Linamar Corp

TSX:LNR

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by, and welcome to the Linamar Q1 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Linamar's CEO, Linda Hasenfratz. Thank you. Please go ahead.

[Linda S. Hasenfratz, CEO & Non]

Thanks very much. Good afternoon, everyone, and welcome to our first quarter conference call. Joining me this afternoon are members of my executive team: Jim Jarrell, Dale Schneider, Roger Fulton, Mark Stoddart and some members of our corporate IR, marketing, finance and legal teams. Before I begin, I will draw your attention to the disclaimer currently being broadcast. I'll start off with a short update on the COVID-19 crisis and Linamar's current focus. Our approach to this last leg of the pandemic is the same as the first a year ago, as we continue to focus on our employees, shareholders, communities and customers in our Linamar Health First plan. In this stage of the pandemic, our focus is really in 3 key areas: First, ensuring we continue to have a safe workplace, where we remain vigilant about following protocols and implementing regular testing and encouraging and enabling high vaccination rates. We are big believers that regular testing is key to controlling community spread and the only way along with vaccinations that we get back to normal. We have also been very focused on communication with our people and communities about the importance of vaccination, which, along with testing, again, is how we keep ourselves safe, our loved ones safe and healthy and how we get back to normal. Given we're normally not seeing transmission of the virus in our plants, some may question why we decided to implement this rapid testing in our Guelph core plants that's more than 9,000 people twice weekly. And the answer is pretty simply, you are most contagious in the 1 to 3 days before you show your first symptoms. You may be positive, not yet feel sick and be actively spreading the virus to others in your family or community. And if we could stop that, our community spread goes down and everyone stays safer. And vaccination is the last key area of focus for us. We launched our vaccination clinic in early March after 4 weeks of focused work by our team. We have vaccinated 11,235 people already in our 2 months in operation and expect to ramp up more significantly this month as more vaccine becomes available. We actually have capacity to do 2,000 shots per day given enough vaccine. To assist other companies interested in launching their own clinic, we have developed a playbook with all the information needed to enable an even quicker time to launch. The playbook is posted on our website, and we encourage the information to be shared and hopefully utilized. Okay. With that, let's jump into some of the specifics about the quarter, and we'll start off as usual with sales, earnings and content. As we mentioned at the outset that we have renamed our transportation segment, Mobility, to better reflect the broader business focus of this side of our business. All of our reporting has been updated to reflect the new terminology, and I will do my very best not to slip up and use the wrong word today. Sales for the quarter were $1.78 billion, up 15% from last year. The auto sector continues to perform very well in North America and Asia, and launching programs are driving better volumes and margins. Global vehicle markets were up 14.7%, driving some great market rebounds. The cloud on the horizon, of course, were customer plant shutdowns related to shortfall in the supply of semiconductor chips. MacDon also saw a very strong quarter, driving much of the Industrial segment growth over the last year, although we are elapsing Skyjack markets recovering. Market share growth in targeted regions in both Industrial businesses also helped to boost sales. Normalized net earnings are up 133% to $158.3 million, driven by the strong sales growth, of course, as well as cost reduction that has been implemented and government support programs. The change in FX rates from last year also provided the tailwinds this quarter. In North America, content per vehicle for the quarter was $196.05, another new record level, up 14.6% over last year, with customers we have heavy weighting with also seeing the biggest market share gains. Vehicle production levels were down 3.9% compared to last year due to those chip shortages. However, our automotive sales in North America grew 10.2%. It should be noted that powertrain plant closures do tend to lag vehicle plant closures typically. This is relevant. Although we did feel an impact from the chip shortages in Q1, we expect to likely feel a bigger impact in Q2. This would also serve to enhance North America content per vehicle somewhat in Q1. In Europe, content per vehicle dropped a little to $82.81 in a market that was slightly down due to our customer mix, resulting in modest automotive sales decline in comparison to last year. The market in Europe continues to be difficult with continued showroom shutdowns and the resulting impact on consumer demand as well as complications from chip shortages production levels. And as a result, CPV are likely to remain volatile until the region settles down once we move into the post-pandemic period. In Asia, content per vehicle increased significantly again to $13.51, up 25.4% over last year, with key customers seeing strong market share gains in certain products as well as additional sales from launching programs in a market that was also up 32.4%. Recall nearly all pandemic-related production hits in 2020 for Asia were actually concentrated in Q1. So this gave us a 66.4% boost to automotive sales in the region to $147.4 million. Global automotive sales were up in the quarter, driven mainly by the strong growth in North America and Asia. Commercial and industrial sales were up 25.2% in the quarter, mainly due to the strong MacDon performance, although Skyjack is now seeing some growth over prior year as well. Health care sales were also up over prior year as the final ventilator program units were delivered and Synaptive deliveries of robotic digital surgical microscopes began. Carefully managing CapEx continues to be a key theme for us. In Q1, we were down significantly in CapEx from last year at $59.5 million of spend. For the full year 2021, we expect to see an increase from last year but still at the low end of our normal range of 6% to 8% in order to continue to be somewhat conservative. Linamar's utilization of flexible, programmable equipment is the key factor in allowing us flexibility in times of market softness to continue to tool up new business without requiring significant CapEx. This is a massive advantage that Linamar has in comparison with competitors who may invest in more dedicated equipment, which although cheaper and often requiring less labor, is not easy to reallocate to new programs or to scale the line to match actual capacity needs. We have continued our track record of generating free cash flow despite the pressures of working capital normally seen in the first quarter of the year. We generated $166 million of free cash flow and expect to see solidly positive free cash flow for the full year 2021. We have $1.6 billion of liquidity available to us as well, which is also outstanding. Our strong balance sheet and liquidity means we have the ability to take on takeover work or acquisitions as they arise in an opportunistic market and drive even more growth for us. The solid cash flow has allowed us to reduce net debt levels. Net debt now sits at $309 million, which is down now over $1.85 billion from the peak in early 2018, despite the pressures of the pandemic. Leverage likewise improved dramatically to now 0.3x last 12 months EBITDA. Turning to the market outlook. We are seeing markets sharply up across the board this year, which shouldn't come as a surprise after a tough 2020. Industry experts are predicting solid growth in light vehicle volumes globally this year to 15.7 million, 18.6 million and 44.3 million vehicles in North America, Europe and Asia, respectively. Next year, we'll see continued growth in the mid- to high single digits. On-highway, medium and heavy truck volumes are expected to be solidly up in North America and Europe this year but down in Asia. Next year, we will see continued growth, moderate in North America, stronger in Europe, but again down in Asia. Industry experts predict double-digit growth in the access market in North America and Europe this year and next year, coming off a very tough 2020 as construction projects start to ramp back up and consumer confidence builds post-pandemic. Asia will continue to grow but a little less strongly than what we saw last year. Backlog is meaningfully up from prior year at more than double the level we were at in Q1 2020. Lastly, industry is predicting solid growth in the combine draper header market this year in double digits in North America, Australia and CIS and mid-single digits in Europe and South America. The order book is up significantly from last year, with farmers feeling more confidence with a rally in commodity prices, a good harvest last year and a perception of a more stable international trade environment. Looking at a little more detail. On the auto side, you can see a pattern of recovery in every region on vehicle sales when compared to the prior year, notably once we hit the months where the clients were really starting to hit last year. China is quite consistently up in double digits. Europe, a little bit of a down based on lockdowns, and North America is consistently trending higher. In fact, vehicle sales in North America are nearing record levels. April 2021 SAAR in North America was the second highest in reported history. March 2021 was the third highest SAAR in history, this while vehicle builds are constrained by chip shortages. What this means is we should expect robust production levels once the chip issue is solved and a sustained period of strong performance while the industry catches up to demand and rebuild vehicle inventories to normal levels. And looking at production levels compared to what was forecast at our last conference call at the beginning of March, you can see a slightly stronger Q1 than was forecast, really driving at a stronger recovery in China. Q2 is now expected to be a little softer than we thought in March. Again, this is because of the ongoing chip shortage issue, which is trimming another 1.1 million units out of production in Q2. This is -- there's a similar story for the full year. So that same really 1.1 million units are impacting the overall full year performance for 2021. Now that said, production in Q1, Q2 and 2021 full year are all up significantly from 2020. Q1 was up 14%. Q2, 58% is the forecast, and 2021 full year, 12%, so double-digit growth across the board. The impact of the chip shortage and other supply chain issues seems to be changing day to day, and it's very difficult to predict. We will have a better sense for you as we see how things play out in the next 6 weeks and can provide an update with our mid-quarter market update that we'll provide in early July. Looking at the access market in more detail. You can see first that all 3 markets showed growth over prior year in the first quarter, which is very positive. Further growth for the full year in core North American and European markets are expected to be even better, which is a great sign. Equipment utilization levels continue to look positive. In Q1 2021, utilization levels were between 95% and 105% of 2019 levels and well ahead of last year's level, which is also a very good sign. In much of April, utilization was 98% to 102% of 2019 levels, so continued improvement happening through the year. Double-digit growth is expected in core North American and European markets in 2021 and in 2022. The strong backlog already noted at Skyjack supports this and should drive double-digit sales growth at Skyjack this year and next year. In the agricultural business, we're seeing a very optimistic outlook in North America, in particular, for double-digit growth this year after a soft 2020. Q1 combine retails in North America were 17% up from prior year with a stronger showing in Canada, which was up 21%, and U.S. also showing strongly at up 16%. International markets are predicting high single-digit or double-digit growth pretty much across the board. MacDon continues to build market share in international markets with strong growth and market share growth in all of Australia, South America, Europe and CIS over the last 12 months. Order intake is significantly ahead of last year at this time, indicating double-digit sales growth for MacDon this year as well and an expectation of continued growth in 2022.So turning to an update on growth as well as our outlook. You'll be pleased to know that we had another solid quarter in new business wins. I'm going to highlight some of our more strategic wins in a moment. But first, electrified vehicles continue to provide great opportunities for us. In fact, more than 1/3 of business wins in the quarter were for electrified vehicles, which, likewise, make up a substantial share of the book of business that we are currently pursuing. You can see a steady build here in our global content per vehicle for battery electric vehicles, that's the gray outline, which is getting very close to the internal combustion blue line on this chart. The lines are converging, which, of course, is the goal. Our content per vehicle in electric vehicles is predicted to surpass that of hybrids, as you can see, within a couple of years as we see more and more battery electric vehicle wins. Our strategy for pursuing electrified vehicles is diverse in many aspects, which actually allows us to really maximize opportunities for growth. And we tried to capture that on this slide. First, we have a diverse lineup of products in various areas of the vehicle, from propulsion systems, the structural and body parts, to power system solutions and full chassis solutions. We are targeting pass cars as well as commercial vehicles, trucks of every class and off-road vehicles. We are targeting all types of electrified propulsion: Battery electric, hybrid and fuel cell electric vehicles. We're targeting traditional OEMs and new entrants to the vehicle field -- to the electric vehicle field very successfully. And finally, we're open to a variety of scalable solutions for our customers, from individual components to subassemblies to full systems. I think the last point is really important as our customers are still developing their own manufacturing strategies in that regard. Being flexible means you get on the platform one way or another and as the incumbent, are in a much better place to take on more responsibility as the OEMs evolve their strategies. We believe being sourced onto as many new electrified platforms as possible in any way is absolutely key in this emerging market. The strategy is paying off as we win business in all of these different areas and a variety of combinations as such. Once again, the flexibility of Linamar's strategy is key to our success. Equally important to the success in an electrified future is the flexibility of our manufacturing assets. Linamar's long belief in the importance of using flexible, programmable equipment in our production lines allow us to maximize utilization of our investment and better scale and match line capacity to fluctuating demands. What that means is the same equipment can be used to make a variety of types of parts with minimal investment in new tooling and programming. And that means that capital assets that are currently employed in Linamar's operations today can be adapted to manufacture electrified components at little incremental cost, as volumes on internal combustion engine vehicles decline and volumes on electrified vehicles grow. So for instance, the same gear grinding equipment can produce gears for electric vehicle e-axle and for internal combustion engine powertrains and the like, as you can see illustrated on this slide. The same is true for our lathes, our machining centers, our heat treat equipment, straighteners, [ pipe ] rolling equipment, et cetera. The list goes on. There is some equipment, of course, which is more product specific, like assembly equipment, for instance. But even these lines can have some elements reused for a new program. The bottom line is we don't expect to see a significant amount of stranded assets over the next decade as we transition into electrified vehicles, and we think this is very good news from a risk perspective. Our addressable market across a range of vehicle propulsion types continues to look excellent with our total addressable market for us today somewhere around $80 billion, growing to more than $300 billion in the future, an increase of more than 3x. As you can see, the market potential for each type of vehicle, whether internal combustion, hybrid, battery electric, fuel cell electric, are all really starting to even up. This is largely driving from the higher potential content per vehicle we have now in the battery electric, fuel cell electric and hybrid vehicle areas, thanks to the continued product development efforts for products like assembled battery trays, hydrogen fuel tanks and others. Our potential content for all types of vehicles are roughly $3,200 per vehicle. With respect to launches, we are back to seeing ramping volumes on launching transmission, engine and driveline platforms, which are predicted to reach 40% to 50% of mature levels this year, which should generate incremental sales of $500 million to $600 million. These programs will peak at nearly $3.7 billion in sales. We saw a shift of more than $70 million of programs moving from launch to production last quarter, which was more than offset by solid business wins. Next year, we should see growth of 30% to 40% for launches to generate additional incremental sales of $600 million to $700 million. As usual, we are summarizing all of these expectations of market changes on our outlook slide that is now being displayed. With markets recovering as described, we're expecting to see double-digit growth on the top line and strong double-digit growth on the bottom line in 2021. And we will see continued growth in 2022. This drives from double-digit growth at both Skyjack and MacDon this year as well as significant market growth in auto and continued ramping of launching business in that segment. Next year should see continued growth of all 3 businesses based again on growing markets, growing market share and launching business. Margins will be back into our normal range of 7% to 9% at the net level this year, driving from the Mobility segment margins being back into the mid-normal range and Industrial margins getting close to being back to normal level. Next year should see normal margin ranges for both segments and overall. Leverage levels continue to improve based on continued positive free cash flow both years. Looking specifically at Q2, you should expect to see significant growth in the Mobility segment based on the much higher production levels forecast this year. But I'd recommend being cautious about the impact of the plant shutdowns related to chip shortages. As noted earlier, the powertrain plants tend to lag the vehicle plants in terms of timing of shutdown. Plus, the issue seems to be far from resolved and really is playing out on a week-to-week basis. We'll know better the impact of the shutdowns as we get closer to the end of the quarter, but it is safe to assume that the impact to us in Q2 will be higher than what we saw in Q1. Agriculture and access will both see solid growth driving out of that strong backlog and, again, a much stronger market than last year. I think it's important to mention also that both segments are feeling some cost pressures due to supply chain issues at the moment. We expect to see -- to feel some impact of that throughout the balance of the year. That means you won't see a repeat of the very strong Q1 Mobility segment margin. Although as noted, we still do expect to be up from last year and in a mid-normal range for the full year. Similarly, although Industrial margins will grow, as they normally do in Q2 and Q3, they will be tempered somewhat based on these cost issues, hence, our suggestion of getting close to a normal range of earnings in terms of margin performance in the Industrial segment this year. We will also see continued dial back on government support as our recovery continues. I will add, as the lawyers insist I do, that impacts from COVID-19 outbreak and subsequent supply chain challenges are currently not fully understood or determinable in terms of their impact to all segments at this point. So of course, risks remain. So I now highlight a few of our more interesting business wins this quarter. First, we picked up another significant program for next-generation battery electric vehicles. We'll be manufacturing more than 70,000 units per year of this subframe assembly for one of our customers as of 2023. Although the volume doesn't sound substantial, the price point of this program is substantial. So it is -- as it is quite a complex assembly, making this quite a notable win for our team in North Carolina. Next is a major differential assembly win for a very high-efficiency transmission for a Japanese automaker that we've been focused on for years. This is a notable win given this automaker rarely strayed from their in-house manufacturing or [ corrective ] partners for this particular type of product. Third, we had a very active quarter in lightweight cylinder head and block wins, over $100 million, in fact, in annualized business. These wins are key as they are likely the last generation of internal combustion engines that will see us out the decade. There's a huge opportunity in these types of programs over the next 10 years. Careful equipment selection, as referenced earlier, will ensure any capital can be reallocated to new energy vehicles as they develop over that time frame and into the 2030s. And finally, a win in the off-highway market pursued some substantial sales as well. The commercial vehicle and off-highway vehicle markets are both picking up in terms of opportunities at the moment after a few dry years. Turning to an innovation review. I would like to highlight a few great technology developments that we launched this quarter. First, I'd like to share some new product offerings that our MacDon Group has recently introduced. The TM100 is a tractor-mounted draper header that can be used in crops when swapping is required prior to harvesting, but the total acreage doesn't justify the investment in a self-propelled windrower. The draper header can be mounted directly to a farmer's existing tractor. Next, the sunflower attachment option that can be assembled to the bottom front of our current FlexDraper header. This is another great example of the multi-crop versatility of our FlexDraper products. And lastly, MacDon is adding its own transport header trailer solution, which is really a must for markets like Europe where field sizes are smaller and roadways are more narrow. All these features are great examples of MacDon's ability to adapt to the needs of the regional market it serves and a significant reason why we are growing so strongly our share in Europe and CIS. Next, I'd like to highlight one of our Innovation Hub projects. As you know, the iHub, as we call it, is our incubation and development center for future diversification efforts aligned to Linamar 2100 plan. ThermoLift is one of our early-stage start-up partners, who we are helping to scale up and commercialize by using our manufacturing expertise, design, testing and supply chain capabilities. Their residential heat pump system can replace a home furnace, water heater and air conditioner all from a single unit and at significantly less energy requirements and, therefore, of course, emissions. We've been conducting validation tests at our McLaren engineering center, and the design is progressing well towards an important durability type of milestone. Early trial units will be going out into the field later this year. Lastly, our product development efforts for electrified mobility continue by incorporating innovative new solutions into our e-axle offerings, where prudent performance, safety and EV range with features like electronic limited slip differentials, park locks and disconnects. These features are both for our light vehicle and commercial vehicle e-axle applications, as you can see illustrated here on the slide. We also continue to make great progress on our digitization efforts across our operations with notable increases in both the levels of automation as well as data collection points across our connected equipment to optimize equipment performance and efficiency. Turning to a strategic update. We announced this week the establishment of a strategic alliance as a first step towards a possible joint venture with a Canadian leader in fuel cell technology, Ballard Power Systems. Linamar and Ballard have entered into an agreement to jointly develop and market a fuel cell powertrain and chassis system for cars, SUVs and trucks up to class -- up to and including Class 2 for sale in North America and Europe. The partnership will have a flexible approach to customers, where some may be interested in the entire rolling chassis system, inclusive of the fuel cell powertrain and e-axle propulsion system, which is basically the gearbox, electric motor and controller and is mounted on a wheeled chassis. And others just might be interested in subsections as such. The partnership is really intended to leverage the expertise and skill sets of both companies, so obviously, Ballard's expertise in fuel cells and then our expertise in electric vehicle propulsion, the hydrogen tanks, chassis systems and manufacturing overall. And together, we think we're really bringing a couple of world-class companies together to lead fuel cell powertrains for the market. I think this schematic helps to clarify the roles of what each company is going to do. So Linamar is basically responsible for 4 key areas: the hydrogen tank; the e-axle system, that's the gearbox, electric motor and controller; the chassis system, so that's things like the frame or unibody structure or it's sometimes called skateboard, the steering, wheel end, shocks, springs, brake pads, et cetera; and then fourth, the balance of the plant requirements to kind of pull the system together, which would be essentially everything in a fuel cell that isn't in the stack, like air compressors or pumps, humidifiers, cooling systems, enclosure or cradles, et cetera. And then Ballard would be responsible for 3 key areas: the fuel cell stack, so the proton exchange membrane or PEM fuel cell stack; the -- secondly, the fuel cell control system; and then finally, various fueling subsystems and components related to the sort of mechanical, thermal and noise vibration system. One of the concepts that we're exploring is to design the fuel cell and tank system into a package that would replicate the size and dimension of a typical battery pack. The benefits of this design would be the ability of the customer to convert a battery electric vehicle into a fuel cell electric vehicle with minimal cost and minimal challenges around changeover by simply pulling out the battery pack and replacing it with the fuel cell and tank system. The balance of the chassis, including the e-axle propulsion system, would remain intact. A battery electric vehicle and a fuel cell electric vehicle are actually quite similar in terms of operations. Both drive the vehicle off of an electric motor system, which is the e-axle. And in the battery electric vehicle, the power source of that is a large battery pack. And in the fuel cell electric vehicle, the power source is the fuel cell system. That's what makes this plug-and-play concept work. We believe a hydrogen-based future utilizing fuel cell technology is the best solution for mobility and really for 4 key reasons. First, it's clean. It is truly 0 emission. Hydrogen fuel mobility is truly green, generating 0 emissions from the fuel source and generation right through to vehicle operations, in contrast to battery electric vehicles, which, of course, rely on the source of electricity to determine their carbon footprint. Hydrogen can be made from water using wind or solar electricity to power the process of electrolysis of the water. When the fuel cell is operated, the hydrogen is reunited with oxygen to create energy with the byproduct of water. In some ways, the fuel cell vehicle is really being powered on either wind or solar energy, which is being temporarily stored in the hydrogen. Secondly, fuel cells can be quickly refueled, as we had become accustomed to in an internal combustion engine world. Thirdly, hydrogen has a very high density of energy, making it a very efficient source of fuel to power vehicles. And lastly, fuel cell electric vehicles don't rely on sort of regionally concentrated sources of certain minerals such as cobalt and lithium, which are currently largely controlled by the Republic of the Congo and China, which could create some concerns in the future. We are very excited about this partnership, which we think levers off decades of experience and technology development of both companies to pursue a future of mobility that is truly great. So with that, I now turn it over to our CFO, Dale Schneider, to lead us through a more in-depth financial review. Dale?

[Dale Schneider, Chief Financial Officer]

Thank you, Linda, and good afternoon, everyone. As Linda noted, Q1 was a strong quarter for sales and an exceptional quarter for earnings as a result of the recovery from COVID-19 shutdowns that occurred last year. It was also a great quarter for cash generation as we generated $166.2 million of free cash flow. Additionally, we were able to maintain our strong levels of liquidity of $1.6 billion. For the quarter, sales were $1.8 billion, up $232 million from $1.5 billion in Q1 last year. Earnings are normalized for any FX gains or losses related to the revaluation of the balance sheet and any unusual items that may have occurred in the quarter. In Q1, earnings were normalized for FX losses related to the revaluation of the balance sheet, which impacted EPS by $0.07. Normalized earnings -- operating earnings for the quarter were $221 million. This compares to earnings of $103.5 million in Q1 of 2020, an increase of $118 million or 114%. Normalized net earnings increased $90 million or 133% in the quarter to $158 million. Fully diluted normalized EPS increased by $1.37 or 132% to $2.41. Included in earnings for the quarter was a foreign exchange loss of $6.4 million, which is almost fully associated to the revaluation of financing balances. As I mentioned, the net FX loss impacted the quarter's EPS by $0.07. From a business segment perspective, the Q1 loss of $100,000 was a result of a $10.2 million loss in Industrial and a $10.1 million gain in Mobility. Further looking at the segments. Industrial sales increased by 16.5% or $49.3 to $348.3 million. The sales increase in the quarter was due to the strong demand and market share gains driving agricultural equipment, the strong demand and market share gains also driving North American access equipment sales, which were partially offset by declines in the European access equipment that is still being adversely affected by COVID-19 and the negative impact on sales from changes in FX rates since last year. Normalized Industrial operating earnings in Q1 increased $14.5 million or 46% over last year to $45.9 million. The primary drivers impacting Industrial were the increased contribution from the strong agricultural volumes and the increased contribution from the net volume increase in access equipment, which is partially offset by the negative impact from the changes in FX rates. Turning to Mobility. Sales increased by $183 million over Q1 last year to $1.4 billion. The sales in the first quarter was driven by the increasing volumes on certain programs in North America and Asia, the increasing volumes on launching programs, the impact of positive FX rates since last year, partially offset by the market impact of the semiconductor chip shortage, which is impacting our customers. Q1 normalized earnings for Mobility were higher by $103 million or 143% over last year. In the quarter, Mobility earnings were impacted primarily by the net increase in sales, as I just described, the cost savings we were able to achieve in the quarter, the positive impact from FX rates since last year and the utilization of government support programs. Returning to the overall Linamar results. The company's gross margin was $313 million, an increase of $112 million compared to last year due to the same factors that drove the segments. COGS amortization expense for the first quarter was $118 million. The COGS amortization as a percent of sales actually decreased to 6.6%. But on a dollar basis, it increased by $9.5 million, primarily due to the impact of launching programs and products in the quarter. SG&A costs decreased in the quarter to $91.5 million from $97.5 million last year. The decrease is primarily the result of cost savings achieved since the pandemic started a year ago.Finance expenses increased by $200,000 since last year due to a onetime foreign exchange impact because of the U.S. dollar repayment and the funding of the new EUR 320 million private placement notes in January and lower interest earned on declining long-term receivable balances. These increases were also almost fully offset by the lower interest expense because of the debt reductions that we've been able to achieve in the last year and the lower effective interest rates, which improved by 55 basis points or 20% last year. The consolidated effective interest rate for Q1 declined to 1.9% from 2.5% last year. Effective tax rate for the quarter increased to 26% compared to last year due to an increase in nondeductible expenses. As a result, we are expecting the 2021 full year tax rate to be in the range of 24% to 26% and consistent with the 2020 full year rate. Linamar's cash position was $672 million as of March 31, an increase of $258 million compared to March 2020. The first quarter generated $224 million in cash from operating activities, which is mainly used to fund CapEx and debt repayments. This also resulted in cash flow generation of $166.2 million in the quarter. As a result, net debt-to-EBITDA decreased significantly to 0.3x in the quarter from 1.57x a year ago and from 0.5 turn at the end of 2020. Based on the current estimates, we are expecting net debt-to-EBITDA to continue to improve by the end of 2021. The amount of available credit on our credit facilities was $958 million at the end of the quarter. Our available liquidity at the end of the quarter remained strong at $1.6 billion. And as a result, we believe we currently have sufficient liquidity to satisfy our financial obligations during 2021. To recap, sales and earnings for the quarter was a story of exceptional performance, driven by strong market recoveries from COVID-19 and market share growth, driving normalized net earnings up 133%. Despite this exceptional performance, the future is not known. And as a result, Linamar remains focused on cash generation and strong liquidity. Linamar remarkable quarter of cash generation as we generated $166 million in free cash flow in the quarter, while maintaining our strong liquidity at December 2020 levels of $1.6 billion. That concludes my commentary, and I'd like to open up for questions.

[Linda S. Hasenfratz, CEO & Non]

So operator, if you're on the line, if you could open it up for questions, that would be great.

[Dale Schneider, Chief Financial Officer]

We're ready for question in Q&A session.

[Operator]

[Operator Instructions] For our first question we have Krista Friesen from CIBC.

[Krista Friesen, Associate]

Congrats on a great quarter. Just a few questions here. If you can remind me on the commodity front, what is your exposure like to steel? Do you participate in some of the resale programs with the OEMS? And I guess, not just steel, but aluminum and resin as well.

[Linda S. Hasenfratz, CEO & Non]

Yes. So on the auto side of the business, we have contracts with our customers that allow for metal market price change pass-throughs. So on our aluminum contracts that were fully covered with metal market adjustments. They're done on a quarterly basis on a predetermined metal market index. On fuel-based products, I wouldn't say it's 100%. I would say it's probably more like 60% or 70% of contracts that would be covered by such metal market adjustment program. At the same time, we are out in the market trying to protect ourselves in terms of our expected steel purchases, not just for the auto business but also for our industrial businesses. So typically, we would have contract out for at least the current year or the balance of the year. So we're in no bad shape in that regard. But of course, we do have to come to an agreement for next year's prices in that regard.

[Jim Jarrell, President & COO]

Yes. And I would just say for the automotive side, again, we -- on our supply base side, we definitely would have contracts on the base level and then we also pass-through the surcharge that Linda reference to our suppliers that comes through the automotive. But we do protect on a contract side. And of course, on the industrial side, Skyjack, MacDon is a little bit more open. It's up to us to have our contracts sort of laid out with our suppliers and also protect on that steel commodity, which we all know has jumped up quite a bit over the last 6 to 8 months from last year. So we're really, as Linda said, referencing for like the future. And then, obviously, that plays into your pricing models and that with your customer base, too, because we have that product pricing ability in that as well.

[Krista Friesen, Associate]

Perfect. And just on the Skyjack side, utilization rates for the access equipment were great in the quarter, almost at 100% there. Was this what you were expecting at the beginning of the year? Or has this maybe accelerated a bit quicker than you thought?

[Linda S. Hasenfratz, CEO & Non]

Yes. I would say it's quite similar when we had our call at the beginning of March, we also cited actually very similar levels of utilization in comparison to 2019. So just to be clear, when I say 95% to 105%, I'm comparing equipment utilization levels this year compared to what they were in the same week in 2019. 2020, obviously, was quite skewed. So I think it's not a very meaningful comparison. So we're running at the same kind of equipment utilization rate out there in the field as we would have 2 years ago, just to explain what that is. And I wouldn't say that -- April has definitely taken a bit of a step up, like we're closer to 98% as much as 102% in comparison to 2019 equipment utilization for most of April.

[Krista Friesen, Associate]

That's great. And just on the Skyjack side, is that being impacted very significantly by the chip shortage?

[Jim Jarrell, President & COO]

A little bit, very, very minimal. It would really be through the powertrain side, but very, very minimal. It really would be not material at all for Skyjack.

[Krista Friesen, Associate]

Okay. Great. And then the 1.1 million reduction in vehicle production, your outlook, are you just assuming that, that gets pushed out into 2022? Or is some of that potentially lost?

[Linda S. Hasenfratz, CEO & Non]

Oh, I think it gets pushed out. I mean, as we were showing, the demand is very high, I mean we're selling in North America at record rates. So the demand is 100% there. It's just how quick can we get the chip to build the vehicles, right? So whatever can't be made up this year, in my mind, will absolutely be made up next year.

[Jim Jarrell, President & COO]

And I would say the messaging from the OEMs across the board, Europe and North America, is they plan to make this up. That's the messaging.

[Operator]

For our next question, we have Peter Sklar from BMO Capital Markets.

[Peter Sklar, Analyst]

Okay. So on your results in the Mobility segment, where you have this 12.2% margin. I was looking back through my spreadsheet, I don't think I've ever seen a margin that high. I was wondering if you could be a little bit more forthcoming on what happened. Like if you look like your revenues in Q1 '21 versus Q4 '20. So just looking at those 2 quarters, Q1 really only had 44 more -- $44 million more revenue than Q4. So effectively, the revenues were the same. But in Q4, your operating income margin in that segment was 9.8%. And then in Q1, it was 12.2%. So something happened. I wonder if you could just explain a little bit more that what happened that really drove this high-margin in 1 quarter.

[Linda S. Hasenfratz, CEO & Non]

Yes. I mean there were a few things that, as I mentioned, I mean, I guess, in the year-over-year comparison, North America and Asia sales were up significantly. And in addition, we had cost reductions, and we had the government subsidies, and we had some tailwinds from exchange this quarter. So that sort of explains the year-over-year change. Your comparison in looking at Q4, I mean, sales were up from Q4, for sure. So that definitely drives part of the change. And then part of the impact is also the exchange piece. So that one is obviously hard to predict and can't be counted on, right, to what's going to happen 1 quarter to the next. So there was some tailwind from exchange. So you're absolutely right. The 12.2% is an unusually high level for Mobility margins. We do not think it's sustainable. As I mentioned in my formal comments, we suggest that you dial back to somewhere around the midpoint of our normal range of 7% to 10% for the balance of the year. So that is a more realistic expectation, particularly given some of the pressures that we are expecting around some of the costs that we talked about and also being a little bit conservative around what might happen in terms of shutdowns. So midpoint of 7% to 10% for the full year.

[Peter Sklar, Analyst]

Okay. And Linda, could you or Dale quantify what the dollar amount of contribution to operating income was for that segment as a result of foreign exchange? And also, could you quantify the amount of government support you received?

[Linda S. Hasenfratz, CEO & Non]

We don't quantify the FX piece that relates to transactional/translational exchange and hedging that is not something that we typically quantify. I mean we do quantify the revaluation on the balance sheet, but not the FX piece. With respect to subsidies, it was somewhere around $16 million in the quarter. And I believe that's detailed out in the notes. And most of that did hit Mobility.

[Peter Sklar, Analyst]

Did you say 16, 1-6?

[Linda S. Hasenfratz, CEO & Non]

Correct.

[Dale Schneider, Chief Financial Officer]

Yes. It's $15.9 million.

[Peter Sklar, Analyst]

Okay. Okay. And then just one last question. You said that 1/3 of the orders that you won, contract wins during the quarter were battery electric vehicles. Can you -- like what is the annual dollar value of those wins? I don't know if that's a small number or a big number?

[Linda S. Hasenfratz, CEO & Non]

Yes. I mean it's a big number. We had a strong quarter in new business wins, but it's -- I don't have that figure handy. What I do know is we had a strong quarter in new business wins. We're on track for a strong year and 34% of the wins were related to electric vehicles.

[Peter Sklar, Analyst]

Okay. And then sorry, one last thing. I mean just on the big bogey here, which is what are Q2 production volumes are going to look like? I mean you have some insight because you're seeing the production schedules a few weeks out. Is there -- do you have any commentary on what you're saying and what your sixth sense is on how Q2 is going to fall out?

[Linda S. Hasenfratz, CEO & Non]

I mean the problem is it is quite difficult to predict. It's not just us that are having difficult -- difficulty predicting. It's the automakers as well. So I mean I'll let Jim comment further, but what I can tell you for sure is Q2 impact is going to be higher than Q1 impact.

[Jim Jarrell, President & COO]

It's a really interesting -- you're chasing releases. And in fact, I was on the call with a customer today, Peter. And really the key is they're chasing microchips, right? And so what the problem is, is they have their releases at a high rate right now. So they keep the releases at a high rate, then they find out they can't get microchips so then they take the assembling plant down, shut it down. And then those releases don't immediately go back to the driveline or powertrain plants that we're servicing. And then some of them keep the releases high and then eventually, it changes, right? And so this is like a constant back and forth. And quite frankly, the comment is we are struggling to schedule our plant, so it must be really difficult to schedule you guys. So it is a constant back and forth day-to-day. It really is that changing.

[Peter Sklar, Analyst]

And are they -- are your customers building inventory of completed engines and transmissions that they can't send the assembly plants because the assembly plants are down?

[Jim Jarrell, President & COO]

Yes, for sure, they're doing that, but eventually, that gets cut off too, right, like, because you do have chip issues there. But -- so I think what they're doing is keeping those inventories high. And then obviously, the whole supply chain is backed up a little bit. So they want to make sure suppliers are keeping up as well because when they turn it back on, right, they can out assemble typically, right? They could take a second shift and add a 2.5 shift, right, and make up the difference. So I think that's what they're -- when they say they're going to make that up, I think that's their sort of planning to do that is sort of the comment that I'm seeing. Mark, you would...

[Mark Stoddart, CTO, Executive VP of Sales & Marketing and Non]

Yes. Peter, as we were talking about. But I think they're really concerned to keep the industry or keep the process moving in regards to the product and not have complete shutdowns, as we know, is coming back out of the shutdown. There's always lots of hiccups. And all of the OEMS, when they get chips, they want to be able to get vehicles. And you're seeing them park a lot of more or less finished vehicles in lots that they just need to stick the chips in so that they can get them to dealers. So I think as we've been talking about it's very fluid day-to-day. But definitely for the powertrain for the engine and transmission plants, they want to keep them running so that they can build inventory because they are [ and the most ] when it comes to normal production to the vehicle assembly plants.

[Jim Jarrell, President & COO]

And the other -- the new capacities on Microchip, there's a lot of discussion on that, too, going on, Peter. And that's years or with that -- couple of years away right before any of that can have any impact. So predicting the future is never easy. This one is a tough one.

[Peter Sklar, Analyst]

Yes. But I would think at some point, like if the vehicle assembly volumes really are taken down in the second quarter because there's no chips, like at some point, they have to stop building engines and transmissions and finally, you will see that...

[Linda S. Hasenfratz, CEO & Non]

That's already happening, Peter. And they're already shutting powertrain pipes down. Like we did feel an impact in Q1, and we will feel an impact in Q2, and we think it's going to be a bigger impact. But again, it's very dependent on how quickly the issue resolves and how quickly they ramp production back up. So it feels right now like it's going to be a bigger impact. If they get going quicker, they may start catching up already in Q2. It's hard to say.

[Peter Sklar, Analyst]

Okay. And then with Ford specifically, like obviously, you know Ford is saying that their production schedule in Q2 is going to be half of what would have otherwise been. Are you seeing -- are you feeling the impact from Ford specifically yet?

[Jim Jarrell, President & COO]

We're seeing it definitely from Ford and also other OEMS, but again, it's not one-for-one, you know what I mean? Because, again, powertrain driveline, they want to -- again, a better perspective would also be we're going to make that up. That's a strong message. So I think what they're doing is keeping us -- and probably a lot of suppliers who have been under the gun probably for months, right, running 6, 7 days a week, you keep those going because if you're going to make that up, you can't get an extra day in a week, right?

[Peter Sklar, Analyst]

Yes, yes. Okay. Those were helpful...

[Linda S. Hasenfratz, CEO & Non]

I think the important thing to focus on is the fact that demand is staying very strong. So although it's distressing to see these shutdowns and it is disruptive, it will be made up. And we are -- we can look forward to a strong surge back and a sustained period of higher production. So what we're seeing right now is absolutely temporary.

[Operator]

For our next question, we have Brian Morrison from TD Securities.

[Brian Morrison, Research Analyst]

And I agree with you on the strong demand environment being positive going forward. Just in terms of Peter's question on the operating margin within Mobility. I'm not sure I fully understand it. So if I look at your guidance going forward, your midpoint of 8.5%, you basically revert back to a mid-7% or low-7% margin -- operating margin in the back half of the year. So if sales are sort of constant on average, based on your guidance and cost reductions flow through, what's changed from Q1 for the remainder of the year to get to that 8.5% margin?

[Linda S. Hasenfratz, CEO & Non]

Yes. I mean part of what we're expecting is the cost impact from the supply chain issues. And admittedly, I'm being a bit conservative because we're a little concerned about where volumes are going to go. So I'm trying to be a little bit cautious on where margins are going to land, based on a conservative outlook on what's going to happen with volume.

[Jim Jarrell, President & COO]

Yes. And maybe just to comment on the cost side of things, like as we talked about already in the commodity prices, if you look at -- and again, we got a lot of pass-throughs and contract. But when you look at hot-rolled or cold-rolled material now up to like $1,300, $1,400 a ton versus a year ago, $600, $700 a ton. You look at logistical side as well, Brian, where you have a 40-foot container coming out of China that was probably $4,000 a year ago is now $7,800 to $8,500. There's just a lot of these cost elements that are in there. We have stepped up -- I mean we have really stepped up our cost attack team efforts in here. I mean in the pandemic, we talked about keeping certain cost reductions in place, which we've done, like I think we use travel as a really good example. We use subscription, software sharing, like all those things, we are really stepped on to try and mitigate any of that. But there is some reality to some of these cost increases.

[Linda S. Hasenfratz, CEO & Non]

And I'd just like to point out that notwithstanding all of that, we're expecting solid double-digit earnings growth in both segments, but most notably in the Mobility segment, where normalized operating earnings are going to be dramatically up from last year. So notwithstanding what's happening with -- on the cost side, we're obviously trying to offset that as best we can. It's still going to be a fantastic year for the Mobility segment, just so that you don't get too caught up in all that and what's happening over the next 2 quarters.

[Brian Morrison, Research Analyst]

Yes. No, I understand that it's just a variance from one quarter to the next. That's all. In terms of your guide, do you expect the full recovery in volumes? Is it -- is the full recovery in volumes baked into your guidance? Or do you expect that to -- does your guidance extend the recovery into 2022?

[Linda S. Hasenfratz, CEO & Non]

Well, we're basing it on industry forecasts, what volumes are forecast for the balance of the year and what we're hearing from customers and with a bit of conservatism built in there. So as we talked earlier, there is an expectation that some of the missed production from this year will be made up in 2022. So I think that's most likely to happen, but we certainly do expect to see a bounce back in the back half of the year.

[Brian Morrison, Research Analyst]

Okay. And I think maybe overlook. This is for either Dale or Linda, but overlook here is just how strong your balance sheet has become. You're clearly in an advantageous position here. And I don't want to ask you about M&A activity because we're not going to go there. But what are your plans with your buyback? Do you plan on getting active here?

[Linda S. Hasenfratz, CEO & Non]

Yes. I mean it's -- it's something we talk about with the Board every quarter, including this one, both dividends and buybacks. So with respect to both questions, I mean, we did just increase the dividend 2 quarters in a row. So that didn't seem like something that made sense to do so quickly again. And I will say the buybacks are definitely always an option and one that we would seriously consider based on share values and our expected needs for cash. So it's something that we've discussed. It's not something we're ready to make a move on at this moment, but it's something that would potentially be on the table.

[Operator]

For our next question, we have Mark Neville from Scotiabank.

[Mark Neville, Analyst]

Great quarter. I think I'll leave the Mobility margin conversation alone, industrial -- the industrial segments, a great -- a strong quarter in the comments around backlog and order intake, some very supportive. You're guiding to double-digit growth. But I mean that could mean a lot of things. I'm just curious if you can maybe try to help ballpark it for us. What maybe your expectations are for that business for the year?

[Linda S. Hasenfratz, CEO & Non]

Yes. I mean I hesitate to get any more specific. But I have given you what the market is looking to grow in more specific figures and that we're looking to grow market share. So I think that could give you some level of guidance as to what we think will happen in the industrial segment. And also, I mean, Q1 is obviously a leading indicator for the year. And normally, Q2 and Q3 are stronger quarters than Q1.

[Mark Neville, Analyst]

That's helpful. Looks very strong. I'm just trying to put a number on it. And again, I guess maybe just a follow-up on the balance sheet. Is there -- in your sub or close to 0.3x, I think, is the number you quoted. You're generating lots of cash. Is your expectation that sort of to ramp CapEx back up? Again, I'm just sort of trying to understand where you sort of want to sort of operate sort of in the absence of M&A, because it does seem sort of maybe a little too low and maybe wondering why you might not want to hit the back -- hit the buyback a little sooner.

[Linda S. Hasenfratz, CEO & Non]

Yes. I think that CapEx is definitely going to ramp back up. I mean we will be higher this year than last year. We'll be at the low end of our normal range. So that's a bump up from last year for sure. And that will continue to build based on the book of business that we are winning. We are trying to be conservative just given the current situation. And just wanting to manage things conservatively. So we're -- we have the ability to do that. So we're going to do it. But you can expect CapEx to ramp up. On the M&A side, there's lots of interesting opportunities out there. So for sure, that's something that we think would be interesting and we can explore some opportunities around. And then as just noted, buybacks and dividends are another obvious use of cash that we would discuss every quarter with our Board.

[Operator]

For our next question, we have Kevin Chiang from CIBC.

[Kevin Chiang]

Congrats on a great start to the year here. I'd like to just ask about the Ballard joint venture. I see it's focused on light-duty vehicles. And the other slide here about, I guess, the advantages of fuel cell vehicles over this battery electric. I'm just wondering what you think the penetration rate here for fuel cells are. It just feels as though the momentum for battery electric and the first-mover advantage seems pretty insurmountable now if I think of the ability for fuel cell vehicles to gain any real traction. But obviously, I don't know that for sure. Just wondering how you view the technology over time?

[Linda S. Hasenfratz, CEO & Non]

Yes. You're right. Battery electric have a lot of momentum. And for sure, we're going to see lots of growth over the next 10 years on the battery electric side. And the fuel cell electric will sort of come in behind that. So I'm not saying there won't be anything for 10 years. But I do see battery electric as a bridging technology to fuel cell electric. And because the technologies in a sense are quite similar, as I was describing in my formal comments, they're both electric vehicles, they both run-off of an electric motor with a gearbox and a controller, all of that is the same. It's really just the source of power. So switching out from a big battery pack to instead a fuel cell system and tank is actually pretty realistic. And so I think the move to battery electric is great because it gets us a step closer to the fuel cell electric. And it is cleaner and in some countries, it depends on the country and the source of electricity. So it's starting to help. And then fuel cell will make a much bigger difference once we can get to that point. So I'm not suggesting that fuel cell electric vehicles are going to leap on to the scene in a dramatic way in the next year or two. Absolutely, it will take a few years for that to start to play out. But I will say that there's a lot of interest, a lot of discussion, a lot of automakers are in active discussion and development around fuel cell. So this is clearly where the next-generation is going. So this is a really important building block for us.

[Jim Jarrell, President & COO]

Yes. I think as well, I mean, as Linda said, this isn't like a short-term idea. This is a bit more of a longer-term play, of course, with things that will be developed in. I think it's really already, it works, right? I mean let's look at that. It does work and it's in buses. It's in commercial vehicles. And you also have to look at the whole environmental side, long-term and regional jurisdictions and governments who are really starting to endorse these type of plays. And then when you look at this, just to correct you right away, it's a strategic alliance to start, which essentially would become a JV. And really, what we're now doing is we're making a statement of work that Linda sort of described, and you saw in the pictures, we've set up a commercial technical team to sort of work together on our expertise. And then what we're going to do is define the technology to now be taking this to the customers to show them this play that you could have this sort of plug-and-play interchangeability. And so to me, really another impact that we got to like sort out is a cost factor, right, because there is a cost impact. And both of the companies are going to work that because long term, putting within an automotive vehicle that we're going to drive around has to be cost effective. So the start is really good. The momentum is very good. And really, I think government and support is very good globally for this.

[Mark Stoddart, CTO, Executive VP of Sales & Marketing and Non]

Kevin, you need to keep focus too on what we're looking at, which is mainly around the class 2. So that's your sort of entry into the heavy-duty pickup truck, right, the F-250, the 2500 series. And to put pure electric vehicle in those -- in the pickup trucks, you start to take away from payload and towing capacity, and those trucks are typically used in the trades, contractors. So they're towing equipment around trailers around or for the personal -- person, he's got it for towing recreational product around. So filling the truck up full of batteries actually limits the amount of towing capacity, and that's where we feel cell, we think, is a better option for that.

[Kevin Chiang]

Actually, that answered my other question as to whether you saw this leading into your commercial vehicle offering and it sounds like that's the case. I guess just as maybe another high-level question with this potential JV. And as you kind of think of it longer term, I get the sense, and I guess, correct me if I'm wrong, I think on Asia-Pacific region is where I think they view fuel cell electric vehicles as a solution, maybe more so than we think of in North America and Europe. Just wondering, do you also view this as potentially if this JV ends up being as successful as you hope they will be, could that accelerate your growth in Asia -- in that market in the Asia-Pacific market, just given -- I think that maybe the more readiness to adopt this form of technology?

[Linda S. Hasenfratz, CEO & Non]

Yes. I mean, absolutely, we think that Asian market is very interesting. It's not specifically part of the scope right now, but we have discussed the idea of expanding the scope into that region. So that's already something that's on the table under discussion.

[Jim Jarrell, President & COO]

Yes. I think the key was we want to take on what we know today here and then really assess the customer side and the market and understand what it is and then apply that to a model in Asia as well.

[Operator]

Presenters, we don't have any further questions at this time. I would now like to turn the call over back to Linda Hasenfratz, the CEO of Linamar, for the closing remarks.

[Linda S. Hasenfratz, CEO & Non]

Thanks very much. So to conclude this evening, I'd like to leave you with 3 key messages. First, we are thrilled with a solid start to the year financially with earnings more than double last year. Sales up in double digits and continued free cash flow. Secondly, I feel like we're making exciting new inroads towards a green mobility future with our new partnership with Ballard and continued strong wins in the electrified sector. And finally, it's great to see all 3 of our core markets of auto, ag and assets, expecting significant double-digit growth, top and bottom line in 2021 after a tough year last year. That, coupled with solid market share gains means we are seeing all businesses intersect to paint a picture of solid growth for the full year 2021 after a strong first quarter. So thanks very much, and have a great evening.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.