© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Linamar Q2 2018 Analyst Call. [Operator Instructions] Linda Hasenfratz, CEO, you may begin your conference.
Thank you. Good afternoon, everyone, and welcome to our second quarter conference call. Joining me this afternoon are members of my executive team, Jim Jarrell, Mark Stoddart, Roger Fulton, Dale Schneider and some members of our corporate finance and legal teams.Before I begin, I will draw your attention to the disclaimer currently being broadcast. So I will start off this evening with sales, earnings and content. Sales for the quarter were $2.16 billion, a new record, up 22.1% from last year, which has been happy to see. Earnings saw another strong level of performance in Q2 as well. Net earnings normalized for balance sheet exchange impacts and any unusual items in each quarter increased 15.1% compared to last year to reach $193.6 million, also a new record, another quarter of double-digit normalized net earnings growth achieved in 6 out of 8 of the last 8 quarters. Just look at all those stars. A few factors were key in driving this solid performance. First, our new acquisition, MacDon, made a great contribution to growth with solid performance. Second, the access market experienced double-digit growth over last year in units sold, driving great performance at Skyjack, particularly with our popular boom and telehandler products, which continued to build market share. And finally, launches in the transportation business are running strong and doing a great job of driving top line growth in some challenging markets. It's exciting to see the growth of our industrial segment. Our diversification has led us to a couple of excellent technology-driven businesses, which are leaders in their field, growing market share and generating solid returns. In fact, earnings from our Industrial segment represents half of our operating earnings this quarter, a huge benefit to us in some more challenging times on the auto front. I see this as a real differentiator for Linamar in our ability to generate consistent, sustainable earnings growth and returns for our shareholders. A few factors were a challenge this quarter and hurt our results. First, light vehicle markets for the 3 regions we serve were up 4.1%, but the North America light vehicle market was down 1.7%, and key customers were down as much as 12% in North America this quarter. Secondly, a key customer experienced a serious production disruption due to a fire at one of their suppliers. The resulting shut down of the key vehicle platform had a negative impact on the results as we have had [ a contact ] on that platform. Finally, FX compared to last year provided some headwinds for both segments but, in particular, the Industrial segment. Normalized net earnings as a percent of sales in Q2 were 9%, down a little from last year. Both production issues that I noted above impacted margins overall and, of course, in the transportation segment, particularly as declines in these mature high margin programs were replaced by sales of launching business with low or negative margins. [ That gets us to ] the launching business to mitigate these declines and also to position us for solid growth when the market starts to pick up. This has been an ongoing theme over the past year as some of our customers have seen production setbacks in a flat to declining market. Until the production levels start to pick up a little, we can expect to continue to see this impact on margins although notably, we remain within targeted levels. We target normalized margins for the transportation segment of 7% to 10% and expect to be at midrange this year with expansion next year. On the positive side, our Industrial segment is performing very strongly despite FX headwinds, in no small part thanks to MacDon. In fact, we are revising our target margin range for the segment from 12% to 16%, to 14% to 18%. We expect to be at the midpoint of this new range this year with expansion next year as well. The adjustments to targeted margins in the Industrial segment also impacts our overall net market target range, which moved from 6% to 8%, to 7% to 9%, more reflective of recent experience as well as forecast levels. We expect to see strong full year net margin performance for 2018 and 2019, once again in the range of 8% to 8.5%, noting first half results will fall to the low end of the range this year but we do expect to see good margin expansion next year.Investing in our future continues to be a priority for us at Linamar. CapEx in the quarter was $119.7 million or 5.5% of sales. We are expecting 2018 CapEx as a percent of sales to be higher than last year and reach the mid level of our normal range of 6% to 8%. 2019, we'll see a similar result. Our net debt level was, of course, higher than Q2 last year, given our Q1 investment in MacDon but down a little from where we sat at the end of Q1. Net debt to pro forma EBITDA is now 1.7x (sic) [ 1.75x ], and we do expect to bring leverage back down under 1 within 18 months. In North America, content per vehicle for the quarter reached $165.44, up 2.9% from last year, thanks to launching business, offsetting a 1.1% decline in production levels and much more significant declines as I described with key customers. Q2 automotive sales in North America, as a result, were up 1.8% over last year at $748.7 million. This is a great example of the importance of launching business to offset market cycles, a strategy that we have long employed. In Europe content per vehicle for the quarter is $80.02, up 15.2% over last year, thanks to launching business in the region in a market that was up 5.1%. Growth in Europe for us has really been [indiscernible] . It was only 5 years ago that content in Europe was only $14.45. Our Q2 2018 automotive sales in Europe, therefore, grew 21% compared to last year to reach $480.8 million. In Asia Pacific, content per vehicle for the quarter was $9.11, down 15% from last year due to production declines with certain customers out of sync with the overall market. Our Q2 2018 automotive sales in Asia Pacific were down 10.1% versus last year, reaching $110.7 million in a market that was up 5.7% in production volume. Linamar continues to target doubling our current footprint in Asia in the next 5 years. It's great to see continued content per vehicle growth in most regions despite lower production levels of key customers. Our expanding content per vehicle reflects our increasing market share, thanks to large amounts of launching business, key to accelerating growth when volumes start to pick up.Other automotive sales not captured in these content calculations were $71.6 million, up 23% from what we saw the same quarter last year, namely on higher [indiscernible] sales.Commercial and Industrial sales were up 64.8% in the quarter at $745.7 million versus $452.4 million last year, thanks to the acquisition of MacDon, which also had a strong quarter and a strong quarter for SkyJack, with markets up nicely and continued market share growth as well as continued recovery in our off-road vehicle business.Turning to a market outlook. We're 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 17.2 million, 22.7 million and 50.9 million vehicles in North America, Europe and Asia, respectively. Next year is expected to similarly generate small amounts of growth ranging from small increases in North America and Europe to 3.3% growth in Asia. Industry experts are predicting on-highway medium heavy truck volumes to grow this year in North America and Europe at 13.7% and 5.2%, respectively, but see a decline in Asia. Next year, we'll see fairly flat markets, plus or minus 2% in North America and Europe but another decline in Asia. Off-highway, medium duty and heavy duty volumes are continuing to show signs of improvement at last, which is great.Turning to the access market. As noted, we saw double-digit global volumes growth this quarter, a trend which is expected to continue for the year, dropping back to mid to low single digits next year. Performance is being driven by growth in each global market and each product group. We continue to see positive industry metrics with significant infrastructure spending planned for the next couple of years in every region and an ARA forecast of 4% to 6% rental revenue growth for the rental business. Skyjack's backlog is substantially higher than it was last year at this time. The issue has really become keeping up with market demand. It is our goal to continue to outperform the market through market share growth as we have so successfully done in the last several quarters. Our new agricultural business, MacDon, will benefit this year from an agricultural market at the early stages of a cyclical recovery. The industry expectation is for mid- single-digit growth in the agriculture market in 2018; it is our goal at MacDon to also outperform the market with our industry-leading harvesting equipment.Turning to new business, we continue to see solid levels of new business wins and a strong book of business being quoted with levels dramatically higher than last year at this time.Q2 was another strong quarter for us with quite a few notable strategic wins driven by continued acceleration of powertrain outsourcing, which is very exciting. Our addressable market across a range of vehicle propulsion types continues to look excellent. Global vehicle growth is forecasted to grow at a compound annual rate of 1.5% to 2% over the next 25 years. Changing dynamics and new technologies are having various impacts, some driving demand up, others driving demand down, but the drivers for growth are expected to exceed the drivers for contraction on a global basis. Each type of vehicle propulsion offers excellent and growing potential for us and our suite of products for each continues to be developed and to grow and we will see examples of that in the highlights this quarter. The total addressable market for us today is $130 billion, growing to more than -- more than $325 billion in the future.We have 207 programs in launch at Linamar today. Look for ramping volumes on launching transmission, engine and driverless platforms to reach 25% to 30% of mature levels this year, which will add another $600 million to $700 million in sales for 2018. These programs will peak at nearly $4.5 billion in sales. We saw a shift of about $70 million of programs moving from launch to production in the last quarter. Programs moving to launch -- to production from launch this year will add about $75 million in incremental sales growth to 2018 so total business launched in 2018 of $700 million to $800 million. Launched programs grow quite steeply next year to more than double this year's level for incremental growth in 2019 of between $1.2 billion to $1.3 billion. In addition, as noted, Skyjack is targeting solid growth, driving at a growing market in the double-digit range this year and high single digits to low double-digit range next year.MacDon will be a key growth driver for us this year and next as well. MacDon, if you recall, was about $600 million in sales on acquisition. The market is growing in mid-single digits. And remember, we will have just 11 months of results in 2018 for Linamar. Expect mid-single-digit growth for MacDon this year and low double-digit growth next year. It's important to note that both Skyjack and MacDon seasonal peaks are in Q2, meaning you should expect a seasonal dial-back in Q3 and much more so in Q4. [indiscernible] growth with the loss of business that naturally ends each year noting to expect such at the low end of our normal range of 5% to 10% in 2018 and the high end in 2019 as well as normal productivity givebacks.Our strong backlog of launching business and growth in our Industrial sectors will do a great job of driving strong double-digit top line growth for us this year. Next year, the strong launch will continue to build to drive an organic-only growth level at the high single-digit level.Sales growth continued -- with continued strong and expanding margin performance will result in double-digit normalized net earnings this year and next.New business wins are of course also filling in growth for us in the midterm as well. Our current estimate is for $8.5 billion to $9 billion in booked business for 2022 based on current industry volume forecasts layered with new business wins and adjusting for business leaving. I would like to highlight a couple of our more interesting wins this quarter. First, we won an important program strategically for a structural cap component for our Montupet Group. This program is significant in volume and revenue, as you can see, but also important strategically as it adds to our content in the body of the vehicle, which we have targeted as a key growth area to build content for alternatively powered vehicles.Next, we picked up another win for our business in China, this one a transmission component due to launch in 2020.Third, we were awarded a commercial off-highway vehicle [indiscernible] program that's due to start production right away. It is great to see a win in this area, which has had very little opportunity in the last 2 years due to a sluggish market. Next is another quick start program, which is kicking into production right away, this one for a takeover project for a turbine shaft. We were thrilled to win another camshaft program based for an Asian OEM right here in Canada. We have done a great job of building market share with our Japanese customers in these types of critical components in the last few years so it's great to see that growth continue. Finally, several projects were won for our plants in Mexico. 2 cylinder heads and a block and a balance shaft assembly. Despite all the political issues, we are still seeing opportunities in Mexico, which is a positive.Turning to a strategic update. We continue to work towards developing our strategies around long-term markets that we target such as food and agriculture, waterpower and age management even as we continue to build our transportation and infrastructure businesses. Our strategies are to develop multiple strategies that allows us to succeed in a variety of outcomes, whether it's through developing strong portfolio of products for every type of vehicle in our transportation business or through the product and regional expansion that we focus on in our Industrial businesses. In all cases, however, innovation is at the heart of our strategy. We have launched several key innovations for Skyjack this year, and I'd like to share a few of them with you. First, they launched an excellent and user-friendly telematics tool to help our customers access the realtime data they need to help them run their business. Our focus has been on getting them the right information at the right time. Where is their equipment, is it being operated safely, when is it due for service, is it being appropriately utilized. Our customers are loving this [ optional ] feature. We expect even this year in the year of launch to already be at more than a quarter of machines telematics equipped this year. Secondly, they launched a new mechanically driven CVT transmission for our popular Telehandlers series. This is the first of its kind in the industry, and it is great leading-edge technology. It's easier to operate and reduces damage and repair cost to the transmission. Lastly, working with a key partner, we launched a great innovative VR training simulation tool to help train newcomers on how to operate a Skyjack. The technology is unique in that it has motion feedback to create a very realistic training experience, and our customers are loving it. On the transportation side, we just installed a new gear lab in our technology center here as well. This lab is key to us growing our gear and electric vehicle gearbox business where we are seeing many opportunities. We can produce prototypes and evolve both our gear design as well as processing for those gears. And our new iHub tech center is finally about to start construction in September, which we are very excited about. A key element of work, which we will ultimately transition to the iHub on completion is our factory-of-the-future work centered around collaborative robotics and digitization of information. We are making great progress on the digitization with impressive numbers already in terms of systems implemented as well as the robotics. There's a huge amount of opportunity in these technologies to dramatically improve efficiencies of our operations, both on the shop floor as well as in the back office, which we can deploy on a global basis.In other areas of operations, our plants continue to perform well both on mature business metrics and in terms of launch. In terms of plant launches, we have our new casting facility in China almost complete. This will be our first casting facility in China for which we have already secured 3 programs, one for domestic Chinese OEMs. The facility will be ready to run initial samples this fall. And in Hungary we have finalized the location for a new facility dedicated to our new E-Axle gearbox program and are about to start production.Finally, a NAFTA and tariffs update, lots of that in the news these days. Discussions have resumed in the month since the Mexican election, which is positive. I think the key is to focus on the facts. At its simplest, the argument that more than $500 billion of U.S. exports to Canada and Mexico are at risk in the absence of NAFTA is very powerful. That represents millions of U.S. jobs. In terms of next steps, I think that it is very positive that discussions have resumed. We are close to a deal on autos that is workable. 70% of regional North American content that has been proposed by the Mexicans can be done, I believe, with minimal disruption. 40% high labor value content is also doable, given 40% of the content of Mexican vehicles, on average, already comes from the U.S. Two key issues remain to be resolved, the proposed sunset clause to bring us back to the table every 5 years and dispute resolution, these are the areas to focus on in the coming weeks. If an agreement can be reached before the end of August, it can be tabled to the existing sitting Mexican government for its 90-day consultation period before the new government is put in place on December 1. This is in everyone, including President Obrador's best interest. Of course, the key issue on the table right now are the tariffs that are in place and proposed. At the moment, we have the metal tariffs on steel and aluminum imposed by a whole series of countries, Canada being hardest hit, given the high level of exports overall.So what has the impact been? Well, certainly, companies are starting to feel the impact of the metal tariffs. Several automakers have cited higher costs and warned of escalating impact from such. Pain is slowly building and will ultimately take its toll. For Linamar, happily, the impact has been minimal. From the direct impact in terms of tariffs on metal, we are buying ourselves directly; the impact is only on metal we're purchasing from the U.S. and importing to Canada. But happily because 100% of such is subsequently exported again, we can claim all of those tariffs back under the Canadian duty drawback program. So no impact other than to cash flow. In terms of indirect impact meaning suppliers of ours who are levying price increases based on their own higher input costs resulting from tariffs. Again, the impact thus far has been really quite minimal. Only a handful of suppliers have demonstrated legitimate cost increases to justify their request. We're, in general, using a very disciplined process on receipt of any price increase to cleanly identify which costs have increased, how much and then dealing with that, with that supplier and where appropriate, our customers. Regardless of tariffs, although certainly related to them, steel prices are, in any case, on the rise, which is an issue our OEM businesses, SkyJack and MacDon, are having to strategize around from a pricing perspective. All of the above has been considered in the outlook that I gave to you earlier. Meanwhile, a bigger issue looms, which is the proposed auto parts tariffs so let's just spell it out a little bit. Parts tariffs are different from metal tariffs in 2 important ways. First, the cost impact of the auto parts tariff would be massively bigger to the industry than that of the metal tariffs. Auto parts cross borders on average 7 times. Simple math says that's 175% price increase. More sophisticated analysis has been done and estimates the additional cost per vehicle at between $5,000 and $9,000. That is a $126 billion cost penalty for the industry, which is enormous. The second important point is auto parts cannot be quickly moved or resourced to the U.S. to avoid these tariffs. The lead time to tool up a new line, whether it's to enable a move or get resourced to a new supplier, is a minimum 12 to 18 months. Equipment lead time is significant as all machines on the line must be validated and parts retested prior to being assembled into a vehicle. That means it's a $126 billion problem for 1 to 2 years. Clearly, this is not a sustainable situation, which in an odd way is really what I believe will stop this from happening. The good news is that if these dire consequences are ignored and the tariffs imposed, it will be quite short order before the problem gets so immense as to lead us to a cease-fire on the trade war. I estimate 2 to 4 months at most. I think it's also worthwhile to point out that the concept of moving work to the U.S. or resourcing it to a U.S. supplier in itself is simply not feasible due to a lack of labor. There are 6.6 million open positions right now in the U.S. that can't be filled. The last thing we should do is to -- or try to do, is to add to that. I'll also remind you that Linamar is somewhat unique in that virtually 100% of any auto parts we import are subsequently exported, meaning any tariffs incurred on import will be 100% reclaimed under our duty drawback system in Canada. I see this as a key differentiator and advantage for us in the situation. With that, I will turn it over to our CFO, Dale Schneider, to lead us through a more in-depth financial review. Dale?
Thank you, Linda, and good afternoon, everyone. As Linda noted, Q2 was another strong quarter as sales grew by 22% and net earnings grew by 21.7% in an environment where North American light vehicle market was down by almost 2%, driven primarily by lower production at Ford and GM. For the quarter, sales were $2.2 billion up $391 million from $1.8 billion in Q2 2017.Operating earnings for the quarter were $272 million. This compares to $215.6 million in Q2 2017, an increase of $56.7 million or 26.3%. Included in operating earnings was an unusual item related to onetime restructuring costs. Normalizing operating earnings for the unusual item and the net effects gained from revaluing the balance sheet resulted in normalized operating earnings increasing by $44.6 million or 20%. Net earnings increased $35.2 million or 21.7% from the same quarter last year to $197.1 million. Normalized net earnings increased by 15.1%. As a result, fully diluted earnings per share increased $0.53 or 21.6% to $2.98. Normalized fully diluted EPS increased by 14.9%.Included in earnings for the quarter was a foreign exchange gain of $8.8 million, which related to a $9.1 million gain on the revaluation of operating balances and $300,000 loss on the revaluation of financing balances. The net FX gain impacted the quarter's EPS by $0.10. From a business segment perspective, Q2 FX gains due to the revaluation of operating balances of $9.1 million was the result of a $5.1 million gain in transportation and a $4 million gain in Industrial.Further looking at the segments, sales for transportation increased by $101.7 million or 7.2% over Q2 last year to reach $1.5 billion. The sales increase in the second quarter was driven by higher volumes of launching programs, additional sales from our European light vehicle customers, increased sales from our medium, heavy truck and off-highway vehicle customers and partially offset by 2 issues that impacted high-margin mature programs. First of all, we had lower production volumes for key North American customers, and we were impacted by the production disruption at Ford due to fire at one of their suppliers.Q2 normalized operating earnings for transportation were lower by $23.4 million or 14.6% over last year. In the quarter, transportation earnings were impacted by the increased volumes driven by the items such as launching programs and the light vehicle volumes in Europe, which are offset by the loss of volumes on high-margin mature programs due to the 2 production issues that we could not offset fully with an increase in low-margin launch programs. Furthermore, operating earnings were impacted by the increase in management, R&D and sales costs. And finally by an unfavorable impact from the changes in FX rates since Q2 2017.Turning to Industrial. Sales increased by 80.2% or $289.5 million to reach $650.6 million in Q2. The sales increase for the quarter was due to additional sales that result from the acquisition of MacDon with strong volume increases in access equipment in addition to market share gains in scissors, booms and telehandlers in certain regions and partially, offset by unfavorable changes in FX rates since Q2 2017.Normalized Industrial operating in Q2 increased $68 million or $108.5 million (sic) [ 108.5% ] over last year. The primary drivers of the Industrial operating earnings results were the additional earnings for MacDon, the increase in access volumes, partially offset by an unfavorable FX impact from changes in foreign exchange rates since Q2 '17 and the increased management, R&D, and sales cost supporting the growth.Turning to the overall Linamar results. The company's gross margin percent increased 17.9% in Q2 2018. Gross margin increased by $72.8 million due to the additional earnings from the acquisition of MacDon, the higher earnings as a result of the net increase in volumes, partially offset by lower earnings due to the sales decline on high-margin mature programs related to the 2 issues that I already outlined. And finally the unfavorable foreign exchange impact from changes in rates since Q2 2017. Cost of goods sold amortization expense for the second quarter was $91 million; COGS amortization as a percent of sales decreased to 4.2% as compared to 4.5% in Q2 2017. Selling, general and administration costs increased to $122.7 million from $90 million in Q2 2017, an increase of 5.7% of sales. The increase on a dollar basis is mainly due to the additional SG&A costs at MacDon; the higher management, R&D and sales costs; and the onetime restructuring costs that incurred in the quarter. Normalized SG&A was $118.4 million or 5.5% of sales. Finance expenses increased $9.7 million from Q2 2017 to $12.6 million due to the increase in debt spreads as a result of the MacDon acquisition; higher interest rates due to the Bank of Canada rate hikes since Q2 2017, partially offset by higher interest earned on the investment of excess cash and on the long-term receivable balances, in addition to the repayment of the private placement debt in Q3 2017, which was replaced with lower interest rate debt. The consolidated effective interest rate for Q2 increased to 2.8% compared to 2.2% in the same period last year, primarily due to the new acquisition debt and the Bank of Canada rate hikes. The effective tax rate for the second quarter was relatively unchanged at 23.3% compared to last year. The effective tax rate in Q2 was reduced due to the decreasing tax rate in foreign jurisdictions and offset by an increase due to a higher effective tax rate on income for MacDon. We are expecting the effective tax rate for 2018 to be in the range of 22% to 24%.Linamar's cash position was $417.1 million on June 30, a decrease of $93.5 million compared to June 2017. The second quarter generated $171 million in cash from operating activities, which was used to fund CapEx, debt repayment and interest payments. Net debt to pro forma EBITDA decreased to 1.75x since Q1 2018, and we expect net debt to pro forma EBITDA to be back under 1x in the next 18 months. Debt to capitalization also decreased since Q1 2018 to 43.4%. The amount of available credit on our credit facilities was $591 million (sic) [ $595.3 million ] at the end of the quarter. To recap, Linamar had another strong quarter of sales and earnings growth, earnings growing over 20% each. The strong sales increase of 22.1% led to solid earnings performance resulting in net earnings improving by 21.7% for the quarter. That concludes my commentary, and I would now like to open up for questions.
[Operator Instructions] Our first question comes from Mark Neville with Scotiabank.
First on the guidance, just some puts and takes by segment, I guess, just to clarify. It sort of sounds like consolidated guidance is essentially unchanged. Am I sort of reading that right, just the double-digit growth [ both ] years?
Well, I mean we're still seeing double-digit growth, but I think what's changed is a bit lower on the margin side based on what's come down in the first quarter or the first half. So we've been talking 8% to 8.5% net margins and I'm suggesting you should be at the low end of that range based on what's gone down there.
Yes, that's what I meant. Okay. Just on the transport -- sorry, the industrial margin. I think it's 14% to 18% midpoint this year. I'm just sort of looking at what you did sort of first half and where it's tracked, I guess, last year at SkyJack. It just feels fairly conservative so I'm just trying to understand sort of the rationale or the thinking in the second half. Is it really just a seasonal component? Or is there something else that you're sort of factoring into the guidance on the margin for Industrial?
Yes, I mean, seasonally on the Industrial side, both SkyJack and MacDon, will see pretty big declines so Q3 is -- can be down 25% to 30% top line compared to Q2. And Q4 could be down another 30% to 40% compared to Q3. So those are pretty big declines that generally have associated with them margin compression so I'm just trying to take that into consideration.
I guess I'm just looking at the last -- nevermind. Just on the metal tariff, the 100% that you can reclaim, was that just on the auto? Or is that for -- would that include SkyJack and MacDon?
That includes anything. So Canada's duty drawback program has been in place for many, many years so it's not at all tied to one sector or another. Anything that you import, if you pay duty, if you subsequently export it, you can reclaim.
So I guess, the only real impact the business is seeing from metal tariffs is just higher prices, just generally? Again, it's not really just from the tariff.
Well, from the tariff, there is some indirect impact, right? So from some suppliers who are passing on higher metal costs that we're unable to utilize through the drawback for, there is some minimal impact from that. It's literally a handful of suppliers and it's quite a small impact that we are expecting. At the same time, however, we do have higher metal costs that Skyjack for instance would be seeing just based on either pressure on metal prices as a result of the tariffs, right? So obviously, people are being opportunistic. American companies, they know that their competition has 25% higher price so they're the only game in town, they're jacking the price is what happens.
So I guess If I'm just taking those indirect costs as well as the local suppliers raising prices as well, even if I think about that impact -- is that a material amount?
It's not a material amount. On the indirect side and on the metal cost for Skyjack, I mean, it's a more important number. I don't think it would reach our levels of materiality, but it's something we do need to deal with.
Yes, I think on the transportation side, I think we have always talked about any increases on metal, we'd have surcharge agreements with our customers. So we're pretty tight on that. And as Linda said, the duty drawback covers us on the back and forth there. On the industrial side, we're an OEM so the exposure to us is, if we're buying in the U.S., what stays in Canada is domestic sales. And then secondly is now working with each customer to mitigate those cost increases, okay? So we're very careful on that. We are growing market share in the booms and telehandlers and actually increasing a little bit on scissors as well. So we're very calculating on what we want to pay to a customer and when. So we try to mitigate first on the supply side and then secondly, if we can, we will talk with our customers.
And Mark, I just wanted to come back to your question around the margins for the Industrial segment, the normalized margins. First of all, I'm taking exchange out of that, so balance sheet exchange. And also when I say midpoint of 14% to 18%, I'm talking about the full year, not individual quarters, right? So if you're comparing to this quarter's normalized margin of 20%, yes, it sounds low but when you think about a low back half, of mid 14% to 18% it's actually better than last year. I mean, last year's normalized margin in the Industrial segment was 15.5%.
Yes, again, I guess, that is sort of where I was getting there because I thought MacDon was a mid-20% EBIT margin business on an annual basis. So just again mathematically, it felt like the 16% was low, but I appreciate your commentary around just the seasonality and how significant it could be.
Your next question comes from David Tyerman with Cormark Securities.
My first question. I wonder if you could outline the onetime charges and the FX revaluation so I can get my numbers right on this, please?
Yes. So you mean the restructuring charges that we -- and do you want to hear that by segment?
Yes, please.
Sure. Starting with Transportation, the restructuring was $3.1 million, and the balance sheet exchange was $5 million. So $5 million gain and then $3.1 million loss, obviously, on the restructuring. And then on the Industrial side, the balance sheet impact was a $4.1 million gain, and the restructuring was $1.3 million loss.
Okay. And so the net of all this is that the earnings were quite close to -- on an adjusted basis to the actual reported. Okay. Second question, I'm just wondering when on the CPV guide, the Meridian fire and the industry volume issues you ran into in Q2, what's the status at this point?
Well, the fire situation was resolved, and F-150 is back in production. Thank goodness.
I mean, they talked a lot about making up the volume later but we have not seen those flow through at this time.
Okay. And then on the industry side, are we kind of back to normal?
Well, it's hard to say what normal is for the last 4 quarters. We've certainly seen some higher production tests at Ford and GM than in the industry overall. So it's all going to depend on levels of inventory and levels of sales and -- I mean, I think that the [ we book ] forecast us for their production levels to normalize, but I mean, obviously, it's going to depend on those other issues.
I think they'd also, David, react when they see some inventory, they take weeks out, right. And that's what happened, and as it comes, right. We saw that in the last quarter, it's just as inventories creep, they then take the actions immediately and cut a week out here and a week out there, and we just deal with that.
And I think, too, David the product changes in regards to seeing what cars are important, passenger car are not -- I think we're now seeing sort of an overall restructuring of the OEMs in regards to the product mix.
Right. So based on what you see right now for Q3, are you back to whatever normal it is, but better than Q2? Or are we still seeing the cutbacks here and there and so the drag on CPV continues?
Well, first of all, don't forget Q3 is seasonally a low quarter. We're going to have shutdowns. And whether we see additional shutdowns on certain platforms is going to totally depend on their levels of inventory and levels of sales.
Yes, the only thing that we would see, hopefully, right now is in maybe Europe, which is really around I'd say one of the key customers there, Volkswagen which is -- what's it called, the WLTP, which is I think the worldwide light vehicle technical procedure, which was started I think in last year. And so I think they are struggling with that, which basically took over from the old standard, and I think it's around CO2 emissions certification. So I think they are under a little bit of a challenge on those, and I think we're seeing a little bit of softening around that.
Yes. That's a very good point.
Okay. So very, very strong CPV, maybe be a bit careful sounds like in Europe. And Asia Pacific do you expect that to continue to be based on your platform orientation?
Yes. It was okay. Really no disruption there. No hesitation there that we have seen.
Again, the content per vehicle in a region like Asia where it's a pretty small number, it's not unusual to see a lot of volatility because a customer decides to rationalize some inventory, and it has a big impact even though it's a small dollar value as sales change?
Right. And just finally on SkyJack and MacDon, it sounds like you're having some challenges, maybe not super large, on margins as the tariffs or whatever. I'm still not clear, like, can't you source most of your steel locally? Can't you get it right back anyway from the drawback?
If it's a tariff, then yes, you could get that back through duty drawback. But the problem is this is not necessarily tariff. It's tariff-related but it's not a tariff, right? It's opportunistic steel companies knowing that they're the only game in town increasing their prices. So can we resource? We're certainly going to try to do so. To a Canadian source, for instance. But in the meantime, the industry is dealing with it. So as Jim has outlined, it's something we're going to have to deal with, with our customers, right? So there's a pricing issue at hand there. I have to say our competitors increased their prices months ago. We have tried to be a little more disciplined about it and work more closely with our customers, which I believe they appreciate. And they understand the situation so we're dealing with it in that sense. I would not say that we're experiencing margin pressure in the Industrial segment. As noted, the guidance that I gave you is higher than the normalized margin range for last year. So I wouldn't say that there's really margin pressure at hand. There's a bit of margin pressure from the cost that we're hoping to offset with price -- on the pricing side. And we're heading into the back half of the year, seasonally a low point. I mean, margins are going to be up from last year. That's not pressure.
To clarify, Skyjack and MacDon, are they in any different position related to costs than your competitors? I wouldn't think so but...
I wouldn't look at, I think, all of us as in that Industrial sector. Take MacDon for a second, within the aerial work platform, are definitely experiencing cost pressure on the supply side. And actually, the supply side of getting enough parts into the system, I think, is part of what's going on because we're at a high-water mark for that Industrial business, with SkyJack. MacDon certainly does not have that pressure like SkyJack or aerial work platform businesses would.
So you're all in the same boat here, it sounds like. It's just a matter of the industry dealing with it.
Your next question comes from Michael Glen with Macquarie.
Linda, can you maybe just go back to the tariff dynamic? Within your -- you have those forging businesses down in the U.S. Are those -- some of those products I believe are getting sent up into Canada to get machined. Are those subject at all to the tariffs, or the retaliatory tariffs in Canada?
No, the tariffs that are in place right now are strictly on metal, not products made from metal, right? So we're talking about steel or aluminum that is being purchased from the U.S., or if we were in the U.S., from outside of the U.S. So they would not at all be captured in the current tariffs. If tariffs are imposed on auto parts, then yes, that they would be in. But the current tariffs are strictly on metal, not parts made from metal.
So that forged item itself is not considered to be an auto part in any way? It's considered to be an auto part then?
Yes.
Once it's forged, correct.
Yes. That's right. Tariffs are strictly on like steel bars, sheets of steel, ingots. We buy very, very little of that. Most of what we buy is castings and forgings which use those types of metals but are not classified as metal.
And in a situation where auto parts came into a tariff situation, theoretically then, there would be a double tariff type situation where that comes into Canada and then gets shipped back into the U.S. engine assembly plants?
Yes. So in the instance of an auto parts tariff, then we would pay a tariff for the castings and forgings that we bring into Canada. We would pay that to the Canadian government. When we exported it, we would -- back to the US or wherever, we would claim back that tariff, so we would be fully reimbursed for that. However, our customers on importing it into the U.S, would have to pay the tariffs that the U.S. imposed. That would be paid to the U.S. government.
Okay. And in general, outside of the steel inflation that you're seeing as well, the ability for -- I think, Mark, you touched on the surcharge in place. You're having no problem passing that through to the OEM as you incur that higher steel price?
Yes, on the transportation side, we have surcharge agreements set up with customers and we go in and basically do a calculation based on weight. And increase the cost or decrease the cost and that's how the system works.
Okay. Switching over to MacDon, when you acquired the business, it was -- the top line indicated was about $600 million. Is there any sort of change? Is in that sort of what we're still working with? Just trying to get a sense of the seasonality that we might have in the business in the back half of the year.
Yes. So it seasonally slows down in the back half, for sure, just like Skyjack, so very similar kind of a pattern that Q2 normally is the strongest quarter. So you can expect to see it starting to the draw back in Q3 and Q4.
Okay. And are you able to help us in any way -- you provided a net earnings number for MacDon in and around $46.1 million for the quarter. How -- to work that back into an EBIT-type number, we would -- how would we do that exercise? What would be the tax rate on that business? Would that just be a 27% type tax rate?
That's the statutory tax rate in Manitoba, yes.
And then would there be an interest expense add-back there to consider?
For sure, that would include the interest on the acquisition debt.
On the acquisition debt. Okay. And then one clarification, on the cash flow statement, the interest payment was about $37.5 million versus the -- which was meaningfully different than the finance expense. What was the -- can you -- the variance between those 2 numbers this quarter. Usually, they're a lot closer.
Well, the difference is that we're paying a lot more interest on the new acquisition debt. But also because our debt levels are up, our covenants are up and, hence, our spreads on our overall debt is up. So pre-purchasing MacDon, yes, our interest earned on our excess cash and on our long-term receivables for a couple of quarters, only, tended to offset each other or come close to it, but that will be gone until we delever back under 1x.
Which we do believe will happen within 18 months.
Our next question comes from Peter Sklar with BMO Capital Markets.
When you said you're seeing cost pressure in terms of underlying steel, is that from Canadian steel suppliers or U.S. Steel suppliers or both?
Both.
Okay. And on the reported operating income number of $272.3 million, I just want to make sure I understand, is that net of the restructuring charges?
Yes. So to get to normalized earnings, you start at the reported operating of $272.3 million. You would take out the $9.1 million of balance sheet revaluation, and you would add back $4.3 million of restructuring and should come out with $267.5 million.
Okay. I get that. And then, Linda, I'm sorry. At the beginning of your presentation, you gave -- it came very quick and furious, but you gave some revised margin guidance. Do you mind going through that again? That was right at the beginning.
Yes. Sure. I said that we thought this year net margins and next year would be 8% to 8.5% and that we would be at the low end of that range this year just based on a bit of a lower margin in the first half than had originally been expected, with expansions next year. Were you also looking for the segments?
Yes, please.
Yes. So the segments on the transportation, we suggest a normal margin range of 7% to 10%, and we expect this year we would be sort of midrange. And then on the Industrial side, we increased the margin range. We used to say 12% to 16%. But as you know, we've been running above the top end of that, and expect to see continued strong performance so we revised the margin range to 14% to 18% and said that we would expect to be at the mid-ish level of that this year with expansion next year.
Right. And then 1 last question. Like when you look at your transportation segment with the operating earnings, I believe, are down year-over-year and there's like a lot of moving parts. Can you just -- that you brought up. Can you just talk in order from largest to smallest what are the major components of that? I mean there's industry production, the Ford fire, [ ramp ] cost. There's so many different moving parts.
Yes. So the 3 key ones was the production levels at Ford and GM. I mean Ford was down 12%.[Audio Gap]