider, Chief Financial Officer]

Just you'd have to decide if you want to consider the extra interest [ revision ] to the acquisition as part of Linamar or part of 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.

[Michael W. Glen, Analyst]

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 500,000 unit per-year win over in Europe. So are you going to have to -- are we going to 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 in existing plants that you can utilize?

[Linda S. Hasenfratz, CEO & Non]

Yes. I mean, there's, for sure, space in facilities that these -- some of these new jobs would replace existing work, for instance, or fill in space, but without doubt, we need to add facilities. I mean, I talked about 4 -- 2 new plants and 2 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 we do need to do that. But don't forget that the capital associated with building a new facility is actually much smaller than the capital that would be associated with actually tooling-up the program. So a new plant might cost $12 million, $15 million, but the capital that's going to go into it is going to cost $50 million to $80 million. So whether you're fitting it into an existing plant or having to build a new plant, the capital expenditure is not going to be dramatically different.

[Michael W. Glen, Analyst]

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 $152 million on the cash flow statement. I was just wondering what we could expect this year.

[Dale Schneider, Chief Financial Officer]

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.

[Michael W. Glen, Analyst]

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 -- were they a headwind in any way in the quarter?

[Jim Jarrell, President & COO]

I think the pressure is up on raw material, for sure, in the commodity side. And I would say we are covered up on the auto side pretty well. So there would be maybe a gap in how the indices are looked at. We may have one [ indice ], 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. The -- both MacDon and Skyjack obviously have some headwinds with that as well. I think there's some opportunistic things going on from a demand in the scarce -- the scaring of the tariffs. But there is some pressure there. But 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 margin.

[Michael W. Glen, Analyst]

Okay. And have you had the ability to put through some price to capture some of the increased raw material at this point in time?

[Jim Jarrell, President & COO]

We basically make deals with customers that are -- if we're talking about MacDon and Skyjack, we make individual deals with customers that we want to grow our business but keep margin.

[Linda S. Hasenfratz, CEO & Non]

And on the auto side, as Jim was saying, we have automatic systems that pass through metal market changes. I mean, for aluminum 100% and on other metals, the majority of it, not necessarily 100%, but a significant percentage is passed on to customers. So that's sort of a regular automatic process.

[Operator]

Your next question comes from the line of Todd Coupland from CIBC.

[Todd Adair Coupland]

I was wondering if you could just give us -- 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, true us up within those ranges, and the outlook that you had in the past?

[Linda S. Hasenfratz, CEO & Non]

Yes, sure. So again, I'm making my comment exclusive of FX impact because we can't predict where that's going to be at. So ignoring such, I would expect to be at the high end of our projected range of 12% to 15% this year, with some potential for mild margin expansion next year in the segment as well.

[Todd Adair Coupland]

Okay. And 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?

[Linda S. Hasenfratz, CEO & Non]

Well, they always do, right? So I mean, transportation segment is always stronger in the first half and then weaker in the back half just as we get into a shutdown period. So that's sort of a normal cycle.

[Operator]

There are no further telephone questions at this time. I will turn the call back over to the presenters.

[Linda S. Hasenfratz, CEO & Non]

Great. Thank you. Well, as always, I 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, as the most opportunistic sourcing environment in auto that we have ever seen. Thanks very much, and have a great evening.

[Operator]

This concludes today's conference call. You may now disconnect.