Canadian supplier Linamar Corp. reported a 5.5 per cent gain in net earnings in the third quarter, even as operating earnings in its automotive and transportation business dropped 20 per cent in the wake of headwinds in Europe.
The company, based in Guelph, Ont., said it earned $113.2 million on $1.84 billion in revenue in the quarter ended Sept. 30. Revenue was up 19 per cent compared with a year earlier.
Linamar’s earnings gain was largely the result of its industrial business, which provides equipment and machining to the agriculture and energy sectors, surging in the wake of a recent acquisition. Its transportation unit, which includes its automotive powertrain business, saw sales revenue rise by 4.9 per cent on the quarter to $1.35 billion, while its operating earnings fell by $21.5 million to $108.1 million.
The company pinned the automotive-related earnings dip on the adoption of the Worldwide Harmonized Light Vehicles Test Procedure, which Linamar said has lead its automakers to cut production. Linamar CEO Linda Hasenfratz said the company’s troubles in Europe were offset by sales gains and new revenue from product launches in North America.
“Thank goodness for the launching business to mitigate these top-line declines and also to position us for solid growth when the market does start to pick up,” Hasenfratz said on a Thursday call with investors and analysts.
She said fourth-quarter earnings could again be impacted by WLTP, though she anticipates those concerns will fade in early 2019. The WLTP, which in September strengthened emissions testing on the continent, has rocked automakers and suppliers on the continent. Volkswagen Group, for instance, saw its sales plummet in the wake of the new rules since only half of its core models were compliant.
Despite the headwinds, automotive revenue in Europe gained 3 per cent to $376.1 million even as production declined. Automotive sales rose 8.1 per cent in North America to $718.4 million, while they dipped 5.6 per cent from a year earlier in the Asia Pacific region, according to Linamar.
TRADE AND TARIFFS
Hasenfratz said Linamar could stand to gain from new rules in the revamped North American trade agreement, should it be ratified by the United States, Canada and Mexico. She said higher North American sourcing and labour requirements could help to make its Canadian and American operations more attractive for business. Under the new rules, 75 per cent of a vehicle’s value would have to be sourced from within North America to be imported duty-free, up from 62.5 per cent, while 40 per cent would have to be made with labour earning at least US$16 per hour.
“The terms are not significantly different than NAFTA, which is very positive,” Hasenfratz said. “We see no key areas of concern for us at Linamar, frankly. I think it’s fantastic to have this behind us so that everybody can get back to business.”
She said the steel and aluminum the United States imposed on Canada and Mexico, as well as their retaliatory tariffs, are having a “minimal impact” on Linamar’s operations, though automakers and suppliers in the United States are passing on increased costs to other suppliers.
“The impact to us is small, but the concern, of course, is that the impact is building in many American companies,” she said. “Pain is obviously building, so it’s imperative that these tariffs be dropped as soon as possible.”