Linamar Corp (LIMAF) CEO Linda Hasenfratz on Q4 2018 Results - Earnings Call Transcript

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About: Linamar Corporation (LIMAF)
by: SA Transcripts
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Earning Call Audio

Linamar Corp (OTCPK:LIMAF) Q4 2018 Earnings Conference Call March 11, 2019 5:00 PM ET

Company Participants

Linda Hasenfratz - CEO & Non-Independent Director

Dale Schneider - CFO

Mark Stoddart - CTO, EVP, Sales & Marketing and Non-Independent Director

Conference Call Participants

Peter Sklar - BMO Capital Markets

Michael Glen - Macquarie Research

Operator

Good afternoon, my name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Linamar Q4 2018 Earnings Call. [Operator Instructions]. I will now turn the call over to Linda Hasenfratz, CEO. You may begin your conference.

Linda Hasenfratz

Thank you very much, and apologies for the late start. We had a few technical glitches. So good afternoon, everyone, and welcome to our fourth quarter conference call. Joining me this afternoon are members of my executive team, Dale Schneider, Roger Fulton, Mark Stoddart, as well as members of our Corporate Marketing Finance and Legal teams. Before I begin, I'll draw your attention to the disclaimer that is currently being broadcast and hopefully, you can see, and then I'm going to go ahead and get started with sales, earnings and content.

So sales for the quarter were $1.73 billion, up 10% from last year, which is fantastic to see. But takes us to another record year of $7.62 billion in sales, up 16.4% over prior year. Operating earnings were $158.9 million normalized for balance sheet exchange impact on any unusual items, which was up 8.2% over last year on a reported basis and down marginally after normalizing in each quarter.

Net earnings were $115.4 million normalized, down roughly 4% over last year's normalized results. Full year normalized operating earnings were $807.6 million, up 10.8% over 2017. That makes nine consecutive years of normalized earnings growth at either the operating or net level, a record that few companies can bolster. A few factors that were key in driving our performance this quarter. First, MacDon continued to perform well and made a great contribution to growth this quarter. Number two, Skyjack growth from continued market share growth. And finally, launches in the transportation business are running strong and doing a great job of driving top line growth in some challenging markets.

A few factors were a challenge this quarter and hurt our results. First, light vehicle markets for the 3 regions we serve were down 2.9%, due to significant declines in the light vehicle market in Europe, thanks to both the ongoing WLTP situation as well as deteriorating demand for diesel vehicles.

In addition, vehicle volumes were significantly down in China, affecting several key customers. We believe the WLTP situation and results since -- for our inventory levels will mainly result by the end of Q1 2019, but the European market is forecast to continue to underperform compared to the prior year through the first half, picking up in the latter part of the year.

China volumes are also expected to be under some pressures through the first half of the year, as you can see from this slide. The second key issue was higher commodity cost in our Industrial segment as we saw in prior quarters as well. We are addressing such with price increases to customers, which were implemented January 1 of this year.

Finally, continued pressure from launch cost due to heavy launch activity in the transportation segment, which we do expect to see normalized over the next quarter or two. Normalized net earnings as a percent of sales in the fourth quarter were 6.7%, down from last year due to these factors, but 7.7% for the year, in line with our outlook. On the positive side, our Industrial segment continues to perform well, thanks to MacDon, with normalized operating margin sitting at 17.1% for the year 2018 at the mid-high point of our target range of 14% to 18% as expected. We continue to expect moderate margin expansion in this segment this year. Transportation segment margins were impacted particularly by the declines in mature-high profit program in Europe due to those market declines described, being replaced by sales of launching business with low or negative margins.

Thank goodness for the launching business to mitigate the top-level decline and also of course, to position us for solid growth when the market starts to pick up. We target normalized operating margins for the transportation segment at 7% to 10% and deliver 8.4% in 2018, excellent performance given industry conditions. We expect to see margin expansion in this segment as well this year. As a result of improvements expected in both segments, we expect to see normalized net margin expansion in 2019 to reach between 7.75% and 8.25%. Investing in our future continues to be a priority for us at Linamar. CapEx in the quarter was $144.5 million or 8.3% of sales. That took us to a full year spend of $537.3 million or 7.1% in sales in mid-level of our normal range of 6% to 8% as expected. We expect 2019 to see lower CapEx in both dollars and as a percent of sales and end up at the low end of our 6% to 8% range.

Our net debt level continues to come down, now at $2.02 billion. Net debt-to-pro forma EBITDA is now 1.68x. We expect to bring leverage back down under 1x by late 2019. In North America, content per vehicles for the quarter reached $150.33, up 1.7% from last year, thanks to launching business in a market that was up 1.9%. Q4 automotive sales in North America, as a result, were up 3.6% over Q4's 2017 at $699.2 million. In Europe, content per vehicle for the quarter was $73.06, up 4.5% over last year, thanks to launching business in the region and the market that was down 5.7%. Growth in Europe for us has really been fantastic. It's only 5 years ago that content in Europe was only $14.45. Our Q4 2018 automotive sales in Europe is slightly down to last year, mainly because of market issues, reaching $399.7 million. In Asia Pacific, content per vehicle for the quarter was $8.85, down 6.6% from last year due to production decline from certain customers, I think, with the overall market. When combined with market declines of 3.9%, we saw Q4 2018 automotive sales in Asia down 10.4% compared to last year, reaching $117.6 million. Linamar continues to target doubling our current footprint in Asia in the next 5 years. It's great to see continued content per vehicles growth in the quarter in most regions, despite lower production levels with key customers. But I'd also point out that record levels of content per vehicles were seen on an annual basis for each region, as you can see in our charts. Our spending content per vehicle reflects our increasing market share, thanks to large amounts of launching business, which, of course, is key to accelerating growth when volumes start to pick up. Other automotive sales, not captured in these content calculations, were $74.4 million, up significantly over last year due mainly to increased sales to other parts of the world. Commercial and Industrial sales were up 45% in the quarter at $441 million compared $303.7 million last year, thanks the acquisition of MacDon, which had another good quarter and continued market share growth at Skyjack.

Turning to our market outlook. We are seeing stability or moderate growth this year in most of our markets. For the global light vehicle business, the forecast is for small -- for flat to small increases and light vehicle volumes globally to 17 million, 20.2 million and 50.7 million vehicles in North America, Europe and Asia, respectively. Noting pressures on the first half volumes -- in the latter too, as I mentioned earlier. Industry experts are predicting on-highway medium/heavy truck volumes to be flat this year in North America, up 6.5% in Europe but decline again in Asia. Off-highway medium and heavy-duty volumes are continuing to show signs of improvement. Turning to the access market, the industry is expecting mid- to low single-digit growth in the global aerial work platform market this year. Performance is being driven by growth in most global markets and each product group. We continue to see positive industry metrics with significant infrastructure spending plans for the next couple of years in every region, and an ARA forecast of 4% to 5% rental revenue growth for the rental business. Skyjack backlog is strong. The issue has become keeping up with market demand and managing the supply base.

It is our goal to continue to outperform the market through market share growth this year. From a timing perspective, please note that some key North American customers have delayed equipment purchases until the second quarter of the year. Meaning, we expect a bit of a softer start to the year than we normally see, followed by a stronger Q2 and Q3. Overall, our outlook for Skyjack for the year has not changed, it is just timing that is shifted somewhat. Turning to the agricultural market, the industry expectation is for low single-digit growth in North America overall, but a flat Combine market and a decline in Combine market in Canada. MacDon's product line track more closely to the Combine market specifically, than overall agricultural industry. So do expect some pressure on MacDon this year as a result. Europe and Asia are also expected to be flat to slightly down, although, for MacDon, this is really to the market they're trying to break into. The key issue for the ag market right now is tariff, which are hitting farmers in North America in particular, and therefore restricting cash flows and equipment purchases. On the positive side, we've launched our Linamar OROS corn head branded MacDon, which is getting a solid reception with our U.S. dealers. A reduction in soybean planting thanks to tariffs was likely to be replaced by corn which would bode well for this industry. Turning to an update on growth and our outlook. We continue to see solid levels of new business wins and a strong book of business being quoted in our transportation business with wins levels significantly higher than last year at this time.

Q4 was another strong quarter for us with quite a few notable strategic wins driven by continued acceleration, our powertrain outsourcing and new opportunities in new propulsion vehicles, which is very exciting. Our addressable market across the range of vehicle propulsion types continues to look excellent. Global vehicle growth is forecasted to grow at a compound rate of 1.5% to 2% over the next 25 years.

Each type of vehicle propulsion offers excellent and growing potential for us, and our suite of products for each continues to be developed into growth. The total addressable market for us, as you can see in this chart today is $125 billion, growing to nearly $325 billion in the future. We have 202 programs in launch at Linamar today. You should look for ramping volumes on launching transmission engine and driveline platform to reach 40% to 50% of mature levels this year, which will add another $900 million to $1.1 billion in sales for 2019.

These programs will peak at nearly $4.4 billion in sales. We saw a big shift of about $400 million of programs that moved from launch to production last quarter.

Total business launched in 2018 was nearly $650 million. In addition, as noted, Skyjack is targeting growth above market this year, so expect high single-digit to low double-digit growth to 2019. And again, a little less growth in Q1, a little more in Q2 than you might normally see.

MacDon will face a little market pressure, as noted, particularly in Canada where the market is down and MacDon market share is high but of course, we've got that extra month of sales this year, as our acquisition was February 1 last year. This should balance out the results in flat to somewhat increased sales for the year compared to 2018.

Temper that growth with the loss of business that naturally ends each year, noting to expect such at a high end of our normal range of 5% to 10% in 2019, as well as normal productivity giveback. Our strong backlog of launching business and growth in our Industrial sectors will do a great job of offsetting market softness in Europe and China. So we still expect to drive mid-single-digit top line growth for us at Linamar this year. Sales growth with expanding margin performance in both segments will result in high single-digit normalized operating earnings growth this year, an excellent expectation driving from organic-only growth in a little softer markets. New business wins are, of course, also filling in growth for us in the midterm as well. Our current estimate is for between $8.5 billion and $9 billion in book business for 2022, based on current industry volume forecast layered with new business wins and adjusting for business leaving.

I'd like to highlight a few of our more interesting business wins for you this quarter. First, we won 2 significant balance shaft assembly programs, 1 in Mexico and the other in Europe. In aggregate, they're going to contribute more than $45 million in annual sales at peak. Our significant expertise in gear manufacturing is really the key to these wins. We also picked up several programs for our current plans, representing more than $25 million in annual sales. Programs are for both the passenger car and commercial truck market where we're starting to see some coating activity pick up after a few quiet years. On that front, we saw another package of commercial vehicles components, this time for North America, that in aggregate, are worth more than $20 million in annual sales. So great to see that market starting to show some life.

We saw two important cylinder head casting wins for our Light Metal Casting business, which in aggregate, are more than $60 million year in annual sales. And still on the engine side, we saw an important camshaft win for a key Japanese customer. Again, this is for our Canadian operations where we are rapidly gaining significant market share.

Finally, we saw another important structural component win for our Shock Tower again at one of our Guelph plants. We're rapidly gaining a solid reputation in these products that are key to vehicles light weighting and used of course, in any type of vehicle propulsion. Turning to an innovation update. We made significant progress in the last quarter and last year with our Linamar manufacturing monitoring system, also known as LMMS, which was our major connected machines initiative in 2018. And that sets our goal with LMMS for us to take unstructured data, gathered in our facilities and really turn it into business intelligence. To do this, we designed LMMS in-house as a global standardized data platform.

We're really proud of the work that our team did, which we've been told is leading-edge in terms of its capabilities. LMMS is a modular system, it assesses system function in terms of productivity, with realtime data gathering, as well as modules that will look at quality, tooling usage and machine health. The productivity module is really the baseline for all the other modules, and this is a piece that we were really focusing on getting implemented today. So in 2018, we connected almost 3,000 machines in 50 facilities at 11 countries with all the requisite system upgrades completed as well. In 2019, we're going to continue our rollout of the productivity module across another 300 programs, which will mean more 1,000 more machines, and we will also begin development of the next module of the system. Of course, LMMS is part of a broader digitization initiative that is better summarized on this slide. There's huge amount of opportunity in these technologies, which if you are -- if you have been tracking it, every single one of these indicators is ticking up significantly every quarter.

Turning to an operational update. Our plans continue to perform extremely well, both our mature business metrics and in terms of launch. Our launch systems are excellent, and plant controls, world-class. The recent increase in launch cost is really more related to volume of launches than any system issue, and we're confident to see normal launch cost resume in a quarter or two. Pressure on margins from launch is also related quite simply, due to transition of older platforms ramping down and newer, lower margin due to their rail state programs, taking their place. There is always a temporary impact to margins when this transition occurs, which rectifies launching programs to reach mature levels of profit, which they typically do within two years of being launched.

In terms of new plants, we have three projects underway at the moment. First, we're building a new state-of-the-art facility in Hungary. You can see picture here to have our new e-axle gearbox program, which launches late next year. Secondly, we are expanding our Fabrication facility also in Hungary to accommodate growing cornhead sales and also to help European requirements of projects. And finally, we're significantly expanding a facility in China, again, that's to take on a major e-axle program, which also launches next year. Finally, a quick trade update. Despite the signing of USMCA, the industry is unfortunately, still suffering under the imposition of significant tariffs on metal and the core products from China. The additional costs are taking a toll on our customers, and we're hopeful we will see the elimination very soon to avoid impact to current production forecast.

On a positive side, the impact of tariff Linamar although not zero, is certainly not even close to material. On the China side, we are seeing impact mainly in our Industrial business and cost increases from material suppliers in the U.S. that are buying from China, again, not at material levels. And on the metal side, no direct impact to use facilities, because they are not purchasing any foreign metals, a small direct impact to Canadian facilities for metals that they are purchasing in the U.S. that it is 100% reclaimable through our duty drawback program here in Canada. And on the indirect side, we have small -- a small handful of suppliers that have increased their cost based on increased metal prices, again, not at all at material levels. So with that, I'm going to turn it over 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, Q4 was a solid quarter as sales grew by 10% and operating earnings grew by 8.2%, in an environment where European and Asian light vehicle markets were down by 5.7% and 3.9%, respectively. For the quarter, sales were $1.73 billion, up $158 million from $1.57 billion in Q4 2017. Operating earnings for the quarter were $171 million, this compares to $158 million in Q4 2017, an increase of $13 million or 8.2%. Our normalized operatings for the quarter were $159 million. Net earnings decreased by $11 million or 7.8% in the quarter to $124.5 million. On a normalized net earnings basis, earnings were $115 million. As a result, fully diluted net earnings per share decreased by $0.16 or 7.8% to $1.88. Normalized fully diluted EPS decreased by only $0.10 to $1.75.

Included in earnings for the quarter was foreign exchange of $17.5 million, which related to an $18.4 million gain on the revaluation of operating balances and $900,000 loss on the revaluation of financing expenses.

The net FX gain in the quarter impacted EPS by $0.21. From a business segment perspective, the Q4 FX gain to the revaluation of operating balances of $18.4 million was a result of a $17.7 million gain in Industrial and $700,000 gain in transportation. Further looking at the segments. Industrial sales increased by 70% or $145 million to reach $353 million in the quarter. The increase in the quarter was due to additional sales from the acquisition of MacDon, a strong volume increase is clearly the result of market share gain and favorable changes in foreign exchange rates since Q4 of 2017. Normalized industrial operatings in the quarter increased by $17.3 million or 62% over last year. The primary drivers of the industrial operating results was additional earnings from MacDon, the increase to their volumes at Skyjack and the favorable impact of FX rates since Q4 partially been offset by increase in commodity prices.

Turning to transportation. Sales increased by $12 million over Q4 of last year to reach $1.4 billion. The increase in the fourth quarter was driven by higher sales from our launching programs, favorable impact of the changes in FX rates, partially offset by market declines in Europe largely due to continued WLTP and diesel engine issues in addition to the market declines in Asia.

Q4 normalized operating earnings for transportation were lowered by $19 million or 15% over last year. In the quarter, transportation earnings were impacted by the European and Asian sales declines on higher-margin mature programs that were only partially compensated by the sales from launching programs that naturally have lower margins. It was additionally impacted by the heavy launch costs activity that was globally incurred and onetime restructuring cost that were incurred in the quarter, partially offset by favorable impact of changes in FX rates since last year. Returning to the overall Linamar results. The company's gross margin increased by $9 million due to the acquisition of MacDon, a favorable changes in FX rates and the increased volumes in both segments, partially offset by additional cost for the -- with heavy launch activity globally within the transportation segment and the increased commodity costs in the Industrial segment.

Cost of the goods sold amortization expense for the fourth quarter was $85 million. COGS amortization as a percent of sales was relatively flat at 4.9% of sales. SG&A cost increased in the quarter to $109 million from $92 million, the increase is mainly due to the additional SG&A cost at MacDon, and a onetime restructuring cost that incurred in the quarter. Finance expenses increased $10 million since last year due to the increase in debt levels and spreads as result of MacDon acquisition, higher interest rates to the Bank of Canada rate hikes, partly offset by higher interest earned on the investments of excess cash and the long-term receivable balances. The consolidated effective interest rate for Q4 increased to 2.8%, primarily due to the new acquisition debt and the impact on spreads in addition to the Bank of Canada rate hikes. Effective tax rate for 2018 came in at 22.1%, in line with expected tax rate as discussed at the Q3 conference call. Effective tax rate for the fourth quarter increased to 19.2% compared to last year. Effective tax rate in Q4 was increased due to the onetime future tax rate reductions last year and the increase due to less favorable mix of foreign tax rates, which is partially offset by 2017 tax adjustments that related to prior periods that did not reoccur in 2018. We are expecting the effective tax rate for 2019 to be in the range of 22% to 24%.

Linamar's cash position was $472 million on December 31, an increase to $33 million compared to December 2017. The fourth quarter generated $260 million in cash from operating activities, which is used to fund CapEx, debt repayments and interest payments. Linamar generated $109 million of free cash flow in the quarter. Net debt-to-pro forma EBITDA decreased to 1.68x since the acquisition of MacDon, and we expect net debt-to-pro forma EBITDA to be back under 1x by the end of 2019. The amount of available credit on our credit facilities was $722 million at the end of the quarter. To recap, Linamar had another solid quarter to complete another record year with annual sales growing 16%, and annual operating earnings growing at 16%. The strong sales increase in the quarter led to solid earnings performance despite the issues in the European and Asian light vehicle markets. That concludes my commentary. And I'd now like to open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from Peter Sklar from BMO Capital Markets .

Peter Sklar

Linda, you were talking about the negative impact on your business from the take rates of diesel engines in Europe. I was always under, I guess, the mistaken impression that you had pretty modest exposure to diesel, and you were largely gasoline exposure in Europe. Was I incorrect?

Linda Hasenfratz

No, you are correct. We don't have a significant exposure to diesel but we do have some diesel programs. So if we had a significant exposure to diesel, you would've seen a much bigger issue. So we do have a few diesel programs that obviously we're running a little soft. Much bigger issue was WLTP in the quarter.

Peter Sklar

Okay. In the Transportation segment, there was a $6.2 million restructuring charge, I believe. Could you tell us what that related to?

Linda Hasenfratz

Yes. We are doing some restructuring mainly in our Light Metal Casting Group. So changing up a little bit accountability to shift more into plants and away from sort of the group level office. So we have some restructuring costs associated with that.

Peter Sklar

So it was not -- it was like people cost termination cost?

Linda Hasenfratz

Correct.

Peter Sklar

Okay. And when you say like Light Metal Casting, that's aluminum die casting?

Linda Hasenfratz

It's the former Montupet group.

Peter Sklar

Okay. I believe you said that in terms of business falling off in 2019 in the Transportation group, you're looking for the high-end of the 5% to 10% range. Is that correct? Did I hear that correctly?

Linda Hasenfratz

Yes. So I've got back up on the screen, the outlook, so you can see what our expectations are around margins for the various segments. So I don't think I gave you a number for Transportation sales, other than talk about the launch book and business leaving. Sales was overall -- for overall Linamar for the year, we're expecting mid-single digit. Was that your question?

Peter Sklar

No. Just the amount that usually you give like the negative impact of the business falling off in the Transportation segment. I just want to confirm you said at the high end of the 5% to 10% range?

Linda Hasenfratz

Yes, yes. That's right. You can see it there at the second last row of the chart.

Peter Sklar

And just to confirm the calculation, the 10% is on the Transportation segment revenues, not consolidated sales?

Linda Hasenfratz

No, it's on consolidated sales.

Peter Sklar

Okay. And just lastly, this little spike we're having in, or I should say, you are having in launch costs that you expect to settle down over the next couple of quarters, like what did that relate to? Because when I look at the -- like you usually disclose the number of programs that you're in launch with, and it's usually 200 programs plus and it hasn't changed. I'm just wondering, was there anything that causes particular spike in launch phase and launch costs?

Linda Hasenfratz

I wouldn't say that it spiked in Q4 in comparison to others. Like we were already in Q3 talking about higher launch cost. So I don't think -- I don't -- wouldn't say it's materially changed from Q4 to Q3. I mean, obviously, when we're launching over 200 programs and we're in a big ramp phase right now with -- we're kind of getting to much more significant volumes on the new programs which, obviously, there's going to be a negative impact to the programs that they're replacing, if indeed, they are replacing something that's in spike. So there's always a bit of a temporary impact to margins when that happens. So there's higher launch cost and then a little bit of impact on the margin side that you've got these new programs that are launching that have lower margins obviously during their ramp phase. And they're replacing mature programs that are running at a higher volume. So you always have a little bit of a balancing issue. So I'd say, we're seeing a bit of that in just launch cost because we're really in a significant ramp phase right now. I wouldn't say -- I wouldn't call it a spike. I mean, it's been -- it's part of the scenario here and it's something we talked about last quarter as well. So I wouldn't read too much into that. And we do expect it to settle down over the next 1 to 2 quarters.

Operator

Your next question comes from Michael Glen from Macquarie.

Michael Glen

Linda, can you just talk a little bit about the e-axle plants that are in China? And I think I can't remember the location of the other one that you mentioned. But can you just talk about when the expected production is and the CapEx that you're outlining for those facilities?

Linda Hasenfratz

Yes. I'll -- so the two plants are in China and in Hungary, I'm going to let Mark talk about the launch from the production volume perspective in a minute but in terms of capital expenditures, we would not normally disclose that on a program by program basis. So I mean, I can tell you in general. Our new plants CapEx for new plant was just primarily the cost of equipment as opposed to the plant itself. The plant itself might be $10 million or $15 million, maybe a little more. And then the capital for that plant might be anywhere from $60 million to $100 million depending on the level of sales.

Mark Stoddart

Mike, both plants will start production in 2020.

Michael Glen

Okay. And are you able to, give an -- I mean, this is a newer product for you, are you able to give some thoughts on the margins coming out of these programs? Do you expect them to look similar to what you've seen on traditional programs for yourself?

Linda Hasenfratz

I would expect them to look similar. They may be a little lower on the margin side because they're assemblies. So there are purchased components that are going to be in them. But I mean, these assemblies are primarily gears and shafts and housings and -- all of which we would make ourselves. So whereas an assembly might normally be a little lower on margin, I think these ones will be reasonably similar to what we would be used to normally.

Michael Glen

Okay. And when you're looking at the European business overall, obviously, there's quite a few headlines as to various directions being taken in that market. The way your product is lined up there, do you see any -- are you well-positioned as they transition into more electric and hybrid offerings?

Mark Stoddart

For sure, we're -- I mean, we've got a full suite of hybrid and e-axle products in regards to the -- our various designs that we've done to date for axle, e-axles, but also our e-axles for hybrids and any of if there are PTUs, RDUs for the hybrid markets. We've got a full suite of capabilities not just also from the passenger car but also where we've got a fair bit of product that we're looking at around commercial vehicles that would be suitable globally, not just in Europe.

Linda Hasenfratz

So I mean, in summary, I'd say, we're very well-positioned. I mean, if you look at -- we've won two major e-axle gearbox programs globally that in aggregate represent over 1 million units at full volume. When they hit low volume which will be in the, let's say, early 2020 -- early to mid-2020 time frame, the current forecast for electric vehicle production globally is around 5.5 million to 6 million units. That means we've got 20% market share, globally, for gearboxes, which is pretty fantastic. So we're clearly in a leadership position around those products in particular and then all the other pieces that Mark was talking about will only add to that.

Michael Glen

Okay. And did you give the total program size for the peak volume like in dollar figures for the million units?

Linda Hasenfratz

No. We haven't.

Michael Glen

Okay. And then just 1 additional question. The working capital that we see on the cash flow statement, is there -- do you expect -- last year it was about $314 million draw. Do you expect that to normalize in 2019?

Linda Hasenfratz

Yes. That is absolutely a key focus for us, is reducing noncash working capital. I think there is some good opportunities to do that particularly in our industrial businesses.

Operator

Your next question comes from Mark Fife from Purchase Holdings [ph].

Unidentified Analyst

I have a number of questions, let me go through them one by one. First of all on Skyjack, in the last recession, Skyjack's revenues plunged over 50%, and they showed a significant loss. Can you tell us the steps you've taken over the last decade, if any, to enhance those results when the next recession comes for cyclical businesses, like Skyjack?

Linda Hasenfratz

Yes. I would say first of all that the last cycle down was hardly a characteristic recession, right? I mean, that -- what happened in 2009 was not anything remotely close to what happened in any other cycle down. So I don't think you should expect anything close to that for Skyjack. So we do expect the market this year to be up, as I've described. They are forecasting that we'll see some tailing down in the market out in the 2020, 2021 timeframe. So what are we doing to respond to that? Several things. Number one, we're growing our product line. So we are increasing market share in booms and telehandlers. So that's a real key to offset market softness if you can be growing your market share than you have a great tool to offset market declines. So that's something we've been very active in, in the last decade. Also expansion internationally for the same reason. So again, growing global market share is the key element in offsetting market softness. Finally, on the telehandler and booms side. As we have launched new programs, we have put in more flexible production systems in the sense that we are outsourcing bigger chunks of what we may have traditionally done in-house in the past and that is very important for positioning for potential cycle downs because it means we're not sitting on all that investment and capital. It's something that sitting at as supply base feeds spread it out. So quite a few things.

Unidentified Analyst

That was very helpful. If I can ask one, did you -- if I understood you correctly, you took down your net margin guidance for 2019 by 50 basis points relative to what you said on last quarter. Did I hear you correctly? And what is the reason for that?

Linda Hasenfratz

Yes. We did trim off the margin expectation somewhat. Really 3 key things were driving that, softer outlook for European and Asian, notably China, production levels than what was forecasted a quarter ago. And a little less growth at MacDon than originally expected because of the tariffs situation that I've described. So we're still expecting to see significant growth, high single digits in soft to declining markets. I think it's pretty fantastic growth and 7.75% to 8.25% margin, I think, is actually also a pretty fantastic level of performance.

Unidentified Analyst

But if your operating margin is going to be at high single digits, as you said, and the interest expense will come down because you're paying down debt, and your tax rate is pretty similar in '19 versus '18, I'm not sure why -- I mean, that other guidance seems very good, I'm not sure how that jives with taking down your net margin guidance.

Linda Hasenfratz

Yes. I mean, I said that operating margins would expand moderately on the Industrial side and that they would expand on the Transportation side. I didn't give any indication of exactly how much. All of that is going to change. But you're right, interest cost will be down a little and we will have margin expansion in both segments. And when you translate that all down to the bottom line, you'd see high single-digit growth.

Unidentified Analyst

Okay. If I could just ask about the comment about being leveraged under 1x by the end of '19. Right now, your $2 billion in net debt EBITDA estimates next year, or 2019 at $1.25 billion, that means you'd have to pay down about $700 million or $800 million in debt this year. Is that what you're really expecting to do?

Linda Hasenfratz

Yes, that's correct. It will be through a combination of obviously higher earnings, so as noted high single digits earnings growth, lower capital spend as I also mentioned in my formal comments, capital spending is going to be down and as just noted in the last question, we've got a big focus on noncash working capital. So it is our expectation to see some good cash flow generation this year.

Unidentified Analyst

That's terrific. Dale, if I can ask you one. On the last call you said because of the accounting changes about writing off a new equipment in Canada. You'd give some commentary on the first -- on the year-end call about what that might mean to Linamar. Could you make any comments about that?

Dale Schneider

Yes. This is in relation to the U.S. tax changes that we're talking about in Q3. So we've gone through our homework and have a better understanding how those impact. It won't -- from an accounting point of view, it won't change our accounting income or the accounting tax. It will mean a better taxable income from following a tax returns point of view. So from our point of view, it's more of a cash flow issue than it will be an earnings issue.

Unidentified Analyst

Okay. And just the last question, I've read recently that several OEMs are closing factories in China because they just can't compete with the local manufacturers. Is that what you're seeing in China? And is that hurting you because you do business with Ford or GM?

Linda Hasenfratz

I mean, I haven't seen certainly any of our customers shutting facilities. So we certainly don't have any impact from any OEM closures. The market is down as we discussed, so that's -- that has an impact but none of our customers have shut their facilities.

Unidentified Analyst

Okay, this really is my last question. Is there any reason financially why you guys tend to report later in the quarter than any others? Is there some Canadian regulation or something I'm missing?

Linda Hasenfratz

No, no, no specific reason.

Operator

[Operator Instructions]. The next question comes from Carlos Asapura [ph], Private Investor.

Unidentified Analyst

So my first question is about what I would call the Linamar platform. You bought the Skyjack for $30 million in 2002 and today, you have a working margin of like $220 million. You've been a small Canadian company all over the world. You can supply essentially with MacDon. So my question is, could you please explain how your -- autoparts -- how did you get -- with companies around the world, what are you seeing with MacDon would have the opportunity?

Linda Hasenfratz

Yes, absolutely. So we feel that our three businesses have very strong relation to each other by virtue of the fact that they're all based in metallics manufacturing. So we've been able to bring a lot of cost-saving ideas to both Skyjack and now MacDon in terms of how we can reduce cost from a lean manufacturing perspective. That's been a hugely successful strategy at Skyjack and also at MacDon. We also bring a lot of strength from a purchasing perspective. And also, economies of scale and leverage in terms of just a bigger buy. So certainly, we were able to do that with Skyjack. And we're in the process of doing so with MacDon as well. So as they become part of our global buy, we can trim off the cost. So lean manufacturing, purchasing, access to global footprints, money to invest to expand the product lineup and the global footprint of the two businesses, I would say, would be the key benefits that we can bring to the table for them.

Unidentified Analyst

Okay, that's great. So my second question is about your -- the market perception of Linamar. I mean, in several interviews you have been pointing to the fact that Linamar is not an autoparts company, it's more diversified Industrial. However, the market valued you like, I mean, you are an auto company, and you have like, 30%, 40% of your operating income coming from Skyjack and MacDon. So I was curious about your opinion about this. And do you have any plans of how you guys change the market perception and get yourself properly valued?

Linda Hasenfratz

Yes. I acknowledge your frustration and can tell you that I am equally frustrated at the level of valuation. I do believe that sum of the parts valuation is more appropriate approach. We do have some analysts who do value us in that way and I think it makes a lot more sense to the sales particularly as we pointed out with the high level of earnings performance from our Industrial segment. So it's a story we continue to talk about and illustrate to our shareholders. And I'm confident that with time, we will see a shift in terms of that valuation.

Operator

There are no further questions at this time. I will now turn the call back over to the presenters.

Linda Hasenfratz

Okay, great. Well, thanks very much. To conclude this evening, I'd like to leave you as we always do with 3 key messages. First, we are thrilled with another record year of sales and earnings at Linamar and particularly with achieving our ninth consecutive year of double-digit earnings growth. I think that is pretty impressive. And we're very proud of that record. Number two, we are really optimistic in our outlook to see margin expansion this year and high single-digit earnings growth. Again, that's something that's not every manufacturing company can say today with soft markets out there. So we're pretty proud of our ability to deliver that. And finally, we are very focused, as discussed, we are continuing to significantly reduce debt and improve our leverage in 2019 through earnings growth, a reduction in CapEx spending and carefully managing our noncash working capital. So thanks very much everybody and have a great evening.

Operator

This concludes today's conference call. You may now disconnect.