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 Third 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 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's CEO and President; and our Chief Financial Officer, Fred Di Tosto. Today, we will be discussing Martinrea's results for the quarter ended September 30, 2018. First, Pat, then Fred and then I will make some comments, and then we will 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 Q3 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 a great quarter. We're having a great year and we are well positioned for the future. And now here's Pat.
Thanks, Rob. Good morning all. As you read in our press release, our Q3 adjusted net earnings per share came in at $0.43, within our guidance despite a $2 million FX loss and some volume headwinds. We also have some tariff effects in the quarter, which we believe will be temporary in nature. Our adjusted operating income margin came in at 6.9% for the third quarter, up nicely year-over-year from 6.2% last year. We're now at 7.8% for the last 12 months, representing continued progress towards our new annual margin target of 8% for 2019 and 9% for 2020. Q3 results now make it 16 consecutive quarters of year-over-year improved record adjusted results. That's 4 years running by my math.Production sales came in at $803 million, at the lower end of our sales guidance range. We continue to see pressure on some passenger car sales, including European vehicles, which were lower than expected. CUV, SUV and truck sales remained strong. And fortunately, as you know, our portfolio is weighted toward these vehicles. Q4 adjusted EPS is projected to be between $0.49 and $0.53, reflective of a higher year-over-year interest cost, tariffs and launch activity. Notwithstanding, we expect Q4 to be another great quarter from an earnings and margin perspective, closing out another record year. Production sales for Q4 '18 we estimate will be between $820 million and $860 million. The third and fourth quarter tends to be lower than the first half, and we expect to see some inventory adjustments prior to the holidays. This year, we have a lot of launch activity during the back half of the year, which will weigh on our margins slightly. So far, launch costs have been within our plan. New business wins for Q3, as noted in our press release, came in at around $40 million, representing annualized revenue at peak volume, continuing our organic growth story for the future. Along with Q1 and Q2 new business announcements, we have now reported new business wins of $580 million, supporting our 2020 growth target. Wins include $18 million in new fluids business with Ford and Chinese OEMs, Geely and JMC. We're also pleased to announce another $22 million in new aluminum work, including camshaft for Scania and battery housing for Samsung. This is the second battery housing win for our Martinrea Honsel business in the past year. As I mentioned earlier, we continue to launch new products throughout 2018, weighted in the back half of the year, increasing launch-related activity and costs in Q3 as well as Q4. Those launches include the GM Silverado at 5 of our facilities. This launch is continuing in 3 of our U.S. plants: Jonesville, Hopkinsville and BCA; and one Mexican plant, Saltillo. The launches are going well as GM is reaching their initial volumes as planned. The Mexican volume is launching and will ramp up in 2019, increasing volume at Saltillo and ramping up our next-generation flex lines in our new Silao 2 facility. The new gen 2 weld lines are performing well, taking the next steps in our flexible multi-generation manufacturing process. I reviewed the weld lines at our Jonesville facility for the second time in the last few months, as well as our Saltillo facility in Mexico last week in our fluids group. I'll visit another Mexican facility launching the Silverado in Silao in the next few weeks. The new Silao 2 facility was completed earlier this year. We continue to invest in our metallics business, including new press lines in both Silao and Jonesville. We also recently completed an addition, an installation of a new paint shop in Jonesville. The JLR I6 engine block, Ford Maverick engine block and 4-cylinder Volvo engine block continue to ramp up in Europe, and JLR aluminum knuckles and control arms in China. In Mexico, we are completing an addition to our Querétaro facility to support new casting and machining lines. A few blocks away, we are completing our new tool shop there. We will produce casting dies, making us the third tool shop in Martinrea Honsel. Last quarter, I mentioned that we were working on a strategy to better serve our customers. While we have been very successful organically recently, we see even more opportunity going forward. We typically sell to our customers based on the processes we employ: aluminum, steel, fluids, assembly and industrial. What we know is that we must continue to focus on developing product and engineered systems regardless of the process. I discussed on our last call that we reflected a lot on our experience with the hybrid sub-frame development between our metallic and aluminum product groups. Based on this reflection, we are poised to make a really positive change in our commercial approach. Martinrea has designed a new commercial strategy. This new sales strategy is how we will approach our customer going forward. All automotive products will fall into 2 commercial groups: one, lightweight structures; or two, propulsion systems. Lightweight structures will include all products related to body structure as well as chassis. This will be the case whether the product is steel, aluminum, a combination of steel and aluminum or any other material that supports [ body and light ] or chassis products. Our second group, propulsion systems, will include engine blocks, electric motor housings, transmission products, battery trays as well as all fluid and thermal products; basically any product that supports the vehicle in motion or braking systems. Third, we will continue to sell our industrial products independent of our automotive groups. We plan to put more focus on our industrial side and help grow this business. Our industrial unit has some unique strengths. After all, Martinrea started as an industrial company. Because of this special skill, we will use our industrial group as our new product skunkworks, allowing the automotive groups to stay focused on their customers. Our industrial unit, known internally as FMG, or Flexible Manufacturing Group, has the capacity to develop new processes for industrial as well as automotive product applications. The [ last space ] facility and talent will be used to construct and develop prototypes of new products as well as some of our future material developments, such as graphene, with companies like NanoXplore. We see our customers are investing in areas that are demanding a different type of thinking and use of their capital. The development cost of electric vehicles, autonomous vehicles as well as the need to integrate into more of a service business, such as investing in companies like Uber or Lyft, has certainly or will stress the limit of their capital capacity. Based on this, we see more opportunity to develop engineered products for our customers, offering engineered systems solutions as opposed to just typical commodity products. The customer cares about the products they purchase from us. They always appreciate a supplier's ability to engineer and provide systems solutions, which allows the customer to focus on new demand, giving the supply base an opportunity to potentially increase content and revenue as well as develop stronger partnerships with the OEMs. What the customer isn't so concerned with is how a supplier organizes itself by manufacturing processes internally. What this boils down to is the new commercial structure will allow us to engineer and sell all of our automotive products and systems solutions through 2 channels: lightweight structures and propulsion systems. At the same time, we intend to maintain the sovereignty of our manufacturing structure to assure our technical professionals continue to focus on the latest process technology and best-in-class manufacturing and all the products they produce and processes they develop and use. This is a long-term strategy based on the changes we are seeing in the industry. In this hard-hitting business, it seems rare that the leadership of a supplier has the time to step back and think about the possibilities. We are fortunate that with our improvements, it allowed myself and the staff to develop this new approach. This is a pivotal decision. We believe offering higher-content engineered solutions to our customers, as their capital is being stretched with new technology demands, will propel our future growth. We're very excited about this change. We have already begun approaching our customers to discuss this commercial innovation, and so far, the feedback has been very positive. Last, I'd like to thank the Martinrea team for their hard work and another fine quarter. With that, I'd like to pass it to Fred Di Tosto.
Thanks, Pat, and good morning. As Pat has already noted, the third quarter was another great quarter, our best third quarter ever from an adjusted EPS and EBITDA perspective. As our press release highlights, Q3 financial results made it 16 consecutive quarters of year-over-year improved record financial performance, I think quite the run, reflective of an organization that continues to evolve and mature on all fronts. Based on this recent track record, it is clear that our objectives are being achieved and they are getting stronger, driven by our Martinrea 2.0 strategy and culture. The team has really rallied around 2.0, and the consistently strong financial results only serve to feed the movement as it continues to gain momentum. The goal is simple: We want to be world-class in everything we do and we'll not stop until we are.Third quarter sales, excluding approximately $48 million in tooling sales, were $803 million, at the lower end of our previously announced sales guidance range of $790 million to $830 million. Production sales were impacted by lower-than-expected production volumes on specific light-vehicle platforms including the Ford Fusion, Ford Edge and certain Jaguar Land Rover platforms in Europe. As Pat already noted, we generally continue to see pressure on passenger car production levels, but CUVs, SUVs and trucks generally continue to remain strong in the market. On a year-over-year basis, overall sales including tooling sales for the third quarter were up slightly by $13 million or 1.5%, with a year-over-year increase in tooling sales, a positive impact from FX translation and new program launches being partially offset by lower year-over-year production volumes on certain platforms, including the Ford Escape, Ford Fusion and FCA's Challenger/Charger platform in North America; the Ford Mondeo platform in China significantly impacting production levels in our fluids facility there; and certain Jaguar Land Rover platforms in Europe. Q3 is the first quarter this year in which we were showing a year-over-year increase in total sales, with new product launches becoming more visible on our top line with the impact from the suspension module we assemble for GM moving to a VAA pricing model essentially behind us now. Based on our Q4 production sales guidance of $820 million to $860 million, which compares to actual production sales of $810 million in Q4 '17, we expect total sales to be up year-over-year for the next quarter as well, the extent of which will depend on the level of tooling sales in Q4, ending the year roughly flattish year-over-year as previously expected. We just completed our annual business planning cycle, and based on anticipated timing of upcoming launches and overall IHS projected production volumes, we continue to expect total sales to start growing again in 2019 and grow to over $4 billion in 2020 based on the new budgets.Adjusted net earnings per share in Q3 on a basic and diluted basis was $0.43 per share, within our published earnings guidance range but at the lower end due to a $2.1 million net unrealized foreign exchange loss recognized during the quarter. Excluding the FX loss, adjusted net earnings per share would have been $0.45, at the midpoint of our earnings guidance range despite the sales headwinds noted.Our EPS performance in Q3 represents a record third quarter for us. We did have one adjustment to earnings during the quarter related to a loss on the warrants we hold on our NanoXplore investment. This is further explained in our Q3 MD&A. On the margin front, margins for the quarter were up nicely year-over-year. Adjusted operating income margin for the quarter increased year-over-year to 6.9% from 6.2% in Q3 '17, representing continued progress towards our 8% and 9% targets in 2019 and 2020, respectively. These margin targets have recently been further validated by our freshly updated budgets and business plans. We continue to expect operating margin to be at or better than 8% in 2019 and at or better than 9% in 2020. Operational excellence activity, a cornerstone of our Martinrea 2.0 strategy, and general sales mix, including new and replacement work that launched and old programs that ended production, continued to contribute to the margin expansion. Looking forward, we expect both these drivers to continue. 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, although we do not have a specific leverage ratio target in mind at the current time after hitting the original 1.5x target at the end of '17, the positive trend in this area continues. Net debt to adjusted EBITDA decreased yet again in Q3, although only slightly, ending the quarter at 1.35x despite being in the market for a period of time during Q3 buying back MRE stock, as noted in our public filings and as Rob will discuss in a moment. We're 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. As you can tell, things continue to come 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. I'll now turn you back over to Rob.
Thanks, Fred. There are few topics that I would like to touch on briefly. As you can see from our press releases and Pat's discussion, we are on track with new business wins and financial improvements. Our outlook for 9% operating income margin in 2020 and $4 billion in revenues by 2020 remain in place. This year will be a record; next year, better; and 2020, better still. All this in what is predicted to be a flat market in North America and some softness in Europe and China. That's a really good outlook on both an absolute and relative basis. We are growing organically and we are also willing to invest in new opportunities. We're positive about our NanoXplore investment and we see real opportunities there. We are investing in some other technologies also. We are seeing some M&A opportunities and we're clearly not averse to M&A activity, but we will be very disciplined as always. In terms of our debt levels, we continue to have a strong balance sheet. 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. This quarter, our debt-to-adjusted EBITDA ratio improved again, as Fred noted. We stated in the last call, we intended to commence a normal-course issuer bid, and we did. In the third quarter, we repurchased approximately 700,000 shares. And in the coming quarter, at these prices, we intend to buy more stock. Frankly, it's a very good investment at these levels and a good return of capital to our shareholders. We will continue to be prudent and balanced in this regard. Make no mistake. Our objective is to build this company prudently and profitably and to increase value and share price over time, which we've been doing. 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 a perfect storm of NAFTA, steel and aluminum tariffs, recession or end-of-cycle fears, trade issues and so on. Despite that, our stock price has improved nicely over the last 2-year period since the U.S. presidential election, despite a lot of noise. After our Q1 release with record results, our shares hit a 10-year high, and there has been some pressure since because of the factors just noted. I think we are oversold, frankly, but the market is what it is and we respect that. We will also adjust to it. Let's talk about the new NAFTA, or the USMCA as it's now termed. As regards to North America, I would like to reemphasize that we have a terrific North American footprint, with approximately half our North American revenues coming from the U.S. and the other half from Mexico and Canada. We are a U.S. supplier, a Canadian supplier and a Mexican supplier. And for North America 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 locate near our customers. In that sense, on a relative basis, we were as well positioned as any supplier, Canadian, Mexican or U.S., for a NAFTA disruption. Indeed, we have a good competitive advantage vis-à-vis other suppliers. So with the USMCA, the old NAFTA, even a new agreement if the USMCA does not get ratified, we're in good shape.As for the USMCA changes re: auto, the higher rules of origin numbers are good for us, frankly. They favor North American suppliers. As for the minimum wage component for vehicles, that does not hurt us. If our customers can live with that, so can we. We do not think the overall cost structure of our industry in North America is much affected by these labor rules, and we will remain competitive as an industry. I would like to point out, business is good. Volumes are good. The U.S. economy is still rolling pretty well. All bode well for a good industry.Now let's talk about steel and aluminum tariffs. 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 and the administrative costs and burden of dealing with the changing landscape. We have some tariff exposure, and some of our suppliers have been pressured into requesting price increases, so there has been costs to us in the third quarter and, so far, in the fourth. We're working closely with governments to help to resolve the tariff issue. We are advocating they go away. 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 we have seen they are certainly a factor between the U.S. and China for sure, and between the U.S. and the EU. This will likely have normal impact on us overall, perhaps in some tooling costs. The reality is, 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, act to increase production in North America, which currently significantly lag sales and we're here to provide product. In any case, we are happier about the tariff and NAFTA situation today than we were on our last quarterly call. By the time of our annual call, we hope we are ecstatic.Now it's time for questions. We 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] The first question is from Meaghen Annett of TD Securities.
So there is a comment in the press release that next year should be better still. And we'd just like to get a better sense of how sensitive you feel your margin targets are to industry volumes, so just in terms of the operating margin targets of at or above 8% and 9% in 2019 and 2020.
Thank you for the question. So in terms of next year, I mean, just to comment on our expectation for volumes, we continue to expect volumes to be quite strong over the next number of months and entering into next year. We're clearly seeing some headwinds in certain platforms, as noted in our public filings. We expect some of that also to continue, but overall, it still looks pretty good. In terms of our margin guidance in light of this outlook, what we've said in the past is that in a flat market, we're going to see our margins go up, and that's clearly been happening. We expect that to continue. In terms of sensitivity, our margin targets are achievable, even in light of a slight decrease in the markets. So anything from 5 -- around 5% decline, we don't expect much change to our margin guidance.
And just within the segment operating income contribution, specifically in Europe, realizing that it has a potential to be lumpy, can you just talk about the impact, if any, from WLTP? And how do you see that progressing over the next couple of quarters?
To be honest, we haven't seen much of an impact to our book. There may have been a slight impact at the end of day, but some of that was already built into our forecast. We did see a decline in our volume in Europe, but it was predominantly with one customer, Jaguar Land Rover. So we're seeing some pressure on their passenger car platforms. But outside of that, it didn't have a big impact to us.
When we give our quarterly guidance, we're generally about halfway through it and we have a generally, pretty good guideline as to what's going to happen in the following 6 weeks. So as Fred said, a lot of that is baked in.
Next question is from Mark Neville of Scotiabank.
Just first on the tariffs. You had mentioned an impact. I'm just curious if you could throw a number at that. And the second part to that question, I think you mentioned that it would be temporary. And I guess I'm just curious if that's just assuming that at some point the steel and aluminum tariffs go away.
On the general question, we do think the steel and aluminum tariffs will go away at some point. I'm not sure exactly when it's going to be. I think there a lot of people that thought they would have been out of the picture by now. And I think that with the U.S. -- the new U.S. Congress and presidential situation, I think that there's a certain amount of cloudiness over when they are going to be done. But I do believe that, from our perspective and our submissions, that they should go away, and that includes not just the U.S. ones but the Canadian ones. In terms of impact on us, I would say and as I did in our remarks, for the most part, the steel and aluminum tariffs have nominal impact but it's a positive impact. And one of the things that we're seeing and we're seeing in the supply base for a lot of tier 2s and 3s is they are having some headwinds. In Canada, for example, a lot of suppliers are seeing some headwinds from the Canadian steel and aluminum tariffs and they're looking for relief. And I think that it makes a lot of sense to basically get rid of them, even if it's unilateral. The other thing I'd say is that-- and you've heard it from the Mexican administration and there's been discussions about that in Canada, that if the USMCA is to be signed by Mexico and Canada, I think there should be a condition that the tariffs go away, and let's see what happens.
Okay. And Fred, the margin guide sounds pretty durable to any sort of slowdown, but I'm just curious, that $4 billion of sales in 2020, sort of just broad strokes, sort of what that bakes in or anticipates for industry volumes.
So we actually just completed our annual budget business planning cycle because we do that annually, and the outcome of that this year essentially continues to validate our market guidance. So we continue to see those type of margins in that revenue. And sorry, hold on a second. Sorry about that. So in terms of the market outlook and our budget cycle and our revenue targets, we have good visibility looking out 2 years. As such, essentially it's booked business at this point in time.
That assumes the IHS volumes, essentially.
Yes. Okay. Just maybe one on the North American market. Again, I understand that you're overweight SUV, truck. But just relative to the market itself, would you be overweight or underweight?
In terms of -- I'd say that by 2020...
We're very heavy in certain lines, yes...
[ Essentially in line ] -- but 90% will be on CUVs, SUVs, big trucks, et cetera. And I think a lot of our North American production is with the Detroit 3 or the Big 3 or whatever you want to call it. And certainly, you've seen an emphasis from those customers on the heavier vehicles.
We have a lot of work on the SUVs, CUVs, the Escape, the [ DTU ] for GM, the T1XX, which is the new Silverado. So as Rob said, as you get closer to 2020, a far majority of our work is weighted toward where the vehicle sales seem to be going. So I'd say we're in pretty good shape there.
So you said 90% of your North American business by 2020 is SUV, truck?
By...
CUV, SUV.
Trucks. Non-little cars, put it that way.
Now if you head into Europe and China, it shifts. But even there, even in China, probably the biggest thing we've won lately, being the Geely contract, is a crossover.
Okay. Maybe just one last one, and you've talked about the new sort of sales organization. I'm just curious if you sort of plan on providing any disclosure to the market in terms of size of those businesses, margin profiles or anything of that? Just maybe to help investors or people value certain segments or different parts of the business differently.
Not at this point because it's really a strategy that is based on how we approach our customer. And as I said in my discussion, the sovereignty of the business units that we have now stays in place, but we sell through 2 channels. Our sales group is going to be set up that way and the commercial structure behind it will be set up that way. But the manufacturing process, the P&Ls all stay sound as they are today.
And it aligns pretty well with some of our customers as well. So for example, when we go in and talk to a customer about a lightweight solution on a chassis product, we say, "Do you want to steel? Do you want aluminum? Do you want a combination? Do you want something else? Do you want us to work with some other material on that?" And so in that sense, I think that we can provide a good customer solution. We are as well positioned as any supplier in the world to provide lightweighting solutions in steel and aluminum. And that's something that is a tremendous sales advantage, and our customers like to hear from it. And to a certain extent, it's approaching the customer so they just don't have aluminum or steel mindset, which has been typically the case over the last many decades. Some people are aluminum folks. Some people are steel folks. We think there's a tremendous future in structural parts that include aluminum or include combinations.
The next question is from Peter Sklar of BMO Capital Markets.
Fred, the $2.1 million foreign exchange loss you had during the quarter, what does that relate to? Is that translation of balance sheet items? Or is it hedge accounting? Can you just fill us in a little bit?
It's essentially a translation of balance sheet items. A big chunk of it came out of our China operations in this quarter. We have some intercompany balances. So we're in the process of localizing as much as we can, therefore we have some product that we still buy outside of China and in foreign currencies. So with the devaluation of the yuan this quarter, it had an impact. So the majority of that -- or more than half of it related to our China operations. And the rest of it was just in North America, predominantly in Canada, we have some U.S.-based contracts. In any given quarter, our balance sheet exposure, we tend to hedge a certain percentage. So there's always a $1 million to $2 million swing either way. And we saw a similar situation in our Q1 results, where we had a $2 million gain. So year-to-date, we're fairly flat, but any given quarter can go up and down a bit.
Right. Okay. Can I have a review of the large programs that Martinrea will be ramping, say, over the next, like -- currently and over the next couple of years, just so we know what to monitor and focus on?
Yes. The largest one at the current time is T1XX. So in Q3, we launched the U.S. leg of that program, and then Mexico is going to kick in at the end of this year, early next year. So that's going to ramp up. And then the SUV portion of that comes in, in 2020. And on a gross basis, that's well over $300 million of business to us, about $200 million of incremental business that we won on that platform. We have the Ford 2.0-liter engine block. It's in the process of ramping up and launching in Europe for us. So that's a fairly large package, about $100 million of business. In addition to that, we're launching some work for Volvo. We have a block in Europe that we're launching there and some work for JLR. And then when you look at China, we have quite of bit of work coming online there. With -- our aluminum plant currently owes -- only services GM and is in the process now of ramping up knuckles and control arms for Jaguar Land Rover. That's going to follow another product for JLR later in 2019, what we refer to as a dog bone. And then as you know, we announced earlier this year a big package with Geely. That's going to be coming down in the pipeline over the next -- I believe that the launch there is 2021. So quite a bit of activity across the globe. And as Pat noted in his opening remarks, it's impacting -- it's weighing on our margins a bit in the back half of the year. There may be some of that next year as well, but the pipeline is quite strong.
Okay. And then lastly, can I just -- can we just have an update on the Kentucky plants, Shelbyville and Hopkinsville, and the progress you've made there and what the major programs in place are now?
The new Escape launches next year, late next year, and we expect that to be a better product for us than the current product, mainly because we put in this new flexible capital which allows us to run their multiple variants as well as some of our [ pass ] product as we go forward. So we're expecting that launch to be -- in fact, we've already got the lines in and are already doing some of the testing at the integrators as well as some of the equipment at the plant itself. So that's very early compared to the way...
And Pat, is that kind of like the stamping line? Or the welding line?
Welding lines. Stamping presses don't change. But our philosophy is go early, get your people early and be ready. And so we're in very good shape. From what feedback I've gotten from Ford, they're very happy with our progress. Similarly, in our Hopkinsville facility, some of the T1XX launched there. We had moved our E2XX platform from Riverside there, that's running smoothly. And then the 432 Ford program is on schedule there as well. So much better condition there. Springfield has got a lot of Nissan work coming in. That plant has been running particularly well over the last year. So we're pretty happy with the progress in the U.S. in particular, which was our weak spot. And then of course, Jonesville, within a year, you won't be able to recognize the plant. There's been so much change with the T1XX, new press line, new paint shop. So we're investing heavily there. We're getting good results. We haven't got everything totally above water yet, but pretty much where we want to be per our plans. So pretty happy with the progress.
And I haven't been in the Kentucky plants in quite a few years. Have they caught up -- would they be -- will they look as good as Alfield, which is very impressive?
Yes. I would tell you within the year, they'll have the next-generation lines. So if you remember, the Alfield line that you saw was our first attempt. We kind of designed that after we had already started the engineering, when we made the change into the flex lines. You would actually see what we call the gen 2 flex lines in Jonesville, in Shelbyville and eventually in Hopkinsville. And if you're happy -- or if you're interested in going down there, I'd be happy to take you through it.
The next question is from Michael Glen of Macquarie.
Just to circle back on the $2.1 million FX loss. So that's something that's in the results every quarter. Just this quarter, it was a bit outsized in nature. Is that the idea?
Yes and no. I mean, there's always an FX impact in any given quarter, so there is an element of that. This quarter was a little larger than usual. But as I noted earlier, we did have a similar situation in Q1. It was just the other way around, a $2 million gain. If you look at our year-to-date FX position, our P&L position, it's fairly flat.
Yes. If it's like $2 million, we'll point it out for you, so people will get a clear perception of our real results.
We did the same in Q1. We outlined the fact there was about $0.02 pickup on FX in Q1.
Okay. And then Fred, maybe just in terms of CapEx and maybe if you can discuss working capital balances as well. But what should be our expectation for CapEx? There was a lot of discussion about some of the ongoing activity that you have. Where should CapEx be over the next few years? And then maybe if you could comment on working capital as well, that would be helpful.
So we made it clear, we're not going to shy away from investing in the business. We're seeing a lot of opportunity and particularly in our aluminum group, so we have a strong pipeline there and we're building that capacity over the next couple of years. The guidance this year continues to be about $300 million. The reality is we're in November, we're at $180 million year-to-date in September. So it may come in a little shy of that just based on some timing, but it would be fairly close. Expecting a similar level next year just based on what we've got in the pipeline. And then thereafter, it's going to be a byproduct of how much work we win and our success in our quotes. But notwithstanding, it's a leveling off of our capital position or our CapEx position over the next couple of years. And at the same time, our margins are expected to increase, and that will clearly bode well for the free cash flow formula. So we're expecting to be free cash flow positive in 2019. In terms of working capital, the one big variable there is always tooling. And as you can see, our balance had been quite elevated for the last little while. We got some very big tooling projects that we've been funding. As a result of that, it's been high now. Not expecting it to drop off too much, but expect it to normalize and maybe drop off to some extent as some of these programs launch and we book the revenue in that tooling.
I think a couple of other things to keep in mind, too, is in the case of aluminum, a lot of that is new capacity. That tends to be a long-term investment. Casting machines and so forth can go 20, 30 years into the future. And in addition to that, our new weld lines that I was talking about earlier are multi-generational. So when we win a second-generation program, whether it's from the same OEM or another, we'll be able to use the same equipment with mainly just the tooling investment and occasional upgrades of the line as technology changes, but the baseline will stay the same. So our investment in metallics for the weld lines will level out as we go forward as well.
Okay. And in terms of -- you discussed NAFTA, the new NAFTA. Are you seeing any activity from some of the offshore OEMs in terms of bringing some work? Are you have any discussions at this point in time about putting some of that business in North America to meet the new content requirement?
There's nothing specific, though we know through the grapevine of some of the OEMs, some of them China-based, some of them that are both China and European-based that are discussing locations. But we know that there's going to have to be, at least from a supply-base point of view, some content change. So we think that's a great opportunity. If you're buying parts overseas, which a lot of OEMs still do, there's a lot of incentive under the new rules to bring that into the United States, Canada or Mexico. And so for us, we see this as a great opportunity. As far as the relocation of assembly plants, not specific, but just a little bit of noise out there. But certainly, when it comes to the parts, we foresee movement from Europe or Asia into North America.
The next question is from Ben Jekic of GMP Securities.
Just a question for Rob. If you can just elaborate a little bit more on the tariff issue. I think you were saying that the impact on you as a company is fairly limited because of buying intra-country, but then you were -- I think you were saying that certain suppliers are affected and there's an involvement of certain transition and administrative costs. Can you elaborate on that a bit more?
Sure. I think one of the things just on the administrative costs is we spent a lot of time as the negotiations were going through, actually working with different governments in different countries, outlining the impact of the various proposals. We did that on a confidential basis so that people could kind of get their facts together in terms of what their proposals meant, and we have an excellent team that's done that really well. I think that where we ended up, actually future administrative costs might actually be not too bad because of some solutions on tracing rules and so forth. And most people will adjust as far as things go. It will be interesting to see the requirements that OEMs put on suppliers to look at the various costs that go into supply situations, including high-wage labor in terms of tracking that so that they can meet the wage requirements of the $16 an hour 40% rule that's there. So there's a little bit of uncertainty as to what has to go on there. But I'd say that we're up to speed on where things are. In terms of the costs in the system, I think we have some direct costs and indirect costs. We estimated about $2 million for the quarter, which is impactful. It's not very impactful. Some of that relates to the fact that suppliers that we see, and a lot of them are localized, are having issues with the tariffs. And they're basically saying, I've got a tariff, I've got to pay for my inputs. I have to somehow pass along the cost or I have a problem potentially making payroll or something like that. And I feel for those suppliers. That was not intended in terms of the tariffs going back and forth. And I think that's one of the things that we say in terms of urging for the industry that the tariffs, no matter how you look at it politically, they're hurting people in smaller suppliers, and things are going to pop in certain situations. So you've got to effectively be able to deal with them. And I think that, certainly with respect to the U.S., and this is an interesting thing, our U.S. tariffs that we had to pay on steel and aluminum to the extent that we did have to pay, we received exemptions from the U.S. government the last month for most of them. So effectively, we're even less impacted on that going forward. But with respect to the Canadian tariffs that have been applied on the industry, to my understanding, no one yet has received exemptions. There are a lot of exemption applications piling up, but one way to deal with that and the potential need for exemptions is to get rid of the tariffs. So that's why we're advocating that.
[Operator Instructions] The next question is from David Ocampo of Cormark Securities.
My first one is, we're in a little bit of a pause period right now, and you've kind of communicated certain drivers that get the business going again, such as booked business and less launch cost. Are there any other drivers that give you the confidence to kind of hit your 9% EBIT margins?
I think most of the activity that we've built in is, again, operational improvement, which is about half of our avenue that we've identified, and then better-margin product that we've launched along with some underwater-margin product dropping off. So that formula hasn't changed. We're still confident in it. And as Fred said, as long as the market stays flat, or even if it goes down a little bit, our plan stays in line. I think the benefit of our book, being CUV, SUV and truck, helps reinforce that given the outlook of where vehicles are going.
And my last one is just a quick modeling question. You've communicated $4 billion of sales in 2020. Is this a smooth step-up? Or is it more back-end loaded based on your booked business?
I think you're going to see a fairly smooth uptick heading into 2020. Part of the guidance was they are going to start seeing growth on our top line in 2019. So based on our new business plans, we continue to see that, again, based on projected IHS volumes. So I don't think it's going to end up being back-end loaded, although you never know if a customer launches. At times, they get delay in the launch and SOPs get extended. So that would be the one disclaimer there. But at this point, I expect it to be fairly smooth.
There are no further questions registered at this time. I would now like to return the meeting back over to Mr. Wildeboer. Please proceed, sir.
Thank you very much. Thank you all for joining the call and asking your questions. We love to chat with you. And if anyone has any further questions, just give any of us a call at (416) 749-0314. Have a great day.
Thank you, Mr. Wildeboer. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.