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Linamar Corp
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Good afternoon. My name is Gabriel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Linamar Q4 2017 Analyst Call. [Operator Instructions] Ms. Linda Hasenfratz, you may begin your conference.
Thanks very much. Good afternoon, everyone, and welcome to our fourth quarter conference call. Joining me this afternoon are members of my executive team Jim Jarrell, Mark Stoddart, Roger Fulton, Dale Schneider as well as some members of our corporate finance and legal teams. As you can see, we are initiating this quarter a webcast platform to allow you to better visualize the key points of the quarter. As such, Roger has offered us to make a statement regarding forward-looking statements provided on this call, and I will instead draw your attention to the disclaimer currently being broadcast. Okay. Let's get started with sales, earnings and content. So sales for the quarter were 1.5 -- sorry, hold on -- sales for the quarter were $1.57 billion, up 14.5% from last year, which is fantastic to see, particularly given market declines in North American light vehicles. Light vehicle markets for the 3 regions we serve were flat at plus 0.4%, but the North American light vehicle market was down 4.1%. The access market, on the other hand, experienced double-digit growth over last year in units sold, but Skyjack outperformed global unit growth by 50%, driving nearly 45% sales growth in the quarter on continued market share growth. Our growth is illustrative of the power of a significant backlog of launching business to offset softer market. Sales for the year hit a record $6.5 billion, up 9%, which is fantastic to see. This is our seventh consecutive year of record sales, all with high single-digit or double-digit growth. Earnings saw another strong level of performance in Q4. Net earnings, normalized for balance sheet exchange impact and unusual items in each quarter, increased 11.8% compared to last year to reach $122 million. This takes us to another record year of normalized earnings of $551.5 million, up 9.4% over 2016. This is our sixth consecutive year of delivering record earnings and again, growth in either high single-digit or double-digit levels, which we are very proud of. Normalized net earnings as a percent of sales in Q4 were 7.7% and for the year, 8.4%. 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 $100.9 million or 6.4% of sales, taking 2017 as a whole to 6.3%, up from 5.7% in 2016 as expected. We are expecting 2018 CapEx as a percent of sales to be a little higher again than last year, but still at the low end of what had been our normal 8% to 10% range before dialing back down a little -- again in 2019. In general, CapEx as a percent of sales seems to be settling into a new normal range of 6% to 8%, which we believe is a better expectation for you going forward. This level of investment still drive double-digit consistent growth and is also well managed from a cash flow perspective. Our strong earnings, spending discipline and focus on controlling working capital allowed us to continue to reduce net debt level by another $83 million to improve net debt-to-EBITDA to 0.83x. This represents a cumulative reduction in net debt of $528 million since our acquisition of Montupet 2 years ago, which is excellent. In North America, content per vehicle for the quarter reached $157.58, up 10% from last year, thanks to launching business, offsetting a 4.7% decline in production levels. Q4 automotive sales in North America, as a result, were up 4.9% over 2016 at $675.2 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 $69.93, up 12% over last year, thanks mainly to a positive mix in the region in a market that was up 8.8%. Our Q4 2017 automotive sales in Europe, therefore, grew 21.8% compared to last year to reach $405.4 million. In Asia Pacific, content per vehicle for the quarter was $9.48, up 10.7% from last year. Our Q4 2017 automotive sales in Asia Pacific were up 12.9% versus last year, reaching $131.2 million in a market that was up 1.8% in production volume. Linamar continues to target doubling our current footprint in Asia in the next 5 years. We were thrilled to see double-digit content per vehicle growth in every global region, as content per vehicle is an important driver of Linamar's overall growth. 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 million, up a little from what we saw in the same quarter last year. Nonautomotive sales were up 34.4% in the quarter at $304 million versus $226 million last year, thanks to a very 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 volumes this year globally to 17.4 million, 22.8 million and 50.4 million vehicles in North America, Europe and Asia, respectively, representing growth of between 1% and 2%. 2019 is expected to see a similar picture, with growth ranging from fairly flat in North America to 3.1% growth in Asia. Industry experts are predicting on-highway medium/heavy truck volume to grow this year in North America at about 9%, see more moderate growth in Europe of about 2.5%, but a decline in Asia. 2019, we'll see moderate growth again in both North America and Europe of around 3% or 4%, but another a decline in Asia. Off-highway medium- and heavy-duty volumes are continuing to show signs of improvement at last, which is great. Turning to the access market. We are seeing an expectation for fairly consistent performance in the global aerial work platform market over the next 2 years compared to last year, which ended up much stronger than expected with double-digit global growth. Performance is being driven by a fairly flat North America market next year with some growth in Europe and Asia. Product growth is driving mainly from the telehandler segment, which, of course, is positive news for our continued market share growth in this product. We continue to see positive industry metrics with significant infrastructure spending planned for the next couple of years in every region and an ARA forecast of between 4% and 5.5% 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, which is a good sign as well. It's our goal to continue to outperform the market through market share growth as we have so successfully done in the last several quarters. So continued growth this year despite markets being flat, but obviously, at a more moderate level. Our new agriculture business MacDon will benefit this year from an agricultural market that is at the early stages of a cyclical recovery. The industry expectation is for mid-single-digit growth in the ag market in 2018. It's our goal at MacDon to also outperform the market with our industry-leading harvesting equipment. Turning now to new business. We continue to see solid levels of new business wins and a strong book of business being quoted. In fact, we hit a new record level of new business wins in 2017. Q4 was another very strong quarter for us with quite a few notable strategic wins. We are seeing more outsourcing of components and systems that in the past were exclusively done in-house, specifically things like fully machined transmission cases, fully machined head blocks and more complex subsystems. We think it's driven from our customers needing to invest in more areas today with our rapidly evolving automotive industry, different types of propulsion, autonomy, mobility, more broadly. And all of that seems to be triggering an acceleration of powertrain outsourcing, which is very, very exciting. Internal combustion engine vehicles remain an exciting area of opportunity for us, thanks to this higher level of outsourcing, which is more [Audio Gap]We were talking about business wins for electrified vehicle, and which in the last 12 months was 23% of our overall wins compared to market share. These vehicles today have only 4% and growing to 14% by 2020. So great to see us really touching above our weight in that regard. We are also notably seeing a big increase in business wins outside North America. In fact, business wins in the last 12 months outside North America represents 53% of overall win. Of course, this make sense as 80% of the world's automotive industry is outside North America, but great strategically for us, given our heavier concentration to date on the North American Market. Global vehicle growth is forecast to continue to grow at a compound annual growth rate of 1.5% to 2% over the next 25 years. Changing dynamics and new technologies are having various impacts [ on us but to drive future growth ] is expected to exceed the drivers for contraction. Of course, paint a picture of great opportunity in this market for us.So moving on to the review of launch. We have 209 programs in launch at Linamar today. Look for ramping volumes on this launching transmission, engine and driveline platforms to reach 25% to 35% of mature level this year, which will add another $700 million to $800 million in incremental sales for 2018. This program will peak at more than $4.3 billion in sales. We saw quite a big shift of about $625 million of program that moved from launch to production last quarter. Program has shifted to production last year, added $315 million in incremental sales growth in 2017 and programs that we still consider to be at launch added another $315 million, for total business launched to last year of about $630 million. Launched programs grow quite steeply next year to more than double this year's level for incremental growth in 2019 of between $1.3 billion and $1.4 billion. Looking at additional growth considerations as [indiscernible] is targeting to drive above market growth, again, this year and next in flat market. So mid- to high single-digit growth is a good estimate for both years. Be sure to factor in sales and growth from MacDon as well. MacDon, for reference, was $600 million in sales on acquisition. We expect [Audio Gap] in 2018 for Linamar. So 2 months in the first quarter, given the close early February. We expect to outgrow the market as mentioned, which are growing mid-single digit, so low double-digit growth. Here the good expectations for this year and next on an annualized basis to prior year. So temper that growth with the loss of business that naturally ends each year, noting to expect that at sort of mid to high end of our normal range of 5% to 10% in 2018 and the high end in 2019 as well as normal productivity give-backs. Our strong backlog of launching business, coupled with our MacDon acquisition will do a great job of driving strong double-digit top line growth for us this year. Next year, the launch we'll continue to build to drive an organic growth level of high single digit or low double digit depending on the market. Sales growth of continued strong margin performance will result in strong double-digit earnings growth as well this year, moderating in 2019 as we move to organic-only growth, but still at the low double-digit level is our expectation. New business wins are, of course, also filling in growth for us in the midterm as well. Our current estimate is for between $8.5 billion and $9 billion in booked business for 2021 based on current industry volume forecasts layered with new business wins and adjusting for any business that's leaving. I would like to highlight a couple of our more interesting business wins this quarter. First, and quite importantly, I'm thrilled to announce a second major e-axle gearbox program win. This program will be for one of our plants in China and will reach more than 550,000 units at full volume. We worked closely with a partner around the fully integrated e-axle with our partner again providing the electric motor and controller and also gearbox. We're very excited about this program for the Chinese market, which clearly is going to move quickly to electrified vehicles, more quickly than other parts of the world. Our 2 e-axle programs together, the first, if you recall, was in Europe and now this one in Asia, together represent more than 1 million electric powertrain systems by mid-next decade at a time frame when total global electric vehicles are forecast to be in the $4 million to $5 million -- 4 million to 5 million unit range. That means a potential market share for us in electric vehicle powertrains of 20% to 25%, which we are very proud of. We won another electric vehicle component for China as well. This one was for a differential case assembly, again, validating the growth potential in the market in China for electric vehicles. Next, we picked up a major driveline axle shaft assembly program for one of our Canadian plants. At over 1 million axles per year, this is a substantial program, and it launches in about 2 years. We picked up further work for our facility in India, this time a basket of transmission components that is launching next year. Finally, we saw a few wins for heads and blocks fully machined for commercial vehicles for both China and Canada, some of which launched already late this year. Total sales for the 3 programs would be more than $50 million a year. So overall, a nice balance of new business for North America, Europe and Asia, and a good blend also, I think, of electric vehicle, internal combustion and light vehicle and commercial vehicle. So great to see that balance coming about. So turning to a strategic update. We continue to proceed extremely well with our new plant developments in North Carolina and Chongqing. In fact, we had the grand opening for our Chongqing plant late last year with great support from customers and local governments. The first launches are going extremely well. And of course, we're targeting additional business for that facility. We're also continuing to work towards developing our strategies around the long-term markets 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 you saw we are so successfully doing, as these products climb in volume while at the same time mining an opportunistic internal combustion engine market as the 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. For power, age and water, we continue to study the market to develop the best entry strategy over the next 5 to 10 years. Of course, the big news in the quarter was the announcement and subsequent close of a major acquisition in the food and agricultural space, MacDon. We are excited about the deal from many perspectives. It provides us diversification into an opportunistic market. It provides innovation as MacDon is an innovative market leader in all their products. Of course, it gives us growth both immediately and longer term as we grow the business globally, and we feel it was a financially attractive deal as well. The deal closed early February, as I mentioned, and our integration work has begun. We have a great team at MacDon and a great integration team from Linamar working on bringing the company into the Linamar family as smoothly and as quickly as possible. Turning to an innovation update. We have lots of activity happening in all our global centers. Our innovation team continued 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 that we just announced, in fact, is a manufacturing partnership with an Israeli innovation company called SoftWheel. Linamar will be SoftWheel's manufacturing partner for their innovative in-wheel suspension products. The wheels are used today in wheelchairs and bicycles for city bike programs with longer-term potential in automotive. Current annual volumes is estimated to grow to about 50,000 per year, but we feel there's great growth potential for this innovative product. We are finalizing designs for an innovation hub here at Guelph to incubate other interacting innovation ideas and partnerships to challenge existing markets and technologies. We are planning on starting construction in the next couple of months. We also have a team working 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 really interesting area to enhance the quality and consistency of our product more efficiently. Digitization, data collection and analytics can also help us create better efficiency, better equipment maintenance and predictive maintenance to drive improved cycle times and maximize machine uptime on the shop floor. We're making great progress on this digitization, with impressive numbers already on the systems implemented as you can see outlined on this slide. We made a significant commitment recently to the new Vector Institute in Toronto focused on AI to make sure we've got a front row seat to all that's happening in that space. We are also the lead partner in a successful supercluster proposal for advanced manufacturing, combining the power of the tech sector with the strength of our manufacturing sector here in Southwest Ontario. We are closely involved with the supercluster again giving us a front seat to all the innovation that is going on in manufacturing. There's a huge amount of opportunity in these technologies to dramatically improve efficiencies of 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 with our 2 wins over the last 12 months. We have other -- several other programs we are working on for e-axles as well and have done an enormous amount of work in developing a whole lineup of e-axle as well as disconnect systems for all-wheel-drive in all variety of vehicles from small car to large truck, and the results are certainly paying off for us. In other areas of operations, our plants continue to perform very well, both in terms of mature business metrics as well as in terms of launch. Finally, a quick NAFTA update. As you know, we just completed the seventh round of negotiations. Good progress had been made on the modernization front with many chapters closed, and others like close to closing. The contentious issue is still related to 4 key areas of disagreement: rules of origin for the auto industry; the proposed sunset clause to bring us back to the table every 5 years; dispute resolution; and to some extent, government procurement. That said, since our last call, there's been tangible ideas tabled by various parties on how to bridge the gap in these areas. The concern, of course, is it's likely not realistic to expect the agreement to be finalized before we enter into election for both Mexico and the American midterms, meaning it is possible that this can get kicked to the end of the year or later. I think we need to all continue to encourage all 3 governments to remain committed to NAFTA and the enormous amount of trade and prosperity this created between our 3 countries, as you can see outlined on this slide. 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 for our U.S. friends. That represents millions of U.S. jobs. Similarly, I think it is 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 exist between the U.S. and China and the U.S. has the $350 billion deficit with them, 6x the deficit with Mexico. Adding cost to building products in North America, whether it's through an elimination of NAFTA and move to WTO tariff or through punitive and, frankly, illegal steel and aluminum tariff hurts all of us, but mainly Americans and American jobs, which is information we simply need to keep reiterating to the American administration in the hope that rational decision-making and cooler heads will somehow prevail. With that, I will turn it over to our CFO, Dale, to lead us through a more in-depth financial review. Dale?
Thank you, Linda, and good afternoon, everyone. As Linda noted, Q4 was a strong quarter and sales grew by 14.5% in net earnings before unusual items and FX impacts grew by 11.8% in an environment where the North American vehicle production was down by 4.7%. For the quarter, sales were $1.57 billion, up $199.7 million from $1.37 billion in Q4 2016. Operating earnings for the quarter were $158.2 million. This compares to $147 million in Q4 2016, an increase of $11.2 million or 7.6%. Net earnings increased $19 million from the same quarter last year to $135.1 million. The net earnings before unusual items and FX increased by 11.8%. As a result, net earnings per share on a fully diluted basis increased $0.28 or 15.9% to $2.04. After backing out the unusual items and FX impacts, the fully diluted EPS would have increased by 11.4%. We did have one unusual item in the quarter that impacted the results. This relates to the statutory rate reductions that were substantially enacted in the fourth quarter, mainly in the U.S. and in France. As a result, certain tax liabilities in these countries were overstated. And in Q4, these tax liabilities were reduced to the appropriate levels on the balance sheet. The offset was a reduction in income tax expenses on the income statement. In comparison to an expected tax rate of 23%, the tax spent was low by $15.1 million, which would have impacted EPS by $0.23. Included in our earnings for the quarter was a foreign exchange loss of $2.6 million, which relates to revaluation of operating balances. The FX loss impacted the quarter's EPS by $0.04. From a business segment perspective, the Q4 loss due to the revaluation of operating balances of $2.6 million was a result of a $3.3 million loss in Powertrain/Driveline and a $700,000 gain in Industrial. Looking further at the segments. Sales for Powertrain/Driveline increased by $136.2 million or 11.1% over Q4 last year to reach $1.37 billion. The sales increase in the fourth quarter was driven by the additional sales from launching programs in Europe and North America; increased volume from our light vehicle automotive customers in all 3 regions; additional sales from our on- and off-highway vehicle customers, which was partially offset by unfavorable changes in foreign exchange rates. Q4 operating earnings for the Powertrain/Driveline were higher by $7 million or 5.7% over last year. In the quarter, Powertrain/Driveline earnings were impacted by a net production increases that I just described, which were partially offset by the unfavorable foreign exchange impacts on the revaluation of the operating balances, the unfavorable changes in foreign exchange rates impacting the underlying transactions within operating earnings and an increased management and sales costs supporting the growth. Adjusting out the FX impacts from the revaluation of operating balances, the segment earnings would have grown by 13.4%. Turning to Industrial. The sales increased by 43.9%, or $63.5 million, to reach $208.2 million in the quarter. The segment also broke the $1 billion barrier for the first time, which is quite a milestone by reaching sales of $1.1 billion. The sales increase for the quarter was due to the strong market share gains and increases in booms in all 3 regions; strong market share gains and increased volumes for telehandlers in North America; and market share gains in scissors in North America and Europe, partially offset by unfavorable changes in foreign exchange rates. Industrial operating earnings in Q4 increased $4.2 million or 17.1% over last year. The primary drivers of the Industrial operating earnings were the net increase in volumes, partially offset by the unfavorable FX impact from the revaluation of operating balances; the lower margins as a result of changes in customer and product mix favoring new launching products, such as telehandlers with lower margins; an unfavorable foreign exchange impact from changes in foreign exchange rates an increase in management and sales costs supporting the growth. Adjusting out the FX impacts from the revaluation of operating balance, the segment's earnings would have grown by 32.5%. Returning to the overall Linamar results. The company's gross margin percent remained flat at 16% in Q4 2017. Gross margins increased by $30.7 million due to the increase in volumes in both segments, offset -- partially offset by the unfavorable FX impacts from the changes in foreign exchange rate and the unfavorable customer and product mix in Industrial. Cost of goods sold, amortization expense for the fourth quarter was $73.9 million. COGS amortization as a percent of sales decreased to 4.7% as compared to 5.7% in Q4 of 2016. Selling, general and administration costs increased to $91.6 million from $82.8 million in Q4 2016. The decrease as a percent of sales to 5.8%. The increase on a dollar basis is mainly due to the higher management and sales costs incurred in the quarter to support the ongoing growth of the company and the acquisition costs associated with the purchase of MacDon. Financing expenses decreased $1.2 million from Q4 2016 to $2.7 million due to the higher interest earned on excess cash and the long-term receivable balances. The repayment of the private placement debt in Q3, which has been replaced by short-term floating rate debt at a lower borrowing rate and the repayment of short-term floating rate debt in general, partially offset by higher interest rates due to the Bank of Canada rate hikes in Q3 2017. The consolidated effective interest rate for Q4 increased to 2.4% compared to 2.1% in the same period last year as a result of the Bank of Canada hikes in Q3 2017. Effective tax rate for the fourth quarter was 12.1% compared to 18.1% in the same quarter last year. The effective tax rate in Q4 was reduced due to the impact of the future reduction in foreign tax rates on the deferred tax balances, primarily in the United States and France. The decreased based on a more favorable mix of foreign tax rate in Q4 2017 compared to Q4 2016 and partially offset by an increase due to the adjustments recognized in Q4 2016 regarding the tax recoveries from prior years, which did not reoccur in Q4 2017. We are expecting the effective tax rate for 2018 to be in the range of 22% to 24%. Linamar's cash position was $439.1 million in -- on December 31, an increase of $34.1 million compared to December 2016. The fourth quarter generated $205.3 million in cash from operating activities, and the last 12 months generated $359 million -- $358 million in free cash flow. Net debt has declined by $163 million since December 2016. Net debt-to-EBITDA decreased to 0.83x in Q4, down from 0.96x reported in Q4 2016 and remains under our target of 1% -- 1x. Debt-to-capitalization decreased to 30.1% from 36.4% in Q4 2016 and is well below our target of 35%. The amount of available credit on our credit facilities was $643.8 million at the end of the quarter. To recap, Linamar had another solid quarter with strong sales and earnings growth. Sales were up 14.5% in an environment where the North America vehicle production was down 4.7%. The strong sales led to solid earnings performance before the impacts of unusual items in FX, which resulted in net earnings before these items improving by 11.8% for the quarter. That concludes my commentary, and I'd now like to open up for questions.
[Operator Instructions] Your first question comes from the line of Peter Sklar from BMO Capital Markets.
On the e-axle contract that you announced today, like the first contract and the second contract, are these for -- I take it these are for pure battery electric vehicle as opposed to hybrids? Is that correct?
That's correct. Both of them.
And Linda, why is it that you're not winning e-axle contracts for, like, mild hybrids like 48-volt mild hybrids? Is your e-axle system not suitable for a mild hybrid?
No, Peter. Our axles are for the -- for hybrids, plug-in PHEV. We have a product for that. We are actively quoting those type of systems, too. I'd say just that hybrids as a whole have been a little bit slow with, again, low fuel prices in North America. There's not a lot of interest for hybrids from consumers. And in the areas of Europe and China, consumers are looking to move directly right to pure electric vehicles versus the hybrids. But we do have activities going on with the hybrids and PHEVs.
And I think Mark's point is valid. The Europe and the Asia, China market are a little bit more aggressive in regards to the full battery electric. And I think the North American customers are still sorting out some of their strategies in regards to full battery electric or hybrids. I think that's still under review.
Okay. And on these 2 e-axles that you've been awarded, like I understand you're manufacturing the gearbox and your partner or partners -- I'm not too sure if it's the same partner, are doing the electric motor and the controller. But who's doing like the overall design for the system? And how is -- like who has the overall design capability and expertise? Where is that coming from?
Well, we both do because we are providing the design and expertise around the gearbox, and they are providing the design around the motor and the controller. And we are working together as a team to create the overall assembly.
Okay. And was it the same partner for both awards?
No.
No.
No.
Okay. The other thing I just wanted to ask you about the -- I'm just trying to think through what would be the potential impact if the steel tariff was imposed. Do you think if there was a tariff on steel that, that would apply to the kind of castings you would import or potentially bring into the U.S. for your U.S. operations?
Well, it wouldn't apply to castings. It would be more about steel product and steel forging. So potentially, steel forging, for instance, that we might buy from an American supplier who is now forced to pay 25% more for their steel, which might be 30%, 40% of their overall costs. So it's not obviously 100%. So I mean, I think in general, it's a little bit difficult to comment on the overall impact of these tariffs just because we don't know what exactly we're going to look -- what they're going to look like. What I can tell you, though, is we do have 100% metal market pass-through on the metal cost of aluminum-based products, so with all of our customers. And we -- about 60% coverage on steel-based products, which, of course, is a positive. What is not positive is even if we can pass this cost onto our customers, somebody's got to pay the price for it, and our customers can't afford it. So who is going to pay the price for it will be the American consumer, which could have a negative impact to demand, which will hurt the whole industry. So we're worried about that. Now on the positive side, our MacDon and Skyjack businesses mainly buy steel from Canadian suppliers, meaning we will have a massive advantage over our American counterparts who are forced to pay 25% more for their steel.
The other factor to -- from the supply side, Peter, is that we have contracts that are pretty specific on pricing -- year-over-year pricing. So -- unless someone wants to break that contract if they claim duress something for a tariff, I mean, that would be a different approach. So we do have fixed contracts with suppliers.
Right. And Linda, when you said you have 60% coverage on aluminum, meaning for your U.S. business like you're covered by your customers on the aluminum buy for about 60% of your total buy? Is that what you meant?
No. First of all, for aluminum, it's 100%. So with every contract that we have with our customers for products that are aluminum-based, we have a preset mechanism by which any metal market fluctuations and resulting changes to metal surcharges that our suppliers passed on to us are passed on to our customers. It's all -- it's a profit that's been in place for many years. It's based on specific metal market indexes. And 100% on aluminum contracts are built that way, like aluminum products that we're selling to our customers. And...
Sorry, and that's on both casting -- that would be for both castings you would buy as well as raw aluminum for your die casting joint venture?
Yes.
Yes, that's right. And then on the steel side, we're covered by -- for about 60%. It's not 100%, not all customers and it's not full coverage. But as Jim was saying, on some of our steel parts -- steel forging contracts, we have agreements in place with suppliers that makes it very difficult for them to increase their prices.
Yes. Yes. The metal market is if something was up $1 per pound, Peter, and it went up to $1.05. That's what Linda was saying, those pass-through. How this tariff would be looked at, I mean, anyone's guess, right? Someone gets a 20%, 25% increase. They could claim whatever and say we can't supply. So at the end of the day, it's sort of a circular thing, right? We're going to get an increase. We're going to take it to the customer. It'll be circling around. So that ultimately the way it could work out.
Your next question comes from the line of Matthew Paige from Gabelli.
One thing I did want to get a little more clarification on, you mentioned in your comments that the margin pressure attributed to management and sales costs. Was that a seasonal timing thing, incentive cost? Or could you provide a little more color on that?
Yes. I mean, we're always growing as an organization, so SG&A costs are increasing from that perspective. So I don't think it's anything out of the ordinary.
No. So these are costs like adding additional salespeople to sales or additional advertising dollars. That type of stuff, trade shows.
Okay. Got it. And then in terms of MacDon, we have 11 months of impact in 2018. But I think or I thought that January is a lower sales volume month for harvesting equipment. Is that the right way to think about MacDon?
They actually have a strong January, but yes, it would be a lower time frame for sure.
But January is not our month.
Yes. Yes. Yes. And keep in mind, January was not our month, too. We closed February 1.
Signaling there similar views, Skyjack
Yes, they would be similar to Skyjack.
So things start to pick up in the first quarter and a little lower in the fourth quarter.
And really the way -- and I think we looked at this in the past like how we've looked at corn headers in Europe. Basically, you're looking at combine sales, tractors sales, commodity prices, farm income and then also, commodity prices. Those are sort of your key factors that are being looked at from a market side.
Okay. That's really helpful. And the last question from me is we've heard from several equipment rental firms that have noticed some CapEx increases coming this year. Is that something you're also seeing in your order book?
Absolutely. As I mentioned in my formal comments, our backlog is substantially higher than last year. And notwithstanding the fact that the market is expected to be flat, we are expecting to see some good growth.
Your next question comes from the line of Michael Glen from Macquarie.
Can you just go back to seasonality on MacDon, how it varies from quarter to quarter? Is the Q1 and Q2 substantially stronger than the Q3 and Q4 periods?
Yes. It's a similar seasonality to Skyjack. So low in the fourth quarter, that's their lowest quarter, and then picks up in Q1 and Q2.
Yes.
Okay. And then I can't remember if you gave this with the -- when you did the deal, but what's the product breakdown at MacDon between corn headers and the windrowers?
So no corn headers, drapers -- Drapers and wind rowers are basically the primary product lines.
And can you give a percent of sales on both of those?
Yes. We'll get back to you. But first, I would say the drapers would be the highest percentage.
We haven't disclosed specific percentages, but as Jim said, the drapers are the biggest chunk of the business.
Okay. And then just finally, the -- we've seen a fairly sharp move higher in the euro, CAD to start the year. How should we think about that impacting your 1Q results?
Well, I mean, obviously, as we've grown in Europe, the euro is becoming a more important currency, but not nearly as important as the Canadian U.S. dollars. So there is some potential impact there, those from the GAAP side as well as from transactional, translational and the balance sheet. So there will be some impact, but it wouldn't be near the same as what you would see out of the -- with our concentration on the U.S. dollar.
Your next question comes from the line of David Tyerman from Cormark Securities.
My first question, I just wanted to get you to give me the number again on the 2018 automotive new business launch, is it still $900 million to $1 billion?
No, because we've taken an enormous amount of business out of the launch book, so that's now going to drive off the content per vehicle launch. So we had a bunch of business wins that we took like over $600 million out of launches and moved them into production last quarter. So we are looking at $700 million to $800 million incremental for anything that's still considered launched. The rest of the growth will be just out of production. And then next year is between $1.3 billion and $1.4 billion.
Okay. So just to make sure I understand this correctly, Linda. If I add $700 million to $800 million to last year's Powertrain/Drivetrain (sic) [ Powertrain/Driveline ] take off the business, roll-off the productivity give-backs. That should give me a ballpark for this year's sales number for Powertrain/Drivetrain.
Well, I mean, you have to take the content per vehicle, which will be beefed -- has been beefed up based on all the stuff that has been launching and consider the higher content per vehicle as well lined up with production growth. So it's not so simple as just taking last year's Powertrain number and adding $700 million to $800 million.
Okay. So put another way, you did $158 CPV in North America, $69 in Europe and $10 in Asia. So if I took that CPV, multiplied it by volumes and then added the $700 million to $800 million, does that make sense -- and obviously, took the give-backs, et cetera, away. Is that what you're driving at?
Yes.
Yes.
Yes.
Okay. Perfect. The second question, I just wanted to follow up on the steel question. The 60% coverage on the steel base, which sounds like it's mostly forgings, how much of your buy is that? Is it a very significant amount? Or are you basically a lot of really not steel stuff, a lot of iron castings? And obviously, you've got a lot of aluminum. So the steel number -- steel base, isn't -- that 60% coverage is on a small number?
It is on a smaller number. I mean, steel forgings are maybe 1/4 of our total buy, not sales of our total spend of somewhere on productive material around $2 billion, let's say. About 25% of it might be steel forgings. But not all of that is North America. Aluminum is probably another 1/4 or so. Cast iron is pretty big at, let's say, 20-ish percent. And then there's a little bit of straight steel that we'll buy for certain types of product. And then of course, we're buying steel for our Forging business, but again, most of that is in Europe, so that wouldn't be affected.
Right. Okay. And the forgings that you're talking about, they, call it, 1/4 of $2 billion, wouldn't a lot of that -- those forgings come from the U.S. originally? Or is it more of a Canada...
Yes, but not -- No, not necessarily, not necessarily because we've got a big business in Europe. So there's a lot of forgings there as well.
So where really forgings are coming from: Europe, U.S. and Asia, India. Those are where our Forging buy is.
So I'd say U.S.-purchased forgings, I mean, I'm ballpark-ing this a little bit, but it would be more like half that, like maybe $200 million. And then don't forget the forging cost is, I would say, only about 1/3 of it is actually the steel cost. So that's a smaller number again.
Right. Okay. So your -- 1/3 of 1/4, which only part of that is actually outside the U.S. is kind of how we should be thinking about the exposure? And then 60% coverage anyway?
Well, it's the steel surcharge that is covered, right? I mean, it's how do you -- how will the interpretation of a tariff play into that, it's called a steel surcharge. It gets covered. If it's not, then it doesn't get covered. And the other thing that is not known is are they going to try and implement this on a processing of a part. I mean, that's a completely different situation altogether that takes place.
But there's been no indication of that whatsoever. So I think the bottom line is, I mean, we've got a lot of business that's not North America. We've got a lot of business that's aluminum. We do have steel-based products. I mean, steel forging, but we're also buying some stampings and blanking and some powder metal parts. And so there's a chunk of business there, but it's not going to flow through at 100%. And we should be covered for at least 60% of it. So for the 40% that we'd be left with, maybe call it $20 million might be a ballpark, very rough back-of-the-envelope estimate. But to be clear, we're absolutely going to be going to our customer with the rest of that, too. This isn't a normal steel surcharge, small change. I mean, this is something pretty significant. And you can back that every single supplier is going to be heading into say, "Hey, this is not normal course, and we need to deal with this, which is where my concern comes from that the OEMs takes on all of this cost and have to pass it on to the consumer and the resultant impact on demand. I also think it's kind of ridiculous because what the President is doing is disadvantaging his own manufacturing companies. I mean, it's almost incenting you to manufacture outside of the United States and buy your raw materials outside of the United States and manufacture it outside of the United States because we're going to be massively cheaper. I mean, Skyjack, frankly, is going to have a big advantage.
Yes. That doesn't seem to be registering on him, unfortunately. But just a final comment...
Possibly to factual.
Just a final question on this. The cast iron part of it is, to your knowledge, is that caught up in all of this? Or is cast iron sufficiently different than...
No. No, it's not.
Should be.
No. And again, we got metal market adjustments on cast iron and things like that as well, so we're covered there.
Okay. Super. That's helpful. Just on the margin side by segment, you did 10% on Powertrain/Drivetrain last year and 14.5% on Industrial. Do you see any material moves, I guess, would be the MacDon effect on Industrial?
Yes. So Industrial will probably come up a bit based on MacDon because their levels are a little higher. But also because Skyjack should also improve just as they continued to ramp volumes on launching programs that will help them to create stronger margins as well. So we should see some positive impact for both of those. So that's where I was coming with that possible margin expansion next year. Powertrain/Driveline is looking pretty solid on the margin side. Again, possible expansion next year, just that we've got big launches this year and that will all starting to be settled out -- starting to settle out a little bit more next year. So that should have a little bit of a positive impact.
Okay. Super. That's very helpful. And then the last question I had. Industrial, you've been launching a lot of stuff at Skyjack for a lot of years, telehandlers, booms and stuff like that. Where are we now in terms of the maturity of these things? Because I've been driving a lot of growth and I'm just wondering how long can this greater-than-market growth go. I'm assuming most of it's coming from the new products.
Yes. I think there's a combination. If you look at -- you got to take it by product, Peter (sic) [ David ] so scissors, we're on...
David.
I'm sorry, David. Sorry. We're on a constant refresh on scissors. So that is a regular updated program. And right now, our rough terrains are that way. Booms, we're still in the midst of launching a couple more booms. And telehandlers, we're coming out with a 5,000 series as well. So those will run its course, and then you get them on a typical refresh that could be anywhere from 3 to 6 years, depending on the acceptance. And the other thing that's I think really, really great for Skyjack is telematics. In Q1, we've launched telematics out in the field. And we've had, I think, overwhelming success on preorders for the telematics. So that's a big plus there. And then the [ AMC ] step changes that are coming off the market like next year. And so that has to be refreshed updated for the standards for [ AMC ]. So it's a constant, I think, evolution. And then, of course, you bring in innovations like telematics and things like that to enhance the product line.
And David, just to expand a little bit, in regards to the product side, the new products that we're introducing on booms and telehandlers, we will continue to do that. We've got kind of a schedule that maps it out until 2020 where at that time, we should have sort of about 90% to 95% of the product range so in regards to the new products. But as Jim said, too, we're constantly refreshing the current product. And as industry sees needs, we're bringing out new product like the smaller manlift that we -- that came out a couple of years ago.
And I would just weigh in as well a couple of extra points. One, we're growing globally as well, and there's still huge opportunity for growth in Europe. We're, for sure, growing market share, but there's plenty of runway left for more market share growth in Europe and in Asia. And at the same time, the Asian market is starting to pick up. I mean, last year, total Asian market for scissor lift was 25,000. In Europe, it was 37,000. So it's not that far off on the scissors. Anyhow, the European market, I mean, they're way behind still on boom and telehandlers, but plenty of runway there. And one last point. Even in a mature product line like scissors, we grew market share last year. If I look at the last 12 months, we grew market share in our North American scissors, which was fantastic, considering we're the leader already, and we still grew market share in a very mature product. In fact, we grew market share in every product, in every region when I look at the last 12 months’ worth of data, which is something we're very proud of.
Your next question comes from the line of Todd Coupland from CIBC.
Just following up on the margin question in Powertrain/Driveline. So I get the potential little bit of overhang from launches in 2018. Which are the hot quarters this year in terms of the most active launch periods?
Well, probably more so kind of coming out of the gate, and then things will settle down later in the year.
And are you calling out how much of a headwind it will be in '18 on margins?
No. And to be clear, I'm not saying there's going to be a headwind. In fact, I think that we can maintain margin levels at about the level we were at last year for the full year.
Okay. And then move up a little bit in 2019 as those programs mature?
Correct.
Okay. And then just on the e-axle win. So great to see the potential volume there. How should we think about that folding into the business? What are the OEM plans for that? Will it be a year or 2 away? Or will we start to see some volumes in Asia right away?
No. The programs aren't starting till early 2020, and mature volume forecasted in around 2025.
Okay. So consistent with some of these larger EV adoption rates by the market research firms where we start to see that in the mid-20s. Okay. That's great.
Your next question comes from the line of Brian Morrison with TD Securities.
Just a clarification, Dale. It looks like the $1.81 on the front page is adjusted for the tax gain and the impact of the FX on the revaluation of balance sheet. Last year, it's not. And then you say it's 11.8% growth, which implies about $1.62 last year. So there's something more than the balance sheet revaluation last year's numbers. Because in your commentary last year, you took out $0.10 for the $8.8 million. I'm just wondering what the difference is there.
From memory, the only thing we adjusted last year was the balance sheet reval.
Okay. And then just following up on the Skyjack margin. I understand the product mix. Is there any chance you can quantify, I think the Industrial margin down about 100 basis points quarter-over-quarter. How much of that was FX? And how much was product mix?
FX was a bigger impact than the product mix is.
Okay. And then just one last follow-up question, the GF, the JV ramp. I think the facilities are near full capacity. When do you expect to be profitable there?
We're not full capacity. We've got one press on the floor with another one coming, I think, in about a month or 2, and we're starting production really at the end of this year.
Basically, we have the floor space allocated for programs at one but they have to launch first.
Yes. Yes.
There are no further questions at this time. I will turn the call back over to the presenters.
Okay. Thank you. Well, to conclude this evening, I'd like to leave you with 3 key messages as usual. First, we are very proud to have driven another quarter of double-digit normalized earnings growth of 12% despite soft markets to complete another record year in both sales and earnings. Second, we are thrilled to see double-digit content per vehicle growth in every market globally for our vehicle business and market share growth in every product globally for our Skyjack business. Market share growth in key and low-growth markets, and we are delivering on that in spades. Finally, we are very excited about our ability to continue to grow in the future in every type of vehicle with another record year in new business wins for 2017 and notably, our second major e-axle win. And of course, growth in new markets with our MacDon acquisition completed as well. Thanks very much, everyone, and have a great evening.
This concludes today's conference call. You may now disconnect.