Martinrea International Inc
TSX:MRE
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Martinrea International Inc
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Good morning, ladies and gentlemen. Welcome to the Martinrea International Second Quarter Results Conference Call for 2018. [Operator Instructions] Please be advised that this call is being recorded.I would now like to turn the conference over to Mr. Rob Wildeboer, Executive Chairman with Martinrea International. Please proceed, sir.
Good morning, everyone. Thank you for joining us today. We always look forward to talking with our shareholders, and we hope to inform you well and answer your questions. We also note that we have many other stakeholders, including employees on the call, and our remarks are addressed to our people as well, as we disseminate our financial results and commentary through our network. With me this morning are Pat D'Eramo, Martinrea CEO & President; and our CFO, Fred Di Tosto. Today, we will be discussing Martinrea's results for the quarter ended June 30, 2018. First Pat, then Fred and I will make some comments and then we'll open the call for questions and we will endeavor to answer them.Our press release with key financial information, discussed on a fairly detailed basis, has been released and gives a great summary of Q2 results and our views. As always, we want you to see how we see the world.As for our usual disclaimer, I refer you to the disclaimers in our press release and filed documents. We will do our best to give you a full and frank assessment of where we see our company, our industry and our place in it. Furthermore, we had great quarter. We're having a great year and are well positioned for the future.And now here we Pat.
Thanks Rob. Good morning all. As you read in our press release, our good story continues with Q2 adjusted net earnings per share coming in at $0.64, at the midpoint of our quarterly earnings guidance, despite some volume headwinds during the quarter. Our adjusted operating income margin came in at 8.9%, the second quarter, representing continued progress towards our new margin target we set up 9% percent for 2020. Q2 makes it 15 consecutive quarters of record year-over-year adjusted net earnings performance. This was on sales of $922 million. Revenues were lower than projected, impacted in part, by the magnesium fire at Meridian that temporarily affected a number of customers. Sales losses from the fire are expected to be made up over the course of 2018. We also, as mentioned previously, continue to see pressure on some passenger car sales, including vehicle supported by our fluids plant in China.The first half of 2018 has been supportive of our plan, as we expect this to continue in the second half of Q3 with adjusted EPS projected to be between $0.43 and $0.47. This would be a record Q3. We expect Q3 adjusted operating income margin to be up year-over-year. Production sales of Q3 '18 we estimate to be at $790 million to $830 million.Our third quarter tends to be our weakest due to seasonality in the business. Also, this year, we have a lot of launch activity during the back half of the year. New business wins for Q2, as noted in our press release, came in at approximately $240 million, representing annualized revenue at peak volume, a continued great growth story for the future.Wins include $35 million of new fluids business with Ford and General Motors. We are also very pleased to announce the addition of $50 million in new metallics business on the next generation Nissan Pathfinder in 2 of our Southern U.S. plants. Additionally, we won $140 million of new steel and metal forming work for FCA, the next generation Grand Cherokee, bringing our metallic new business wins to just under $200 million for the quarter. Lastly, we picked up another $15 million in aluminum work in our Spain facility from JLR just this past week.Including our Q1 announcement of $300 million in new business, this brings us to over a $0.5 billion in new organic business so far this year. This $540 million in new business wins is over a wide range of global customers further spreading our base, as we discussed a few years ago in our Annual General Meeting. This clearly demonstrates customer confidence and the fact that our product offerings are the ones customers are looking for. There is a big need for our lightweight solutions regardless of customer or the propulsion system of the vehicle.As a reminder, we continue to launch new products throughout 2018 that are weighted more toward the back half, which will increase our launch related activity and cost in the latter part of the year. Some of our large launches include the GM Silverado affecting 5 of our facilities. This launch has just begun in 3 of our U.S. plants, Jonesville, Hopkinsville and BCA. And will continue to ramp up joined by our Silao and Saltillo plants in Mexico early next year.These gen 2 lines are built on the philosophy of high frequency delivery systems, similar to our first generation lines at the Oakville plant in Canada. We are continuing that thinking way with more flexibility, speed and even tighter spacing. I reviewed the lines some weeks ago in the Jonesville facility and I'm very pleased with how the lines are laid out and the improved efficiency of the entire plant, not only limited to the new lines.In our aluminum business the JLR I6 engine block, Ford Maverick engine block and the 4 cylinder Volvo engine block in Europe, along with the JLR aluminum knuckles and control arms in China are launching currently and continue to ramp up as planned. And in Mexico, our new BMW subframe as well as a number of Daimler metal assemblies in our Silao plant continue on schedule as well.We had our first product focused tech show at Toyota at their North American Engineering headquarters in Michigan in July. The demonstrations and interactions between the engineers of both companies was tremendous. As you recall, we won our first Toyota business this past year. As we move forward, we are becoming more focused on how to better serve our customer. In the past, we intended to sell out to our customers based on the processes we employ.What we are learning with examples like the hybrid subframe, is that we must continue to focus on our product and engineering systems, regardless of the process. We're learning as we go. And I think you can expect to see more from Martinrea on this front in the future.Operationally, I continue to be pleased with our progress across the businesses. Our metallics product group has more than doubled the size of its lean team. And the team member engagement in lean activity continues to grow. Our fluids products group's pace of improvement has taken root and efficiency gains have offset some of the lower sales in China and on certain other platforms due to the magnesium fire related supplier shutdowns in Q2.Martinrea Honsel has made strong strides in key plants, most notably our Brazil facility. Our profitability is now within reach in 2018, assuming that the market improvements in South America continue to recover. Aluminum group has also set the tone for quality and lowering customer PPMs to a single digit level.Our FMG group has completed its move to its new location in Vaughan, Canada from its previous Lakeshore location where they continued uninterrupted production of bus frames for ADL and other assemblies and weldments for companies like John Deere, Bombardier, K MASS and Clark along with a number of other industrial products. We will hold our new facility grand opening in just a few weeks.As a result of our operational improvements, we are now opening capacity, while maintaining a same level of production volume. This is due to a combination of our lean activities, improved maintenance practices and engaging our people in problem solving. The good news with improving operating capacity is our ability to add accretive business at a lower CapEx rate.Looking into some of our facilities as an example, we have presses that ran on 3 shifts and weekends, they are now making the same amount of hits or product on fewer shifts and eliminating weekends. This is true on a number of our lines beyond presses in a number of our plants. This improves our cost structure, our capacity and our space utilization.Additional space is a function of operational improvement as well. When you operate better you can reduce in-process stock, allowing for more space for new equipment such as future lines. As a side benefit, this is resulting in reducing warehouse space.By the end of 2018, between our fluids and metallics business units, we will have eliminated 50% of our external warehouses by reducing stock and creating plant space. This allows us to shutdown 10 out of 20 warehouses. Of the remaining 10, 3 are dedicated to service tools and equipment targeted to be redeployed.Recently my staff participated in a floor based problem solving session together. You heard me say learn by doing a number of times and you'll likely hear me say it a number of times more going forward. That being said, I'll add a new twist that I call lead by doing. So we have the good fortune of having a number of lean experts peppered in the organization. It's also important that top leadership clearly understand lean, how to drive it and just as important, how our unique deployment process is working.So I feel it's important that we practice what we preach to better understand the effectiveness of what we are doing to continually improve. Whether Lead Counsel, Head of Sales, CFO, CIO or Head of Human Resources, each of our top leaders are participating annually in lean activity, not just to learn, but also to find unique ways to apply what they have learned to their function as well as to the manufacturing operations.We recently celebrated the grand opening of our new tech center in Auburn Hills, Michigan where over 400 customers, suppliers and government officials attended, including Michigan's Governor Snyder. We're pleased with this progress in the engineering activity as well as the R&D and test facility improvements.Lastly, we've stated many times over the past 3 years we have a 4 point mission to improve customer satisfaction, employee security, investor performance and improve the communities where we work. More specifically, our mission is to make people's lives better by delivering outstanding quality products and services to our customers, provide meaningful opportunity, job satisfaction and job security to our people through competitiveness and prudent growth, provide superior long term investment returns to our stakeholders and continue to be positive contributors to our communities as good corporate citizens.In that light, we are announcing that Martinrea is now coordinating our charitable giving activity into a single fund of making people's lives better. This effort entails promoting our charitable efforts under one Martinrea banner for financial gifts and to better promote employee volunteerism. So giving and volunteering is not new for us, promoting it as one company, working together will be. We believe that promoting, making people's lives better under one banner will grow their efforts and improve the communities where we live and work.Progress at Martinrea is accelerating and I continue to enjoy my part in supporting the growth and improvements. As always, very special things goes out to the Martinrea team for their continued great efforts and activity.And with that, I'll pass it to Fred.
Thanks, Pat, and good morning. As Pat has already noted, the second quarter was another great quarter, our best second quarter ever from adjusted EPS and EBITDA perspective. As our press release highlights, Q2 financial results made its 15 consecutive quarters of the year-over-year improved record financial performance. Facing this recent track record it is clear that our objectives are being achieved.And the Martinrea 2.0 strategy had been the catalyst, the team is rallying around Martinrea 2.0 and the consistently strong financial results only serve to seed the moment as it continues to gain momentum. The goal is simple, we want to be world class in everything we do and will not stop until we are.Second quarter sales, excluding approximately $65 million in tooling sales, were $857 million, just below our previously announced sales guidance range of $860 million to $900 million. As Pat already noted, the fire at Meridian Technologies had an impact on volumes during the quarter, disrupting the supply chain and production levels of various vehicle platforms. Further, we experienced lower than expected production volumes of specific light vehicle platforms, including the Ford Escape, Ford Fusion and certain Jaguar/Land-Rover platforms in Europe.On a year-over-year basis, overall, sales for the second quarter were slightly lower by $51 million or 5.2%, with approximately 40% of the year-over-year decrease attributable to negative foreign exchange translation. In addition, production volumes on certain platforms were down year-over-year, including Ford Escape, Ford Fusion and GM pick-up truck line up as that platform moves with next generation T1XX model, all this in North America. And in China, the Ford Mondeo platform was down year-over-year, impacting production levels in our fluids facility there.Further, Q2 was our third quarter with a full impact of the suspension module we assembled for GM moving to a VAA pricing model. The impact to sales from this contract change will start being offset in the back half of the year with new program launches as Pat outlined in his remarks. We continue to expect total sales in 2018 to be flattish year-over-year with overall top line growth expected to start up again in 2019. I'll refer you to our Q2 MD&A for a full account of the year-over-year variances.Despite the sales headwinds in the quarter, our Q2 adjusted net earnings per share $0.64, on a basic and diluted basis, was within the range of published earnings guidance of $0.62 to $0.66, due generally to better than expected performance in a number of our plants. The team did a great job of reacting to the volume headwinds during the quarter and delivering on our quarterly forecasts through various operational improvements. $0.64 represents a record second quarter for us, up very nicely year-over-year.We did have one small adjustment to earnings during the quarter related to a gain on the warrants we hold on our NanoXplore investment. This is further explained in our Q2 MD&A. Margins for the quarter were also up significantly year-over-year and quarter-over-quarter for that matter. Adjusted operating income margin for the quarter increased year-over-year to 8.9% from 6.9% in Q2 '17 and quarter-over-quarter from 8.1% in Q1 '18, some very healthy increases.On a trailing 12 month basis, our overall adjusted operating income margins increased to 7.6% from 7.1% at the end of the previous quarter. Operational excellence activity, a cornerstone of our Martinrea 2.0 strategy and general sales mix, including new and replacement work that launched an all program that ended production during our subsequent to the second quarter of '17, continued to contribute to the margin expansion. Based on this positive margin trend, it is absolutely clear that we are getting stronger in a lot of places.In terms of the balance sheet, you'll recall that we met our net debt to adjusted EBITDA target of 1.5x, ending '17 at 1.45x. And although we do not have a specific leverage ratio target in mind at the current time, a positive trend in this area continues. Net debt to adjusted EBITDA decreased yet again in Q2, ending the quarter 1.36x. We are very pleased with the progress in this area. It is clear we have a strong balance sheet for this industry and the ability to generate cash. And we intend to maintain a strong balance sheet over time.In that regard, on July 23, we updated our lending arrangement with our banking syndicate, comprised of now 10 leading national and international banks. We routinely work with them on our facilities to ensure that we were reflecting market conditions. In this go around, we extended the maturities of facility by 2 years to July 2022 and changed the number of provisions to our benefit, all at market pricing consistent with the previous facility.These benefits include a move to an unsecured credit structure and increasing our leverage covenant threshold, increased availability in the bank lines to fund our growth if needed, increased flexibility on asset base financing and an increase accordion feature. We are particularly proud of our transition to an unsecured credit structure which clearly demonstrates the confidence our lenders have in us.I want to stress that our lenders have come to know us very well. They see our budgets and they see that we meet them. They see that we meet our deliverables. They're diligent to us extensively. They have been there for us from the beginning. They have long viewed and treated our lending syndicate as partners and we have a great relationship with them. We thank them for their tremendous support.And you can tell, things are coming together quite nicely. We continue to consistently deliver strong operational and financial performance. Martinrea 2.0 continues to take hold of the organization and we believe that the best is still yet to come. Thank you. And I'll turn it back over to Rob.
Thanks, Fred. There are a few topics that I would like to touch on briefly. As you can see from our press releases and past discussion, we won a lot of new business recently. With over $0.5 billion in new product awards announced now in the past 3 or so months, that's a lot of organic growth. Some of it is on new models, some of it is conquest business. Of course, we continue to win repeat business too.That implies a few things. First, our customers are rewarding us with new work because of our product offering and performance, and quality, performance, delivery and competitiveness. Second, in terms of capital allocation, investments we've been making in our business have been bearing fruit. And further, we will continue to invest in our own business.There's clearly tremendous value to it. We gave a revenue target of over $4 billion in 2022 to you and with the product wins, assuming industry volumes hold, that target is clearly achievable. But it is also increasingly clear that we're -- that there will be more organic growth going forward. With top line growth given our discipline on financial return hurdle rates, our bottom line will grow too.Note that organic growth is over an increasingly broad range of customers, over many geographies, especially outside Canada and over a broad range of vehicles, internal combustion, electric hybrid, opportunities abound.Many people ask us about M&A opportunities and we see a lot, especially in the automotive space, in general, these days. We are clearly not averse to M&A activity, after all much of our growth to build our footprint to get a presence throughout North America and in Europe and to broaden our product portfolio involved acquisitions. We applied a build or buy scenario. And where it was cheaper and faster to buy than build, we did so. Especially, given the fact there were cheap assets available, although with a lot of fixing to do. We have been fixing very well as our margin improvement attest.Today, we are certainly willing to look at opportunities, but we feel it is very important to be disciplined and to buy prudently. Our perspective is that a lot of assets we see are relatively expensive, fueled, I think, in part by the Gods of private equity money out there looking for a financial home. There will be a lot of suboptimal investments in that environment, we believe, so we will be disciplined.At the same time, I note, that we have invested in and will invest in technologies or products that support our business. We invested in graphene company as we seek to use graphene to enhance our product offerings. We have advanced in robotics, including artificial intelligence in product lines. One of the best ways to improve productivity is the use of ICT in our operations which we have been doing.In terms of our debt levels, we have a strong balance sheet. Last week, we saw an industry presentation that showed we have one of the strongest balance sheets internationally in our product space. This is helpful, not just from a funding perspective, but our customers frankly like companies with financial strength. They know we are there for the long term. Believe me, this industry has long memories and customers still don't like over leveraged suppliers.Finally, the question arises about distributions to shareholders in one form or another. Earlier this year, we announced an increased dividend, we since paid our first dividend at the higher level. It expresses our confidence in many shareholders who are appreciative. On the last call, we also noted that a frequent question we received was whether we would consider some share repurchases in the future given the continued strengthening of our balance sheet and prospects of stronger cash flow, and we said, yes, of course.In that vein, we've just approved as board, the filing of materials for a normal-course issuer bid, which we will announce formally shortly. Frankly, as stated at our Annual Meeting, our stock price, while increasing substantially over the past several years, has faced some downward pressure this year, largely we believe because of NAFTA and trade concerns and how they would affect automotive volumes generally and suppliers -- especially Canadian suppliers, particularly. More on NAFTA in a minute.While we believe our share price is undervalued at these levels and subject to the points on capital allocation just noted, we will look at buying back some shares in the next year, subject to those conditions and market conditions. I note, we've had lots of insider buying recently and over the past 2 years, supported by our ESOP plan. Insider sales, including some by me occur sometimes because of the expiring stock options. Make no mistake, our objective is to build this company prudently and profitably and to increase value over time, which we have been doing.Great companies adapt to changing trends and environments. AT Martinrea, we are playing a long game. Pat and Fred talked to you about the trends in the industry and our approaches to them as we focus on the long game. We're doing the same today, as we look at the trade environment, NAFTA, globalization and so forth.And looking at our stock price, it seems pretty clear to me that our valuation has been negatively impacted recently and probably over the past 2 years by what I will call the protectionist sentiments in the U.S., and indeed, the potential ramifications of a trade dispute or a trade war. After our Q1 release with regular results, our shares hit a 10 year high and there has been some pressure since because of steel and aluminum tariffs and stalled NAFTA negotiations.Let's go back for a minute. As NAFTA discussions began, I believe we've stated people should take a valium before coming to premature conclusions. The NAFTA discussion would be a long drawn out negotiation we said and there would be twists and turns along the way. That certainly has been the case.From a purely Martinrea perspective, we're a global company, as regards NAFTA, I would like to emphasize that we have a terrific North American footprint with approximately half our North American revenues coming from the U.S. and the other half are Mexico and Canada. Our total revenues from Canada is now well under 20%.Our product wins just announced, show our U.S. footprint will grow. We have almost 5,000 employees in the U.S., double that of Canada and about the same in Mexico as the U.S. We are a U.S. supplier, a Canadian supplier and a Mexican supplier. And for NAFTA purposes, a key point for us is that 90% plus of our products or more are shipped intra country from our plant to a customer plant in the same country. We located near our customers. In that sense, on a relative basis, we are as well positioned as any supplier, Canadian, Mexican or U.S. for a NAFTA disruption. Indeed we may have a good competitive advantage vis-à-vis other suppliers.As for NAFTA changes re-auto it is clear there will be higher rules of origin numbers, that's a good thing for us and for North American suppliers, we believe. We think it is clear there will be a minimum wage jurisdiction component for vehicles. Although the details and impact of that are not yet finalized. If our customers can live with that, so can we. We are confident there will be a NAFTA or NAFTA like arrangement assembled together and that's a good thing.I don't think tariffs on Canadian assembled vehicles, for example, with over 50% of their parts made in the U.S. already are likely. We believe we're close on the auto file on NAFTA and I think a deal will get done potentially quite soon. I hope it does and at sometimes almost hysterical prognostications can end and we get back on with business.I'd like to point out business overall is good, volumes are good, the U.S. economy is rolling pretty well. Frankly, in one respect, I'd rather have a robust economy with good sales volumes and some tariff noise, then a weak economy with lower volumes and no tariffs.Now let's talk about steel and aluminum tariffs. Once again, the impact is manageable from our perspective given our footprint. Most of our aluminum and steel are purchased intra country. Most of our steel is on steel resale programs where we do not have exposure. Over time, for any product that crosses borders, we will adjust our supply chains. At the same time, there is some cost to addressing the issues in terms of some transition costs, the administrative costs and burden of dealing with a changing landscape. We're also working closely with governments to ensure any measures taken do not overly adversely impact our industry. My view is that, if and when NAFTA gets sorted out, the steel and aluminum tariff issue in North America will get sorted out too.To be clear, while there are costs on the steel and aluminum tariffs, our margin and revenue objectives for the future remain firmly in place. In terms of broader international tariffs, I think there distinct possibility between U.S. and China for sure and between U.S. and the E.U. more likely than NAFTA. This will likely have little impact on us overall, except perhaps in some tooling costs.The reality for us, we generally produce in North America for North America, in China for China, in Europe for Europe. We're okay with that. Indeed, North American tariffs on autos coming to North America can, in fact, increase production in North America, which currently significantly lag sales and we're here to provide products.As we've stated all along, things will get sorted out at some point, but it will be messy for a while, as it has been. As Winston Churchill once supposedly said, you can always count on Americans to do the right thing, after they've tried everything else. As for Martinrea we'll adapt as we have always done. Our footprint has as well poised.One further item, as noted in the other press release we released yesterday and that is that we welcome David Schoch to our board of directors. He is a fabulous addition to our board. He is a recognized automotive leader with an outstanding record of transformation and growth, who has served in global business and finance leadership positions at Ford Motor Company in Asia Pacific, Europe, Africa, Central South America and North America over a 40-year career. He was most recently Group Vice President and President, Asia Pacific and Chairman and Chief Executive Officer for China. He retired from Ford in late 2017.Operationally, Dave, has built and expanded assembly plants and has grown businesses all over the world, has overseen joint venture operations in many countries, has overseen restructurings and has led businesses with revenues of up to $30 billion and responsible for over 20,000 employees. Dave has vast automotive, international, operational and financial experience. We're confident he will add tremendous value to our board. He's been a leader in all the markets in which we operate. His great experience in corporate growth and developing corporate culture and his guiding values are in line with our vision, mission and principles. We welcome Dave to our board. We've been talking to Dave to come on board for a while, but had to wait for him to take care of a few things before he was free of commitments.The company remains committed to effective governance that results in good corporate performance. Now it's time for questions. I see we have shareholders, analysts, and competitors on the phone, so we may have to be a little careful with our answers, but we will answer what we can. Thank you all for calling.
[Operator Instructions] Our first question is from Mark Neville with Scotiabank.
Maybe just first on the buyback, just maybe you'll sort of align us. I'm just curious, is there something where you're little more opportunistic if the price drops, I mean you're in the market or a little something a little more systematic or automatic, maybe keep leverage at a certain ratio. I'm just curious to see your thought process around this at this point.
A bit of both. I think you've outlined the different aspects. We think our stock price is depressed for the reasons we talked about in the call. We will not have an automatic repurchase program that runs all the time. But I imagine that when your file records this, we intend to buy back some stock and we'll look at it. I think today it's a good buy. I think if the price doubles in the next 2 months then I don't think it's as a good buy.
Got it. I guess the next question, I guess a lot of business wins, a lot of growth, so when thinking about CapEx, I guess looking back to past few years it was probably closer to 5% or 6% sales. I think now it's closer to 7% or 8%. So I'm just sort of curious, on a go forward basis, sort of where you think it falls?
Our thinking in that hasn't necessarily changed and we were anticipating some growth in some of the commentary we've given in past as it relates to CapEx. So $300 million give or take this year depending on time is still our expectation, similar levels next year. And as we said in the past, we see that leveling off. So as our revenue increases over the next number of years, so it's given some of this organic growth, the percentages will come back in line.
Okay. Maybe just one last one then. Just on the Meridian fire, I don't know if you've quantified the amount in the quarter. And I guess as follow up to that, I'm just curious if you're seeing any -- the business starting to catch up yet.
In terms of the impact, it's hard to unequivocally quantify, given the fact that some of it -- was kind of made up later in the quarter and still to be made up over the course of the year. So the quarter, our estimate is around $10 million impact on revenue.
Okay, that sounds like you're starting to catch up on that.
Yes, yes. That's the expectation.
Our next question is from Michael Glen with Macquarie.
You touched on the new business once. Can you maybe just give some insight into the margin profile with how those new businesses might come in?
So I won't get too specific on that clearly. But we've talked a lot about our hurdle rate thinking on the Martinrea 2.0. So we are being disciplined and prudent in that respect. So we expect those programs that we've announced to meet the minimum thresholds that we've established under Martinrea 2.0 hurdle rate.
Okay, and just to get some clarification. When do we really start to see this start to roll through top line?
So our guidance that we've given is essentially intact. I mean, we expect to be flattish in nature, year-over-year this year as we highlighted in opening remarks. We expect to see growth starting in 2019 and then 2020 we've established that the target is to be north of $4 billion. And then as you can, see we're quoting now for the '21. We're off to good start there and we expect the growth to continue thereafter as well.
Okay. And then just on a casual statement. Year-to-date your income tax paid is quite a bit higher than the tax line on the actual income statement itself. Is there some timing going on there? Should that slowdown in the back half of the year?
Yes, there is some timing definitely in there. A lot of cash payments come on the first half year for the prior year, so there's an element of that in the back half which should kind of taper off.
Okay, are you able to give an idea like for the full year what that income tax paid number on the cash flow statement should look like?
Yes.
Should it match roughly on the tax line? Should it roughly match?
The tax expense line would be somewhat lower, just given the fact that we're utilizing losses in the U.S. So I expect probably the cash tax to be about $20 million give or take higher for the year.
Our next question is from Todd Coupland with CIBC.
I had 2 questions. One on the fire and second on trade. First on the fire, I mean just philosophically, I mean it's seems like the North American supply chain was pretty fragile in terms of the ripple effect of that fire. I'd be interested in your thoughts on that and if there any resulting likely changes to the supply chain, because it basically had pretty hard hits certainly to all the auto suppliers. I'm watching on others as well. So I'd be interested in your thoughts on that.
I think probably the answer is -- easy answer is there's not a lot of people in the magnesium business. It's a ultra-light material -- I call it ultra-light material. It's used very specifically in areas to -- it's very strong and it's also very light and it's in [ available ] in certain states as the supplier found out. So it's very difficult to move work to another supplier, whereas another -- other supply chains such as stampings or aluminum or what have you, it's a bit easier to find capacity. That isn't something that so few people are in. And also in this case, there is tool damage and things like that a bad nature that take a little longer to repair. Frankly, given the -- in my view, given what happened, I think that the OEMs did an outstanding job with Meridian getting it back up as quickly as they did. I was frankly flabbergast that they were able to do it as quickly as they were. So an outstanding effort by the OEM's in Meridian. My hat's off to them for their recovery, frankly.
Okay. And then the second question on trade. So Rob I think your point on deal seems to be coming soon and there's going to be a minimum wage component in Mexico. Could you just sort of talk through the mechanics of what that might look like and how it would impact you in pass-throughs et cetera, any color on that would be helpful.
Yes. I'll be a little confidential, because we as a company have basically been working confidentially with people in 3 levels of government as these things go along, and a lot of the discussions are verbal. But with respect to the -- and I know it's kind of -- talk of what's kind of been discussed publicly. With respect to the wage component, the discussion parameters are that 40% to 45% or so of the manufacturing of the vehicle in Mexico should be done, but with a high wage component which is $16 an hour. It's a number that's been bandied about publicly and I think there's probably some legs to that. And so the discussion around that is, when you get 40% to 45%, how do you calculate it in connection with an assembled vehicle? And particularly, when you've got R&D and head office expenses, for example, occurring in the United States and in Canada with respect to vehicles that are assembled in Mexico. And also how do you go back and look to the supply chain? I think that it's becoming relatively clear that R&D expenses and so forth will be considered, which I think is, A, correct. Lot of technology developed in Detroit, for example, is in assembled vehicles in Mexico. And B, I think that the levels that they're working at and there's a lot of discussions with the OEMs themselves, are basically going to reflect the reality of where we're at today. Nobody wants to agree to something and certainly Mexico doesn't want to agree to something that's going to close a number of assembly plants. So they're looking at grandfathering and so forth. So I think that's the nature of the discussions. I think the discussions between Mexico and the U.S. on these very issues and for the lot of OEM involved are actually quite valuable. I think from a Canadian perspective, I think we're fine with the wage component, because quite frankly we are a high wage jurisdiction in the context so that might actually be good for some Canadian assembly plants. But I think that we're getting relatively close on the auto file. And from a supplier perspective, such as our perspective, and I would put other suppliers in there. We will continue to locate our plants near where assembly plants are. And so what we'd like to see, obviously, is the strong North American footprint that we see in the OEMs and that includes Canada, the U.S., but also Mexico continues. And I do think that -- and this is true of everybody, nobody wants to hurt the North American automotive industry, as a whole. And I think that we're getting to the stage where, as I said, a tripartite deal or modernized NAFTA or NAFTA Lite or whether it's done on a couple bilateral agreements, we don't really care, because at the end of the day there is a pretty good consensus that the automotive industry is pretty important and everyone's looking for a win, win, win and I think that we're going to see something. And in terms of speculation on some of the other things involving NAFTA, that's not necessarily our industry. But you see that as much as we do and I think that ultimately we're going to get a deal and I'm hoping it's pretty soon.
So Rob, just playing that out. So if it goes from $4, $5 or whatever the number is, up some. Is there a period where you would have to absorb that or does that just get folded into future contracts, is that what you're saying?
Yes, I think the content requirement that we're talking about high wage jurisdictions is focused on the OEMs, it's not on the supply base. And the issue is how do you calculate it in the overall. Interesting thing is that, there are a ton or parts in Mexico that are produced in United States, particularly at the Tier 2 and Tier 3 level. And the reality is how to calculate all that stuff. But from our perspective, our understanding is the focus on the wage discussion is at the OEM level. In other words, this much of a vehicle has to be from high wage jurisdictions and this much of a vehicle can be from lower wage jurisdictions. The numbers they're talking about -- as I said in my remarks, if the OEMs are okay with that and they've looked at their supply chains and everything, and I really believe that there is no OEM that's going to agree to something that says tomorrow I've got to close this plant in this location.
Okay. That's helpful. Just one last question on trade. So some of the other suppliers that actually called out a dollar impact amount, you didn't do that. So you are essentially saying it's not materially and you are continuing to be on track to margin goals.
Yes, I'm always sensitivity with the -- sensitive with the word material. I would say it's not material, I would say it's not significant, but I will turn...
Yes. I mean, the impact to us is fairly negligible as we said in the past. We've baked in a certain amount in our Q3 forecast. We are actively looking at mitigating some of the costs, but we are anticipating for Q3 an impact of somewhere between $1 million to $2 million, so annualized $4 million to $8 million. So on the grand scheme of things something that's manageable and we believe we'd be able to reduce the impact going forward with some mitigation plans.
Our next question is from Ben Jekic with GMP Securities.
I just have one question maybe for Fred. Just in terms of 2019, my sense is so you're going to get a lot of launch costs in the bottom half of 2018 and 2019 should start or should be stronger. Can you just walk me through the timing through quarters? Is -- one, is it going to be linear throughout the year or kind of more in the second half for 2019, how should it look?
So we always launch products. So I mean, we're always subject to the launch related costs at any given time. I would say the back of this year it's a bit abnormal given some large packages are coming online, so the T1XX for GM, U.S. leg is launching currently and the Mexican leg is scheduled to launch early next year. That's a big package for us, $200 million of gross business. So in those type of situations these launch related costs spike a bit, so which is the reason why we've kind of tempered the guidance for the back half of the year. The other big package coming online is the Ford Maverick engine block, it's currently ramping up. That will continue to ramp up for the next 6 months to 9 months give or take. So I would say the next 2 to 3 quarters we will probably see some heavy launch costs and then '19 will probably normalize.
Our next question is from Peter Sklar with BMO Capital Markets.
Pat, during your discussion you've talked about the new sales approach of the company where rather than strictly focusing on your manufacturing abilities -- I wasn't quite clear what you were saying. But it seemed that you're going to pursue R&D in new processing areas, is that correct?
Yes, maybe the easy way to explain it is -- and we've talked a lot about this hybrid subframe that we finally sold some last quarter, quite a few actually. We learned that when we started -- in the past we've always sold by business unit, steel for steel, aluminum for aluminum, fluids for fluids. And this experience of where we used 2 different business units to combine their efforts into 1 product, we learned a tremendous amount about how to get that done better and the problems that we had to face in crossing businesses so to speak. And the recognition that it's about the product became very clear, it's in the customers' eyes. They don't care which plant it comes from or which business unit it comes from. They care about the product. And so it was a good lesson learnt for us. And so we're thinking about our approach commercially and what things we need to do to capitalize on this, because we foresee, as OEMs capital cost is shifting toward other things, autonomy and the EV and all these new expenses, but the opportunity for suppliers is going to be greater in providing systems, providing more engineered solutions with higher content. So we're studying right now, how do we organize ourselves such that we can get in front of this thing and be one of the better providers. Especially, given the fact, if you look at our footprint, we're very balanced between steel and aluminum, which is a unique position compared to the supply chain. Most are either heavy in one or the other, either they are heavy in aluminum and not so much steel and -- or they are heavy in spiel and not so much in aluminum. Where we have the ability to provide products with a really -- a really good mix working with the OEMs. So we see a lot of opportunity. My message was, we are studying it, there's more to come on this and I think even prior to the end of the year we will have some ideas about how we'll go forward with it. We're pretty excited about the opportunity frankly.
And as the company there's a lot of companies that -- there's some metallic work, aluminum work and there's some light weighting. We are a company that well over half of our business is in the light weighting space, which is one of the great trends in the auto business. People talk about electrification, people talk about driverless, people talk about light weighting, and that is something that we're not quite a pure play company. But we like the areas that we are in, because our light weight solutions are going to apply no matter how the vehicle is propelled, they're going to apply not matter whether it's driverless, whether it's shared or whatever. And it's a tremendous place to be in and that's basically one of the core focuses of our company. We're also very involved in propulsion systems. We think that there's going to be a lot of fluid product available for that in regular gas lines and brake lines. But also in all the stuff we're seeing on electrification, they're going to need coolant lines and that's right down our alley because of our expertise in fluid. So in the context of trend lines in automotive a lot of people spend a lot of time on that stuff. We are in one of the best trend lines for automotive. And in that sense a lot of other companies that do it are on a lot of other lines. And if you take a look at electrification and driverless those are 2 areas where I think there's going to be a lot of skeletons along the path as you go, there will be some winners, but there's going to be a lot of people that spend a lot of capital that don't get it back. And they're going to be picked up cheap at some point by the winners.
Okay. And then Pat, in your presentation earlier in the call, you also talked about different types of equipment that you're installing in your U.S. stamping plants for some of these new programs, wasn't sure if this -- were these like next generation transfer lines or automation, could you just elaborate?
Did you recall, when you were at our Alfield plant you saw our first generation of weld lines where we basically inverted the way we do things, high frequency, delivery in order to get more out of our people relative to margin, so we can take people in or take people out, put them in based on volumes, do quick tool changes, make the same product in a lot less space. That was a first generation line, I talk then about. We have now lining second generation coming quickly, but there's a third generation already on the table. And this is the second generation lines that we're putting in to the T1XX. Our first third generation line will actually be about in about a year from now. So it's just building on that same philosophy of high frequency delivery and flexible welding.
Thank you.
[Operator Instructions] Our next question is from David Ocampo with Cormark Securities.
My question is on the European segment. Obviously, some strong growth in the quarter year-over-year with margins improving and this is despite some cost in Germany. I was just wondering how we should think about margin in your segment going forward and perhaps even if you can quantify the cost?
Yes. So the European segment margin was up year-over-year as you noted, volumes are up, so we're getting a positive contribution from that. As we've noted in the past, we spend a lot of time restructuring that operation, rightsizing the workforce and the cost structure. And once we got there we were able to win quite a bit of work. So that business now is ramping up, executing on a backlog of business. And as it continues to do so, you should expect to see the margin profile increase with it. Again, you have some volatility quarter-over-quarter just given launch related costs and so forth. But in the long term, our European segment is expected to perform well for us. And again, I go back to my remarks earlier, we have strict Martinrea 2.0 hurdle rates and we apply those hurdle rates to all our businesses equally.
Thank you.
Thank you. There are no further registered at this time I would like the meeting back over to you Mr. Wildeboer.
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