Linamar's (LIMAF) CEO Linda Hasenfratz on Q2 2017 Results - Earnings Call Transcript

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About: Linamar Corporation (LIMAF)
by: SA Transcripts

Linamar Corporation (OTCPK:LIMAF) Q2 2017 Results Earnings Conference Call August 2, 2017 5:00 PM ET

Executives

Linda Hasenfratz - CEO

Jim Jarrell - President and COO

Roger Fulton - General Counsel

Dale Schneider - CFO

Analysts

Mark Neville - Scotiabank

Matthew Paige - Gabelli & Company

Peter Sklar - BMO Capital Markets

Todd Coupland - CIBC

Brian Morrison - TD Securities

David Tyerman - Cormark Security, Inc.

Michael Glen - Macquarie

Operator

Good evening, my name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Linamar Q2 Earnings Call. [Operator Instructions] It is now my pleasure to turn the call over to Linda Hasenfratz. Ma’am, you may begin your conference.

Linda Hasenfratz

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, Roger Fulton and Dale Schneider, as well as some members of our corporate team.

Before I begin, our General Counsel, Roger Fulton, will make a brief statement regarding forward-looking statements provided on this call. Roger?

Roger Fulton

Thank you, Linda. Certain information regarding Linamar discussed in this teleconference, including management’s assessment of the company’s future plans and operations, may constitute forward-looking statements. This information is based on current expectations that are subject to significant risks and uncertainties that are difficult to predict.

Actual results may differ materially from those anticipated in the forward-looking statements due to factors such as customer demand and timing of buying decisions, product mix, competitive products and pricing pressure. In addition, uncertainties and difficulties in domestic and foreign financial markets and economies could adversely affect demand from customers. These factors as well as general economic and political conditions may, in turn, have a material adverse effect on the company’s financial results. The company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those reflected in the forward-looking statements. Linda?

Linda Hasenfratz

Thanks, Roger. I’ll start off with sales, earnings and content. Sales for the quarter were $1.77 billion, up 6.6% from last year, which is fantastic to see given key market decline that we saw. Vehicle markets were down 0.5%, but core markets in North America and Europe were down 3% each. The access market was up in the low double digits, which was great to see noting Skyjack outperformed that growth again. Our growth of 7% in markets that were down for 80% of our business is illustrative of the power of the significant backlog and launching business to offset softer markets.

Earnings saw another strong level of performance in Q2. Adjusted net earnings increased 9.7% to $168.2 million or $2.55 per share over last year, marginally up our double-digit growth target. We’re proud of our consistent strong performance at Linamar quarter-after-quarter and year-after-year.

Adjusted net earnings as a percent of sales in Q2 were 9.5%. We continue to run at a solid margin level to sustain strong performance in both of our segments. We expect to see strong full year net margin performance for 2017 and 2018, once again in the range of 8% to 8.5%. Earnings sales again continued to drive solid performance and return on equity above our 20% goal for the quarter.

Our corporate plan of keeping a premium return on investment is driven by our solid disciplined process for CapEx procurement and deployment coupled with our strong technical strength and constant focus on improvement. I see these strengths as key competitive advantages of Linamar.

Investing in our future continues to be a priority for us at Linamar. CapEx in the quarter was $101 million or 5.7% of sales, continuing to trend that somewhat as expected. We’re expecting 2017 CapEx as a percent of sales to be higher than last year but likely not quite into our normal 8% to 10% range. Next year, we do expect to be back in that range of 8% to 10%. Our strong earnings, spending discipline and focus on reducing working capital allowed us to continue to reduce debt levels by another $58 million to bring net debt to EBITDA to 0.92 times.

In North America, content per vehicle for the quarter reached $162.21, up 2.2% from last year, offsetting a 2.8% decline in production levels. Q2 automotive sales in North America as a result were relatively flat over 2016 at $745 million. In Europe, content per vehicle for the quarter was $68.47, a new record, up 7.3% over last year, thanks mainly to business launches in the region. Our Q2 2017 automotive sales in Europe were up 4% versus last year, reaching $392 million in a market that was down 3% in production volumes.

In Asia Pacific, content per vehicle for the quarter was $10.37, up 29.1% from last year. Our Q2 2017 automotive sales in Asia Pacific were up 31% versus last year, reaching $119 million in a market that was up 1.7% in production volume. Linamar continues to target doubling our current footprint in Asia in the next five years.

We’re very pleased with the continued content per vehicle growth in every global region as content per vehicle is an important driver of Linamar’s overall growth. Our expanding content per vehicle reflects our increasing market share, thanks to large amounts of launching business. These launches are proving to be a key factor and differentiator for Linamar in time of softer vehicle production level. Other automotive sales not captured in these content calculations were $58 million, similar to what we saw in the same quarter last year. Nonautomotive sales were up 18.9% in the quarter at $453 million compared to $381 million last year, thanks to growth at Skyjack.

Turning to our market outlook. We’re seeing an outlook of growth or moderate growth this year in most of our markets with a little lighter growth expected in 2018. For the global light vehicle business, the forecast is for 1.8% production growth globally this year and 1.2% next year. Predictions are for flat light vehicle volumes this year to $17.5 million in North America and moderate growth to $22.1 million and $49.7 million, respectively, in Europe and Asia. Next year is expected to be flat, this time in all regions globally with growth of 0.4% to 1.1% depending on the region.

Industry experts are predicting on-highway medium heavy truck volumes to grow this year in both North America and Asia, predicted to be up about 6% in both regions, with more moderate growth in Europe at 2%. Next year, we’ll see continued growth in North America at about 12%, continued moderate growth in Europe of about 2% but a decline in Asia. Off-highway medium-duty and heavy duty volumes continue to be soft but are starting to show some signs of improvement at last.

Turning to the access market. We saw growth pick up further this quarter with global volumes up in the low double digits, as noted. Outlook in the industry for 2017 is an expectation for growth of 5% to 10% in the global aerial work platform market driven by global growth in all product groups as well as growth in all regions. 2018 should see continued market momentum but more muted with growth of up to 3% forecasted. We continue to see positive industry metrics with significant infrastructure spending plans for the next couple of years in every regions and an ARA forecast of 3% to 5% in rental revenue growth for the rental business. Skyjack backlog remains higher than it was last year at this time, which is a good sign as well. 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.

Turning to new business. We continue to see solid levels of new business trends and a strong book of business being quoted. Q2 was a very strong quarter for us with quite a few notable and strategic wins. We’re seeing more outsourcing of components and systems that in the past were exclusively done in house such as buoy machine transmission cases, buoy machine cylinder heads and more complex subsystems. Our customers today need to invest in a wide variety of areas, different compulsion systems, autonomy and mobility more broadly, which seems to be triggering an acceleration of powertrain outsourcing, which is very exciting.

Internal combustion engine vehicles remain an exciting area of opportunity for us, thanks to this higher level of outsourcing, which is more than making up for the forecast for absolute numbers of internal combustion engine vehicles to gradually decline over the next 25 years. In fact, we see our addressable market in these vehicles increasing from about $100 billion today to $200 billion in the future.

Equally exciting, of course, are all the new types of propulsion vehicles currently in the planning stages. All of hybrid, battery electric and fuel cell vehicles bring huge potential to our products. We’re currently quoting substantial opportunities for these vehicles, and we brought home our first major electric vehicle win this quarter. But more on that in a moment. Global vehicle growth is forecast to continue to grow at a compound annual growth rate of 1.8% over the next 25 years according to the latest estimates by Bloomberg.

Changing dynamics and new technologies are having various impacts, some driving demand up, others driving demand down, but the drivers for growth are exceeding the drivers for contraction. This continues to paint the picture of great opportunity in this market in a variety of areas, which Linamar continues to capitalize on. We have 198 programs in launch at Linamar today, representing over $4.7 billion of annual sales at peak. We moved about $75 million of launch business to production this quarter that had a fantastic quarter in new business wins, which is pumping that number up quite a bit.

Looking for -- look for ramping volumes on launching transmission engine and Driveline platform to reach 20% to 30% of mature levels this year. Programs that have moved to production from launch this year, thus far, are adding about $100 million in incremental sales growth this year, and programs currently in launch will add another $450 million to $550 million for total business launch in 2017 of $550 million to $650 million. These programs launch quite steeply next year, growing another 80% to 90% for total launches of between $900 million and $1 billion in 2018.

In addition, as noted, Skyjack is targeting to drive above market growth this year again in markets up 5% to 10%. Temper that growth with the loss of business that naturally ends each year, noting to expect such at the lower end of our normal range of 5% to 10% this year and up at high end in 2018 as well as normal productivity impact each year, which is typically around $60 million or $70 million a year. Our strong backlog of launching business will do a job of driving of growth for us in the high single-digit range or better this year despite flat to down markets. With similar margin ranges between for 2017 as seen in 2016, high single-digit earnings growth and double-digit adjusted earnings growth is expected for this year as well. With an even stronger level of launching business, and again, margin stability, we expect to see a resumption of double-digit growth, top and bottom line, in 2018. New business wins are, of course, also filling in growth for us in the midterm as well. Our current estimate is for $7.5 billion to $8 billion in booked business for 2021 based on current industry volume forecast layered with new business wins and adjusting for business leaving.

I’d like to highlight a couple of our more interesting wins this quarter. First and foremost was a win of an important electronic axle program to a battery electric vehicle platform. Full volume is expected at 500,000 units annually. So this is a very significant program. Start of production is 2020, with more meaningful volumes hitting in 2022 and beyond. Second, we continue to see solid business plans for our client’s machining facility. Another two program wins were seen in the quarter for various transmission components valued in total at more than $35 million in annual sales. We picked up substantial -- a substantial connecting rod program of nearly 2 million rods per year with a French OEM. This was noteworthy as we are endeavoring to increase our content per vehicle with the French given their strong global market position. We saw several wins in the quarter for turbocharger castings. Again, these are at Montupet and in Europe. These are key as small -- smaller engines that are turbocharged to create the power of a larger engine are certainly what we’re seeing in the future of internal combustion engine vehicles.

Our extensive design work around disconnect system saw a big win in the quarter for a heavy truck application. The volume is a little lower given the heavy truck application at about 30,000 annually; but obviously, revenue, potentially higher given the size of the system. Finally, we had a huge quarter in new business wins from our Georg Fischer JV in North Carolina. Over $100 million of annualized sales business was won for the plant, taking our Phase 1 capacity to more than 80% build. Clearly, there’s a need for additional high-quality, large, high-pressure die cast components attached to the inner region, which we have seen great interest in. Turning to strategic update, we continue to proceed extremely well with our new plant development in North Carolina and Chongqing. We also continue to work towards developing our strategies around long-term market that we target such food and agriculture, water, power and age management even as we continue to build our transportation and infrastructure businesses. Turning to an innovation update, we have lots of activity happening in all of our global centers. Our innovation team continues to work with partners, bringing us interesting technology opportunities on a global basis and enhance Linamar’s product offerings in terms of material development as well as product innovation. These are great opportunities to explore new markets as well.

We are finalizing designs for our innovation hub in Guelph where we will incubate interesting innovation ideas to challenge the existing markets and technologies. We have a team working hard on several initiatives in the artificial intelligence and machine learning areas to develop, for instance, next-generation robotics and AGVs, including collaborative robots themselves that can integrate seamlessly into our production lines. We’re also working on automated visual gauging to enhance the quality and consistency of our products more efficiently and also working on digitization, data collection and analytics to create better efficiency, better equipment maintenance and management, improved cycle times and machine uptimes on the shop floor.

We made a significant commitment recently to the new Vector Institute in Toronto focused on AI to ensure we have a front-row seat to all that’s happening in that space. We are also a key partner in the supercluster proposal for advanced manufacturing, combining the power of our tech sector with the strength of our manufacturing sector here in Southwest Ontario. There’s a huge amount of opportunity in these technologies to dramatically improve the efficiency of our operations, both on the shop floor and in the back office as well, which we can deploy on a global basis.

In terms of product innovation, our customers are working closely with us on our Driveline products, in particular -- with particular interest in e-axle opportunities globally as we saw manifested this quarter in our 6 major wins. We have several other programs we are working on for electronic axle as well. We’ve done an enormous amount of work in developing a whole lineup of e-axle and disconnect systems for all the drives [ph] in all variety of vehicles, from small cars to large trucks, and the results are certainly paying off for us.

In other areas of operation, our plants continue to perform well, both on mature business metrics and in terms of launch. In fact, in the last 12 months, we’ve been awarded Supplier of the Year status for each of Ford, GM and FCA. We are continually focused on doing a fantastic job for our customers and it’s certainly paying off.

So with that, I will turn it over to our, CFO, Dale Schneider, to lead us through a more in-depth financial review. Dale?

Dale Schneider

Thank you, Linda, and good afternoon, everyone. As Linda noted, Q2 was a solid quarter as sales grew by 6.6% and net earnings grew by 2.9% in an environment where global market -- vehicle markets were down, which resulted in net margins reaching 9.2%.

For the quarter, sales were $1.77 billion, up $109 million from $1.66 billion in Q2 2016. Operating earnings for the quarter were $215.6 million. This compared to $213.7 million in Q2 of 2016, an increase of $1.9 million or 0.9%. Op earnings growth was depressed by unfavorable changes in FX rates, which resulted in FX losses from the revaluation of our balance sheet. If we normalize out these FX gains and losses, then the operating earnings would have been $222.9 million compared to $208.3 million in Q2 2016, which represents a 7% increase.

Net earnings increased by $4.6 million from the same quarter last year to reach $161.9 million. If we remove any FX gains and losses from the revaluation of the balance sheet, the net earnings would have increased by 9.7%. As a result, net earnings per share on a fully diluted basis increased $0.06 or 2.5% to reach $2.45. After backing out the FX revaluation impact, fully diluted EPS was $2.55 or an increase of 9.4%.

Included in net earnings for the quarter was a foreign exchange loss of $8.2 million, which is comprised of a $7.3 million loss due to the revaluation of operating balances and a $900,000 loss due to the revaluation of financing balances. The FX loss impacted the quarter’s EPS by $0.10. From a business segment perspective, the Q2 FX loss due to the revaluation of operating balances of $7.3 million was a result of a $1.4 million gain in Powertrain/Driveline and an $8.7 million loss in Industrial.

Further looking at the segments. Sales for Powertrain/Driveline increased $38 million or 2.8% over Q2 last year to reach $1.4 billion. The sales increase in the second quarter was driven by favorable changes in FX rates, program launches in Europe and Asia, program launches in the Light Metal Casting Group, higher volumes from both on- and off-highway vehicle, which was partly offset by lower production volumes in certain automotive programs.

Q2 operating earnings for Powertrain/Driveline were higher by $600,000 or 0.4% over last year. In the quarter, Powertrain/Driveline experienced earnings improvements as a result of favorable changes in foreign exchange rate, the net increase in volumes, partly offset by a less favorable product mix, increased management and sales costs that are supporting our growth and a smaller FX gain this year versus last year. If we remove any foreign exchange gains and losses related to the revaluation of operating balances, the adjusted operating earnings for Powertrain/Driveline would have been $160.1 million for the quarter compared to $157.5 million in the prior year’s quarter of 2016, which is a 1.7% improvement.

Turning to Industrial. Sales increased 24.5% or $71 million to reach $361.1 million in the quarter. This increase was due to strong market share gains in scissors in both Europe and Asia, strong market share gains in booms in all three regions and strong market share gains in tele-handlers. Additionally, access equipment volumes increased as a result of solid market growth in all three regions in addition to favorable changes in foreign exchange rate.

Industrial operating earnings in Q2 increased $1.3 million or 2.5% over last year. The increase in Industrial operating earnings was driven by the net increase in volumes, a favorable change in the foreign exchange rate, partially offset by the loss on the FX revaluation of operating balances this year versus a gain last year, unfavorable changes in product mix and launching product and also due to increased management and sales costs supporting the growth. Removing any foreign exchange gains and losses related to the revaluation of operating balances, the operating earnings for Industrial would have been $62.8 million for the quarter compared to $50.7 million in the second quarter of 2016, a 23.9% improvement in operating earnings.

Returning to the overall Linamar’s results. The company’s gross margin percent increased to 17.7% in Q2 2017, which is an increase of $20.5 million, which is due to the increased earnings as a result of the volumes in both segments, favorable changes in FX rate, partly offset by lower earnings as a result of changes in product mix.

Cost of goods sold amortization expense for the second quarter decreased to $80.3 million. COGS amortization as a percent of sales decreased to 4.5% as compared to 5.2% in Q2 2016. On a dollar basis, the amortization decreased over last year as available equipment was redeployed to launching programs to reduce the amount of CapEx that was required.

Selling, general administration cost increased to $90 million from $84.1 million in Q2 2016, and it remains flat as a percent of sales at 5.1%. The increase on a dollar basis is mainly due to the management -- higher management and sales costs incurred in the quarter there supporting the ongoing growth of the company.

Finance expenses decreased $4 million from Q2 2016 to $2.9 million due to the higher interest earned on the investment of excess cash and due to the long -- higher interest rate on long term receivable balances. In addition to this, we have lower interest expense due to the repayment of debt that has occurred since last year. The consolidated effective interest rate for Q2 increased slightly to 2.2% compared to 2.1% in the same period last year, which was a result of the repayment of the -- some of the short term floating rate debt.

Effective tax rate for the second quarter was 23.4% compared to 23.7% in Q3 -- in Q2 2016. Effective tax rate for Q2 2017 was reduced due to net adjustments related to prior year taxes, partially offset by a favorable mix of foreign tax rates in Q2 2017 versus last year. We are expecting the effective tax rate for 2017 to be in the range of 22.5% to 24.5%. Linamar’s cash position was $510.6 million at June 30, an increase of $95.9 million compared to June last year. Second quarter generated $276.5 million in cash from operating activities and in the last 12 months, generated $557.5 million of free cash flow. Total debt has declined by $247.9 million since June 2016. Debt to capitalization decreased to 35.1% from 43.5% in Q2 2016 and is now out of target of 35%. Net debt to EBITDA decreased to 0.92 times in Q2, down to 1.3 -- 1.7 times reported last year and remains under our target of 1. The amount of available credit on our credit facilities is now at $649.1 million at the end of the quarter.

To recap, Linamar has a solid quarter, strong sales and earnings growth. Sales were up 6.7% in an environment where global vehicle markets were down. The strong sales led to solid earnings performance before the impact of the FX revaluations, which resulted in net earnings before revaluations of operating balances of 9.5% for the quarter and a return on equity approaching 23%.

That concludes my commentary, and now I’d like to open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Mark Neville with Scotiabank.

Mark Neville

First on Skyjack, it looks like adjusted margin was flat year-over-year despite 23% increase in sales or -- I’m just curious if you can comment on the impact that mix and pricing might be having on margin and sales as well, I guess.

Linda Hasenfratz

Yes. I mean, we’re growing our boom and telehandler business, which obviously has lower margins than our core scissor business because they’re newer, lower volume. So that does add some impact there. At the same time, of course, we are investing in terms of our R&D group to develop new products. So we’re adding to our fixed cost to some extent as well in order to support this -- the launching products. So our fixed costs are not necessarily static. I’m actually really quite happy with our level of margin performance. I mean, 17.4%, that’s fantastic. I’m super happy with that level of performance.

Jim Jarrell

Yes, I think the pricing pressure has always been there. But I think the key, when you look at what we’ve launched and started to ship this year, I mean, the 85 AJ, I think we’re out with the 30 articulating rough terrains. And so all of these are, as Linda said, higher material content and we’re now getting more market share. So of course, the pricing pressure is there, but the margins, I think, are quite healthy for these type of product sectors, especially around the booms and telehandlers.

Mark Neville

Very good margins. I was just looking for a little color on that. You mentioned backlog being up. Can you give us sort of a sense of magnitude for -- at Skyjack?

Linda Hasenfratz

Yes. We don’t normally disclose the level of the backlog. But I can tell you that it’s higher than it was last year, which obviously is a positive indicator of growth. And I mean, certainly you’re seeing it with the year-to-date performance. I mean, we’re up substantially and substantially above the market. So we do absolutely intend to continue to outperform the market this year and the backlog level would support that.

Jim Jarrell

And weekly order intake still has momentum, and we’re watching that every week. So it really is still healthy.

Mark Neville

And I noticed this quarter there’s another increase in the long-term receivable. Again, I assume that’s supporting some of your independent customers. I think last quarter you talked to maybe potentially sort of selling some of them off as that grew larger. So I’m just sort of curious as to the thought process there or where we’re at with that, I guess?

Dale Schneider

Well, that’s not exactly what we always look at. But as I have mentioned last quarter, we’re only going to do that if it makes sense. So we are constantly looking for opportunities to sell, and when those opportunities do arise, we’ll take advantage of them. But we have not sold any in the quarter.

Mark Neville

And maybe just on the new business wins, you mentioned the e-axle program. Any chance you can tell us the OE?

Linda Hasenfratz

No. We are not disclosing that.

Mark Neville

And I think you’ve talked about, in the past, the addressable market on EVC, the 2,000 per vehicle for you guys. I’m just curious if there’s -- is there any way to sort of estimate where you’re at currently, I guess, including this e-axle program? Just to get a sense of where you’re at versus where it could go.

Linda Hasenfratz

Yes. Well, I mean, clearly the level of electric vehicles production today is timing. So I mean, there’s -- probably anything going on, it’s pretty fragmented. So our content per vehicle is going to be pretty minimal today, but that’s because the market basically doesn’t exist. So we don’t really have a comparator for our current level of production. But this is a great example, I think, of the kind of program that we can be pulling in. If I look at this type of product, I mean, depending on the type of the vehicle and the complexity of the vehicle platform, the mechanical gearbox, which is what this program represents, could sell for anywhere from $300 to $750. So it in itself represents quite a nice chunk of the -- of that $2,000 that I have just talked about in terms of where the content potential is.

Mark Neville

I’m sorry, that was $350 to $750?

Linda Hasenfratz

Something in that range would be reasonable, again, depending on the vehicle platform and the complexity of that gearbox.

Operator

Your next question comes from Matthew Paige with Gabelli & Company.

Matthew Paige

Just a follow-up on one of the earlier questions. Could you try to bucket maybe the margin pressure at Skyjack FX versus mix of telehandlers and booms?

Linda Hasenfratz

Well, I don’t think that there’s enormous margin pressure. I mean, as we’ve discussed, we have maintained our margin performance. I mean, we’re at 17.5% margin. That’s pretty close to where we were last year. So I don’t see that as really indicative of a great deal of margin pressure. So we’re launching new products. That’s going to require continued investment on the SG&A side. So we’re, for sure, doing that. The booms and telehandlers are big growing segments for us. We’re getting more efficient at them every day, but the margins are going to take a few years to reach the level of the scissors. So I just don’t think that it’s an area that really needs much of a deep dive because it’s continuing to perform extremely well.

Matthew Paige

All right. And I guess maybe along those lines, one of your competitors talked this morning about the mix of aerials in the second half moving towards booms and telehandlers. I was wondering if you have any insight into the potential mix of orders in the second half.

Jim Jarrell

Yes, we’re seeing a similar pull on our side, that telehandlers and booms are still having a higher volume push in the second half of the year. So we would echo that comment.

Matthew Paige

All right. And then on the e-axle product, maybe could you explain how that product differs from the traditional product that you would normally supply?

Jim Jarrell

It goes on electric vehicles, so with the electronic axle that’s going to power the wheels. It’s really the difference to the normal all-wheel drive system that you would have, and it really has a stator assembly and inverter and controller that are driving the overall gear system to the wheels.

Linda Hasenfratz

So really in essence, it is the powertrain of the electric vehicle. Now what we’re producing is the mechanical gearbox, and we’re working with partners who are at the other pieces that Jim has described. But in conjunction, they, together, represent powertrain of the electric vehicles.

Operator

Your next question comes from Peter Sklar with BMO Capital Markets.

Peter Sklar

Dale, I just have a few specific numbers questions to ask you first. So in your finance expense of $2.876 million, there’s a gain of $4.619 million. What is that gain?

Dale Schneider

Most of that is interest earned on the excess cash and the long-term receivables.

Peter Sklar

Okay. And then you have on your income statement, other expense of $7.188 million. What is that?

Dale Schneider

That’s mainly the FX loss related to the revaluation of the balance sheet. The $7.3 million net loss shows up.

Peter Sklar

All right, okay. And then back on the e-axle. On this vehicle, like are you involved in the electric motor? I’m just trying to understand your position in terms of the powertrain aspect of this. So where is the electric motor of this vehicle? And where does your axle integrate with the motor?

Linda Hasenfratz

Yes. I mean, it would be fully integrated with the electric motor and the controller. So really the three parts to the electric vehicle powertrain are the mechanical gearbox, the electric motor and the controller. So I mean, obviously, our wheelhouse is the mechanical gearbox. So we’re connected with partners on the other two pieces. The three get assembled together to become the powertrain for the vehicle.

Jim Jarrell

And in our vehicle, you have the front and rear on this, Peter. And so Linamar, obviously, our strength is the mechanical side and then partnering with inverter, motor, control companies to then take a specific design to a customer. So each one of these would be specifically designed for a customer application on their EV system.

Peter Sklar

And is there a gearbox for the front and the rear? Or is there just one gearbox?

Jim Jarrell

Yes, you can have one for the front and the rear. Yes, you could.

Peter Sklar

And on this particular vehicle, what’s the setup?

Jim Jarrell

It’s the rear, mainly.

Peter Sklar

Okay. And are you saying what the content per vehicle is on this? Or is that the range when you were talking about the $350 to $750?

Linda Hasenfratz

Yes, that range would be indicative of this program.

Peter Sklar

Okay. And the other thing I wanted to ask you about, like I’m sure you’ve seen that Detroit Three production schedules are down pretty heavily in the third quarter. So I just wanted to know, like how does Linamar anticipate adjusting for this? I’m not too sure -- like if those production schedules, they’re just going to be taking longer shutdown or are they curtailing over time? I’m just wondering how will Linamar react to that.

Linda Hasenfratz

Yes, I mean, it is quite dependent customer to customer and platform to platform. So in fact, some platforms are running pretty hard right now, seven days even. Others are not running as hard. So it does depend on platform to platform. I mean, generally, when our customer shuts down is when we shut down. There’s nothing abnormal about what we saw in the way of shutdowns this year. Some plants were shut down for the full period. Others were not on our customer side and therefore on our side, so I wouldn’t say there’s anything unusual in the level of shutdowns this year. I’d also remind you that we have a lot of business launching. So that would help in terms of offsetting a little bit of normal seasonal slowdown in the third quarter.

Jim Jarrell

Yes. I think the issue is the car platforms obviously are driving lower volumes, but truck applications and launches in our 9-, 10-speed seems really robust right now. And I think all of these factors of the slowdown and those situations have been factored into our comments that we made.

Operator

Your next question comes from Todd Coupland with CIBC.

Todd Coupland

Just a follow-up, I guess, on the production schedule question. If we’re to think about 2018, is there any way to give us an idea on sensitivity? For example, if we were to see some level of reduction in demand in 2018, what will that need to be to bring your growth back to single digits from the double digits you’re predicting?

Linda Hasenfratz

Well, I think the easiest way for you to cap rate that is our content per vehicle. I mean, our content per vehicle in North America is $150, $160. So if volumes are down $1 million, that’s $150 million to $160 million. So that’s the easiest way for you to build in that sensitivity, and you can do it region by region based on the content that we have in each region.

Todd Coupland

So with that incremental $1 billion, we’d still for North America think about the content per vehicle in the 160 range?

Dale Schneider

The only thing I would add to that is you have to factor in the additional launch work on top of that.

Todd Coupland

Right, yes, and that’s essentially what I’m asking here. And then just on the -- one follow-up on the e-axle. So is that for a platform for multiple batches? Or is that a single batch? Because 500,000 units seems to be quite a substantial outlook for pure EV opportunity given where volumes are today. Can you provide any color on that?

Linda Hasenfratz

Yes, it’s one customer, multiple vehicles.

Jim Jarrell

Yes, and it has -- it probably has 3 different variants in it. So you’d have like a low, medium and high variant application to that.

Todd Coupland

And are you able to say what region of the world that’s going to be targeted at?

Linda Hasenfratz

We’re not disclosing further detail around the program at this time.

Operator

Your next question comes from Brian Morrison with TD Securities.

Brian Morrison

I have a high-level question for you, Linda. Some good commentary again on technology driving an increase in percentage of content. I think on IC you’re charging 50% over the next decade from 30% now. But you detailed some of the drivers of the increase, but what do you see as a risk baked in that 50% or the benefits to exceeding that over the next decade? I’m just trying to get comfort here on the rate of that improvement.

Linda Hasenfratz

Well, I mean, I think that if you look historically, you’ve certainly seen a pretty steady increase in the level of outsourcing. I mean, 20 years ago, it was a transmission shaft. 10 years ago, it was a shaft and shell assembly from that to clutch module. Today it’s for sure a clutch module and sometimes a more complex module over that. So there’s clear trend here. And as I mentioned in my comments, we see that trend accelerating as opposed to decelerating.

In fact, we think that the shift in terms of technology to new types of propulsion means there is so many different areas to invest in that our customers really need the supply base to step up and help cover a broader range of technology options. So we think it’s a train that’s coming that is going to drive outsourcing. I mean, obviously, our customers have their internal employee base that they need to keep employed. So I mean, that’s going to be at the back of their minds. As well is how do they manage that. But the fact is we’re growing global vehicle volumes, which is certainly what is expected. That is driving a need for more vehicles overall, and so that helps to -- if you’re growing overall, you’re growing assembly jobs and you may be shifting from one area of the business to another, but you’re still able to maintain the employment levels and commitments, let’s say, that you might have.

Brian Morrison

So really just volumes that could impact the rate of that?

Linda Hasenfratz

Yes. I don’t think volumes would affect the rate of outsourcing. Volumes would just affect the addressable market.

Brian Morrison

On Skyjack, can you just update us on the product coverage we currently have on booms and telehandlers? I think you’re north of 50%.

Linda Hasenfratz

Yes.

Jim Jarrell

Oh, yes, yes. I mean, we probably have a full range. And then I would say booms were probably about 80% now. Telehandler is probably about 80%. And we have, in the works, probably another 15% to get us up to about a 95% coverage on both. Now that’s for North America. Of course, telehandler is in Europe and we don’t have that product line as of yet.

Brian Morrison

Sorry, I thought the margins look fine. I’m just wondering on the mix. Are you able to provide the ballpark of unit mix of scissors, booms and telehandlers?

Linda Hasenfratz

Well, I mean, it is still primarily scissors, but the booms and telehandlers are clearly growing substantially as a percent of volume -- as a percent of revenue, they’re growing more quickly again because, of course, the selling price of a boom and a telehandler is much higher than that of the scissors. So it does kind of depend on whether you talk about units or sales.

Brian Morrison

Well, just kind of another way, the average price of booms and teles relative to scissors, would it be four times to five times for boom and higher for telehandler?

Linda Hasenfratz

Four times to five times for boom.

Jim Jarrell

Yes. Probably on average you could say that because again, don’t forget in scissors you’ve got small electric, you’ve got rough terrains with them. So you have a full scale of sizes as well, but it’s, on average, three times to four times, I would think, on average, you can probably do that.

Linda Hasenfratz

Yes, like the high runners at Skyjack, you may see in the, say, 10,000 rate. But the booms, you’re going to be probably closer to 45 to 60.

Jim Jarrell

Yes.

Brian Morrison

And telehandlers?

Linda Hasenfratz

Could be 80 to 100.

Jim Jarrell

Yes.

Brian Morrison

Last question, just one housekeeping here for Dale, the finance receivables. I’m just wondering what regulations you have around the size of the portfolio with the receivables getting a little bit higher these days.

Dale Schneider

Yes, it is growing but it’s not a material portion of our balance sheet by any stretch of imagination. So we’re not overly concerned with that at the moment. That’s why we haven’t been rushing on consolidating that. So I don’t think from a balance sheet risk point of view that there is higher percentage of our assets.

Brian Morrison

I’m just wondering how large you’re willing to grow it.

Dale Schneider

We haven’t decided that yet.

Operator

Your next question comes from David Tyerman with Cormark Security, Inc.

David Tyerman

I just wanted to come back to the North American production and the D3 and I guess GM’s K2XX switchover also. So are you saying you don’t think you’re going to see any impact on that roughly 160 CPV from the changes from the D3 and the K2XX in particular?

Jim Jarrell

We don’t see that, no.

David Tyerman

Okay. And we should think of that growth you’re talking about from new product launches, et cetera, being piled on top of the 160 to grow it to a higher level?

Linda Hasenfratz

Well, I mean, I think that certainly the changeover at GM and the reduced volumes in the quarter can have a negative impact, and then the launching business will have a positive impact. So I’m not expecting to see massive quarter-over-quarter increases in content per vehicle if that’s what you’re asking.

David Tyerman

Okay. Yes, that’s what I meant. Just trying to get a sense of are we -- should we be thinking around the 160? Or is there room to move down or up? And I’m getting the message that it’s somewhere in the 160 range. Is that correct?

Linda Hasenfratz

160 and -- probably up a little bit on a content per vehicle basis just based on the launches.

David Tyerman

Okay. Fair enough. And then I just had one other question. The amortization has gone down because of redeployment of existing assets to launching programs. Can you explain how the -- or what’s going on there, how that works?

Dale Schneider

We have more spending on new equipment. Obviously, we’re not depreciating -- we’re depreciating much higher book value on brand-new equipment than we are on used equipment. So by avoiding the CapEx, we’re depreciating just the old equipment.

David Tyerman

It sounds like it’s actually lowered the level, like I think by $5 million or something year-over-year. Is that right?

Dale Schneider

Yes, I think you have all the equipment. Keep in mind, on average, our equipment declines at 20% a year, right? So you would -- in fact, depreciation should decline unless you’re adding CapEx. So by adding CapEx, you’re not going to decline that much.

Jim Jarrell

Yes. And this is fairly fluid, too, that we look at, David, in regards to as a fixed deprogramming maybe coming down where we had a plan of bringing in, let’s say, 10 lays [ph] but we can pull over 6 lays that Dale talked about. We’re watching this on a weekly basis to make sure we’re utilizing the capital properly.

Linda Hasenfratz

Clearly, I mean, we’re going to need to continue to invest, particularly with the big swing that’s needed. This is flowing in for next year. So I wouldn’t expect to see continued decline in the levels of amortization. I mean, typically, we’ve been in that 5% to 6% range. So last year we were somewhere around 5.5% and that’s not what’s right in the middle of that range. I think that’s not a bad expectation. I don’t think we’re going to sit at a lower level and a declining level because there’s obviously a limitation within which we have available asset to redeploy. So we have pretty disciplined process around that, and I think we do actually a fantastic job of managing assets and trying to find the right size for them. So you’ll see that in the numbers. But I wouldn’t expect to see that continuing to come down.

Operator

And your next question comes from Michael Glen with Macquarie.

Michael Glen

Are you able to provide in terms of Skyjack or can you give a sales split between U.S., Europe, Asia?

Linda Hasenfratz

Yes. I mean, the international sales have really been growing at Skyjack. That’s been a targeted area of growth. So we’re trying to diversify both on a global basis and also in terms of the different products. So as we talked about earlier, we’re seeing great growth on the booms and tele-handlers. And similarly, we’re seeing great growth in terms of our international sales. So international is probably -- I think North America is probably somewhere around 65% to 70% of sales and the balance being international.

Michael Glen

Where would that have been a few years ago? Just to get an idea of some of the international growth you’re seeing.

Linda Hasenfratz

Probably 80% to 85% North America.

Jim Jarrell

Yes, 80%, yes.

Michael Glen

Okay. And then just in terms of the North American Powertrain business, can you give your business mix towards passenger car versus truck, SUV or CUV?

Linda Hasenfratz

Yes. We reasonably evenly distributed. I will say that we’re a little heavier towards car. Just from a long-term growth perspective, we’re kind of targeting the smaller, more fuel-efficient vehicles, which of course is not what’s playing out in the market right now. So we used to be pretty evenly, sort of one third, one third. I’d say we’re probably a little more like 40-ish percent car, maybe a little under 30 on the truck and the rest in crossover.

Michael Glen

Okay. And then just in terms of some of the commentary, you’re talking about, regarding the OEMs, potentially looking to outsource more work. Is this a step change in the behavior you’re seeing? And in terms of some of the activity you’re potentially seeing, realistically, when could we see something get allocated to Linamar? Like what’s kind of the time frame there?

Linda Hasenfratz

What do you mean something allocated to Linamar?

Michael Glen

Like when we do actually -- in terms of some of the conversations you’re having today on some of these opportunities, when would that actually -- when can we actually start to see that in Linamar’s financial results? Is it something beyond 2020? Or could there be something more near term than that?

Linda Hasenfratz

Well, I mean, it’s playing out every day. I mean, we’ve been winning more content and surfing on this wave of outsourcing for the last decade. So it’s happening real time. In terms of actual new business wins, I will say that in the last year, we have seen an unprecedented level of buoy machine cylinder head opportunities presented to us. This is a product that was never outsourced. We have won two in the last 12 months, and they’re quoting more. So we’re seeing definitely a shift into areas that were once considered sort of sacred in terms of keeping in house that -- or absolutely no longer. So to me, that’s been a dramatic shift. One of those programs start production -- some of them are in production already and others are a couple of years out.

Jim Jarrell

Yes. I think the other thing to keep in mind is it plays out a little bit different by region, too, right, as the technology adoption with the new propulsion systems or autonomous is playing out. That drives this new potential ways of outsourcing because it will also come back to funding, how much money are these companies willing to put in and balancing out the labor issue that Linda mentioned. So it does play out differently by region, for sure. But certainly, we’re touching things that we never would have touched a couple of years ago. And we’re touching those now. When they get sourced is probably back up in the air, right.

Linda Hasenfratz

And I think the exciting thing about is it is there’s very few players in the market. So when it comes to buoy machine cylinder heads, there’s not a lot of options. And that’s translating into some fantastic opportunities for us.

Michael Glen

Is this something where we could see you take over or acquire some facilities from the OEMs potentially?

Linda Hasenfratz

I mean, I guess that’s always a potential. Certainly, the OEMs have done so in the past, not necessarily in the powertrain area but in other areas. So that could very well be something that we’d love to do. I mean, don’t forget, we bought an engine facility from Renault in 1997. So it’s not an investment.

Michael Glen

And just finally, in terms of -- you’re talking about the casting business. So in terms of Linamar allocating capital and growing the casting business, how far along are you now in terms of where you would like to be in that business? So do you see a lot more opportunity for you to put more capital into growing that business?

Jim Jarrell

Well, I think there’s a couple of comments on that. I mean, the -- first of all, light aluminum is going to grow on vehicles, I can’t remember the percentage, over the next 5, 6 years. It’s quite a big jump. So obviously, the strategy of getting into light metal was key for us. And this latest acquisition that we are undertaking in Europe, obviously, is putting us in high-pressure die cast in a very clear sweet spot between 1,000 and 2,000 metric tons, which is clearly a strategy of working alongside the e-axles.

When you think about e-axles, they have shield a, they have shield b, they have a cover, they have a case, which all fit in very in line with this electronic vehicle e-axle application that we’re pursuing. So the place in Europe has capacity today. So we will need to put some more maintenance upgrade capacity there and then pursue that business.

So I think in relative speaking, we would invest more dollars in this area because there’s more potential opportunities that align with our machining. And I think in Asheville, where we have the joint venture, basically our first phase is basically both 80%, 90% there complete. And that’s a mix of both magnesium and aluminum, which is, again, driving that potential growth opportunity.

Linda Hasenfratz

Yes. If I look at our new business wins just this year, through the first half of this year, we have won almost $200 million of casting business. So I mean, this is a big area. There’s a lot of activity, and there’s clearly a need for the capacity. So it is absolutely an area that we will continue to focus on.

Jim Jarrell

And it also drives really the structural strategy as well, right? It’s not just powertrain that’s got really the structural component that can touch any vehicle, hybrid, electric types, propulsion. So it really covers that and both in magnesium and aluminum.

Linda Hasenfratz

And I think that’s a good point that Jim made around the electric vehicle. Light weighting is the key issue, and so the evolution to these different types of propulsion in electric or hybrid is going to accelerate the adoption of light metal, both on the structural side and in other areas of the vehicle. So we see it as a really exciting area of opportunity.

Operator

And there are no more questions in the queue at this time. Do you have any closing remarks?

Linda Hasenfratz

Yes, I do. Thank you. So to conclude this evening, I’d like to leave you with three key messages. First, we are very proud to have driven another quarter of excellent earnings growth. At 9.7% adjusted growth, we are a whisker away from our double-digit goal, which is great to see for the 24th consecutive quarter. Second, we continue to see strong levels of launches working to offset softer markets, continuing to drive growth for us. Powertrain/Driveline sales up 3% when core markets are down 3% is indicative of the power of market share growth and the value of Linamar’s substantial backlog in these softer markets. And finally, of course, we were thrilled to secure our first e-axle program after several years of focused activity. This is a major program for an all-electric vehicle and indicative of the excellent opportunities that Linamar sees in this segment. Thanks very much, and have a great evening.

Operator

Ladies and gentlemen, this does conclude today’s conference call. Thank you for your participation. You may now disconnect.