Description

Linamar (LNR CN):

Overview / Thesis:

Linamar is a Canadian Tier 1 supplier of Powertrain/Driveline auto parts ($5B (85%) of Sales and $540M (80%) of EBIT) as well as a leading manufacturer (#4 overall; #1 in Scissor Lifts) of Aerial Work Platforms (Industrial segment) ($860M (15%) of Sales and $140M (20%) of EBIT), such as Scissor Lifts, Boom Lifts, and Telehandlers.  They currently have a $3.9B backlog (new business at peak expected sales) in the auto segment that will allow them to grow revenue by 30% by 2020 even with flat auto sales, and by 40% with expected additional new business wins.  Additionally, their Industrial (AWP) segment has higher margins and growth than competitors who are trading at ~15x EBIT.  Despite this they are trading at 5.2x TTM EV/EBITDA, 7.6x EBIT, and 7.6x PE.  In the words of CEO Linda Hasenfratz recently: “That's insane.  We're a growth company, we've got significant business launching that's going to drive continued growth over the next four or five years, even in a flat market, so it's crazy for us to be trading at such a low multiple."  We agree.  If you apply a 14x EBIT multiple on Industrial (vs comps at ~15x) and 8.5x EBIT multiple on Powertrain/Driveline (vs comps at ~7-10x) you get a value of $82 (34% above the current price) (6.5x TTM Consolidated EBITDA at target price), despite having better growth prospects and higher margins than most competitors.  Linamar should trade to $80+ in the next year and to $100+ over the next 3 years.

Linamar has a significant runway for growth the next 4-5 years:

• ~$7.75B ($7.5-8.0B) of total sales secured for 2020 (32% increase from TTM) just on current booked business based on current auto industry volume forecasts (~flat), adjusting for normal business rolloff (5-10% annual roll-off of matured business), and moderate growth in Industrial.  

• ~$8.35B ($8.1-8.6B) of Target sales for 2020 (42% increase from TTM) including the above plus target additional New Business wins.

Substantial growth expected in Powertrain/Driveline (85% of sales and 80% of EBIT) despite "peak auto" in US:

• Ability to grow even if auto sales decline modestly:

• $3.9B of Programs in Launch (annual sales at peak of programs signed but not yet in production).  It takes ~3-5 years from business win on car model until at peak production, which is generally maintained for at least 3 years and then rolls off.  ~5-10% of revenue rolls off each year from mature contracts.

• "Our growth at Linamar does not come from market growth alone. Of course, that impacts our mature business if market volumes were to contract, but we're strongly growing market share in every region, which is the primary driver of our growth. It would absolutely be our intent, even in a scenario of flat or down volumes, to still grow at Linamar."

• US auto sales (cars and light trucks) were 17.5M in 2016 and growth forecasts for 2017 range from -2.6% to +1.8%.

• Linamar 2017 Forecast for Auto Sales:  Expect all regions to see a little lighter growth, with 0.6%, 2%, and 1.4% forecasts for North America, Asia, and Europe respectively.

• We estimate that a much bigger than expected 1M drop-off in US sales (-6%) would impact revenue by ~$165M (vs a $3.9B backlog at peak sales, offset by the 5-10%/year roll-off).

• Only 30% of powertrain/driveline parts are currently outsourced (remaining is done in-house, unlike other auto parts which are mostly outsourced already) but they are more cost-effective to outsource given increasing complexities/demands (including conversion to lighter aluminum parts to meet more stringent MPG requirements).

• Linamar thinks it will take a decade or two for the 70% done in-house to be outsourced which will cause a sustained period of growth for Linamar. "Huge opportunity for extended period of growth.  Significant content potential in both EV (Electric Vehicle) and ICE (Internal Combustion Engine)."  Linamar estimates there is $3500-4000 of Content Per Vehicle in the engine, transmission and driveline systems of an ICE or Hybrid car (but only ~$2000 for Battery Electric Vehicle) with total market at YE 2015 of $500B which will grow to $650B by 2020.

• Linamar currently supplies $157 of "Content Per Vehicle" (9M 2016) with their OEM's in North America, up from $128 in 2011.

• MPG and Emissions Rules are driving transition to Aluminum from Steel in Powertrain/Driveline:

• Global MPG and Emissions Rules:

• US:  47MPG by 2021 and 55 MPG & 110 Grams of CO2 by 2025

• EU: 61MPG and 95Grams of CO2 by 2021;

• Japan:  55MPG and 105 Grams of CO2 by 2020;

• China:  50MPG and 116 Grams CO2 by 2020.  

• Linamar is a global leader in forging/casting/machining light weight metals (aluminum) for powertrain/driveline.

• High Margins on Existing Business and Programs in Launch:

• 10-11% EBIT margins currently in Powertrain/Driveline (vs most comps at ~5-12%).  

• A couple years ago they had medium/long-term guidance of 7-10% EBIT margins but were 10-11% in 2015 & 2016 and guided to low end of 10-11% in 2017.  

• They say Programs in Launch over next few years are at similar margins as recent.  Potential decreased auto volumes would be the biggest factor which could decrease margins.

Value of Industrial (Aerial Work Platforms) (15% of sales and 20% of EBIT) not reflected properly in stock price:

• Company thinks they have a "massive opportunity for growth in Industrial (aerial work platform – Skyjack brand) business" (15% of sales and 20% of EBIT):

• Comps in Aerial are trading at ~15x TTM EBIT (11x TTM EBITDA) vs 7.7x (5.2x EBITDA) for Linamar overall despite worse performance than Linamar and lower margins.

• Linamar is the market leader with ~50% share in scissor lifts, while only ~9% overall in Aerial Work Platforms ($7.4B USD business ($10B CAD); #4 of 5 total players).  

• They have been growing their offerings and market share in other AWP products (boom lifts & telehandlers) and they believe this will continue.  Plan to get to 95-100% coverage in Boom Lifts & Telehandlers (in addition to scissor lifts where they already have full coverage) by 2020.

• Company Target of $1.3B CAD ($1B USD) in revenue 2020 from $864M CAD TTM (50% growth).

• High Margins:  

• 16.3% EBIT margins in Industrial (Skyjack) versus comps at ~6% overall and comps Aerial Work Platform segment EBIT margins at ~9-10%.  

• Linamar previously had guidance of 12-16% margins but have been at or above 16% past few years and guided to same in 2017.

• Linamar(Skyjack) Currently Outperforming Competitors (but industry weak in 2016 and could continue to be weak in 2017/2018 due to ~8Y replacement cycle from weak 2008-2010):

• Terex (#2 globally) access segment revenue and operating income down 8% and 24% YoY in TTM and expects revenue down 12% in 2017.  2008-2010 industry sales in US were very low and this is now impacting the replacement cycle.  Terex expects the market to be down further in 2017 in North America but up in Europe (down significantly overall though).  Terex backlog at 9/30/2016 down 15% YoY.

• Oshkosh (#1 globally) AWP segment Revenue and Operating Income declined 7.5% and 24% YoY in latest TTM.

• Linamar (#4 globally but #1 in scissor lifts) says their backlog is up 10-15% YoY, their 9M 2016 revenue is up 1.7% and operating income down 13% (though down only ~3% if adjusted for exchange rates) (TTM revenue up 3.8% and operating income down 7.4%).  Expects revenue increase in 2017 but more through market share gains.

• Should benefit if Mexico Wall and other large Infrastructure projects are built (though seems to be pushback from many republicans on these plans and I doubt the large infrastructure spend will happen).

• Historical:  Linamar bought half of Skyjack in 2001 and other half in 2002 for $31.4M CAD total.  Grew the segment to $140M CAD in operating income T12M.

Vertically integrated (advanced forging/casting capabilities in addition to machining):  

• In past years would obtain iron and aluminum castings from 3rd parties.  Now they are a leader in forgings/castings, particularly with light weight metals (aluminum).

• A technology leader in advanced light weight metal castings.

• Established JV with GF Automotive for High Pressure Die Casting for casting light weight metal of sufficient strength to replace steel.

• Acquired Montupet, a global leader (7 world class foundries) in aluminum gravity and low pressure die castings with specialty in cylinder heads, in January 2016.  80% of Montupet’s revenue comes from casting of aluminum cylinder heads.

• LNR is global leader in machining cylinder heads.  The Montupet acquisition enables LNR to offer complete cast and machined cylinder heads. Formerly, LNR would machine third-party castings.  

• A global leader in forgings:

• Acquisition of global leader in Hatebur style forgings (Seissenschmidt AG), in 2015, to complement their first forging acquisition in North Carolina (Carolina Forge Company) in 2014. Together these businesses have the capability to manufacture over 200 million forgings a year.

• Forging technology has advanced considerably in the last decade.  New, near net shape forgings eliminate considerable weight in the vehicle as unnecessary material is removed at the outset of the manufacturing process. Less material means less weight, less machining, less cost and better fuel efficiency with lower emissions. The businesses are also a huge complement to their world class gear machining capability.

• Linamar is the largest independent supplier of machined gears globally today with programs running or launching that will take them to more than 50 million machined gears produced annually within the next few years. With in-house forging and machining for gears they open up great possibilities in terms of design optimization for their customers to minimize weight even further and maximize system performance.

• Company expects structural aluminum components to represent >150lbs per vehicle within 10 years.

• Process diversification as they vertically integrate forwards into more complex modules or assemblies of the products they already make and backwards into selective, strategic types of castings or forgings.

High ROE and consistent earnings growth:  

• Target >20% ROE over time and have averaged higher the past 4 years.

• Have had 21 consecutive quarters of double digit earnings growth (as of Q3 2016).

• Company says expect high single-digit revenue growth in 2017 and similar margins so likely high single-digit earnings growth.

• 30% revenue growth to 2020 just on booked business and 40% on expected New Business wins.

High Insider Ownership / Aligned with Shareholders:

• Frank Hasenfratz (Founder and Chairman) and Linda Hasenfratz (daughter of founder and CEO since 2002; 50 years old) hold a combined 19.2M shares (29.5%) worth $820M USD = 1.1B CAD (vast majority of their net worth).  Current holdings are the highest they’ve been historically.

• Repurchases:

• In 2008 spent $66.2M to repurchase $5.1M shares (~$11.00/share) and in 2006 spent $31M in repurchases.

• No repurchases since 2008.  

• Recently have said the stock is cheap but are focused on debt reduction (after acquisition in January 2016).  After they get debt to target levels they’ve said they could increase dividend or do repurchases.

Tariff-Free Trade Agreement reached between Canada and European Union in October 2016 (EU Parliament approved on 2/15/2017):

• The Canadian-European Union Comprehensive Economic and Trade Agreement (CETA), reached on Oct. 30, 2016, will give Canada’s Linamar tariff-free access to Europe, the destination for about 25 percent of its Skyjack division’s sales of aerial work platforms and auto parts.  They said this would give them an advantage vs competitors.

• Currently 23% of revenue is to Europe (though a significant amount it to UK and the Trade Agreement may not apply if BREXIT).  This is expected to rise to 34-35% by 2020.

• US trade with EU:  EU duty on imports from the US is 10%; US duty on imports from the EU is only 2.5%.

• Canada Trade with EU (before agreement):  Canada’s import tariff was 6.1% on vehicles. Europe had a 10% tariff on vehicles and a 4.5% duty on parts. Canada has a large trade deficit in autos with Europe.

• Canada, which currently exports about 13,000 vehicles a year to the EU, will be allowed to export up to 100,000 vehicles annually, provided they are at least 20% manufactured in Canada. Vehicles with at least 50 per cent Canadian content will enter duty free and would not be subject to the quota.

Cheap Valuation Overall and Versus Comps:

• Currently only 5.2x EBITDA and 7.7x EBIT; seems too cheap given the 30% growth by 2020 (assuming flat auto sales) just on booked business and 40%+ growth on expected additional new business.  

• Comps in Industrial (Terex/Oshkosh) (20% of company EBIT) are trading at ~15x TTM EBIT with much lower margins than Industrial (Access) Segment of Linamar (and lower expected growth).

• Terex and Oshkosh have overall EBIT margins of ~6% and Segment EBIT Margins of 9-10% vs Linamar Segment at 16.3%.  

• Linamar has had higher revenue growth than comps as they have been taking market share.

• There are many auto parts companies but we used the following comps for Linamar:  

• The two main Canadian auto parts comps are Martinrea and Magna which are trading at 7.4-8.0x TTM EBIT with 5-7% operating margins and lower expected growth than Linamar (Powertrain/Driveline has tailwinds).  

• Borgwarner (focused on Engine/Drivetrain) is trading at 9.8x EV/EBIT with 12.3% operating margins.  

• We believe Linamar’s Powertrain/Driveline segment should be worth in between these two comps given its margins & growth prospects; used 8.5x.      

• Sum of the Parts:

• 

• Notes:  

• The above assumes operating margins decline by 1-2% by 2020 which may prove conservative as they say current backlog (on auto) is at ~current margins and guided to at or above high end of 7-10% for auto and 12-16% for Industrial (Aerial Work Platforms) in near/medium term.

• “Low Booked” and “High Booked” assumes just the new auto parts business booked for 2020 to date assuming ~flat auto sales.  “Target” assumes an additional $600M of auto revenue (estimate by company) from future New Business.   

Risks:  

• US Auto Sales are at/near peak and could decline somewhat in near term:  

• US auto sales (cars and light trucks) were 17.5M in 2016 and growth forecasts for 2017 range from -2.6% to +1.8%.  High auto dealer inventories, at 3.9M, which is near 2004 peak (though US population is 10% higher than then).  Increased interest rates could pressure sales although tax reform would likely be a boost (excluding a BAT which would increase car prices substantially).

• US auto sales likely will remain fairly flat or slightly down next couple years and low single digit growth long-term.  Unless US went into recession (or large price increases from tariffs) likely would only potentially have max 500K-1M dropoff in US auto sales in near term and then resume slow growth with population; estimate that drop-off would reduce projected revenue by $83-165M.

• ~70% of Linamar's sales (overall not just auto) are to North America with the vast majority to the US.  

• IHS Global Light Vehicle Forecast:  91M Global Light Vehicles (88M ICE; 3M Hybrid; 0.5M Electric) growing to 107M total (86M ICE; 18M Hybrid; 2.3M Electric) by 2023 (2%/-.3%/29%/23% CAGR).

• Linamar should still have significant growth though over the next 4 years unless significant decline in autos sales.  

• Possible Border Adjustment Tax or Import Tariff By US:  

• US auto production is tightly woven with Canada, and Canadian auto parts pass the US border multiple times (~7x) during production of automobile so a Border Adjustment tax would have significant negative impact on Canadian Auto Parts companies.  It would also have significant negative impact on US auto companies, as it would substantially increase prices of automobiles and reduce new auto sales.

• Auto companies, retailers, and other companies have spoken out against the BAT, as have many republicans, including Koch Brothers, Steve Forbes, several senators, and others.  Additionally, some people believe the BAT as recommended goes against WTO agreements.

• We think a BAT is unlikely to pass given the amount of opposition as well as large increases in consumer prices this would cause (along with outrage by consumers/voters).

• I think most likely no border tax is passed or just a tariff with Mexico (where the US has large trade deficits) so Trump can (falsely) claim that Mexico paid for the wall (even though consumers of Mexican products will pay through increased costs).  Trump has focused his threats primarily on countries with which we have large trade deficits and companies which move(d) jobs out of the US, not foreign companies.  Linamar has 5 plants (out of 57) in Mexico which would be pressured with a large border tax with Mexico.

• I think a large border tax with Canada is unlikely given the good historical relationship, interwoven auto industries, and much lower trade deficit than Mexico: $9B with Canada vs $59B with Mexico overall; $4.7B vs $68B in auto and $13B surplus vs $25B deficit in auto parts.  

• ~70% of Linamar sales are to North America with the vast majority to the US so any changes could have significant impact.  (Note that the 25% of sales to EU are now tariff-free).

• According to the Center for Automotive Research:

• "Any move by the United States to withdraw from NAFTA or to otherwise restrict automotive vehicle parts and components trade within North America will result in higher costs to producers, lower returns for investors, fewer choices for consumers, and a less competitive U.S. automotive and supplier industry."

• 35% border tax with Mexico would cost 31-38K US jobs; they said could be higher than this as each part passes border many times.  Would reduce auto sales in US by 450K units.  (They didn’t provide projection if border tax with Canada).

• Linda Hasenfratz (CEO of Linamar): on 1/11:

• “A border tax would be very detrimental for industry.  Have had free trade for a long time.  Would increase cost substantially.  Would be substantial negative for auto industry and volumes.  Average auto part passes border many times (~7x average) before part is in vehicle; if add 10% tax each time would have substantial impact.  We would add all this cost and for what?  The Industry is trying to be competitive from global perspective; adding cost isn’t the way to do it.  Leaders need to understand the numbers.  Who is going to pay the 10’s or 100’s of billions to re-invest in the US and who would pay?  The consumer would pay.  (Leaders) need to make fact-based decisions."  

• Comments by CEO following visit to White House with Prime Minister Trudeau (on 2/13):

• “I feel much better after the positive tone, but that doesn’t mean that we are going to stop worrying and making sure we are getting the very best situation negotiated and agreed to in both countries,” Hasenfratz told BNN in an interview Tuesday. She said the message delivered by both leaders about working towards joint prosperity left her feeling more at ease than she did heading into the meeting.  “I take a lot of comfort in the fact that they talk about the importance of the relationship, the joint prosperity, the integrated approach of our supply chains between our countries – and specifically talk about free and fair trade,” Hasenfratz said. “I’m not as concerned about what tweaking mean[s] as I may have been before yesterday.” “No company can absorb the cost of that (a BAT),” she said. “No company is going to relocate operations. It would take years, and it’s not realistic to do.” “We need to continue to get the facts in front of our leaders and make sure consequences are really understood of proposed changes.”

• Aerial Platform market is cyclical (and competitors/industry showing some weakness) and dependent primarily on non-residential construction markets:

• While Linamar has had high margins in this segment the past few years (well above comps and their guided margin range), margins were negative in 2009-2011 and are sensitive if the economy/non-residential construction markets were to decline (though would be a beneficiary if Trumps Mexico Wall and other infrastructure plans are passed).

• Competitors have been showing weakness:

• Terex (2nd largest competitor in AWP) segment revenue down 13% in 2016 and 12% projected in 2017 (and backlog down 15% YoY) and operating income down 30% in 9M 2016 due to ~8 year replacement cycle now coinciding with very weak 2008-2010.  Their model shows 2017 being weak, 2018 recovering a bit and 2019 to early 2020’s being strong.  Terex says they’ve built detailed market model cross-checked with construction rental companies (who make up ~90% of sales).

• Oshkosh (largest competitor in AWP) segment revenue down 7.5% and operating income down 23% in 2016.

• Linamar had 1.7% growth in 1st 9M YoY but operating income down 12% (only down 3% if exclude FX effects).  Their backlog is up 10-15% at Q3 2016 from Q3 2015 and expects growth in 2017 (likely mostly through market share gains).  This is substantially better than Terex & Oshkosh, but they may prove to be overly optimistic and could see operating income decline in next year or two even if keep revenue flat due to pricing pressure.

• Possible Changes to Emission/Mile Per Gallon Regulations:  

• Trump could potentially change emissions standards in Clean Air Act (set by EPA) & Corporate Average Fuel Economy (CAFÉ) rules (set by NHTSA) to benefit auto industry; most likely these changes wouldn’t take effect until 2022 model year though (this is the year targeted by auto company lobby recently as they plan years in advance and CAFÉ approved through 2021) and would still need to meet the 2016-2021 Model year rules.  

• Changing EPA rules in Clean Air Act (which require higher MPG than CAFÉ in 2021 but lower over 2022-2025) would require passage in Congress which would require 60 votes to overcome filibuster or would need to approve elimination of filibuster rules for legislation (“nuclear option”).

• Reducing MPG requirements in US starting in 2022 could reduce demand for certain of Linamar’s products; particularly could slow the transition of (higher priced and more complex) low-weight aluminum parts to replace steel in powertrain, as well as complex 9 & 10 speed transmissions.  

• The US only makes up 20-25% of global auto demand and the rest of the world continues to increase MPG requirements (US:  47MPG by 2021 and 55 MPG & 110 Grams of CO2 by 2025, EU: 61MPG and 95Grams of CO2 by 2021; Japan:  55MPG and 105 Grams of CO2 by 2020; China:  50MPG and 116 Grams CO2 by 2020).  Additionally, states have the (Supreme Court validated) right to set their own emissions rules.  So even if Trump eliminated EPA standards, states could continue to maintain current requirements and auto companies would likely not want to produce multiple models and would meet the more stringent standards (California and 10 other states currently have their own EPA standards).

• Potential margin declines in medium to long term:

• In past years had guided to 7-10% operating margins in Auto, 12-16% operating margins in industrial, and 5-7% Net Margins overall, but have been above these the past couple years and guiding to stay at or above high end of range in near term based on contracted mix of business.

Catalysts:

• Realized Growth in Revenue and Income from Already Booked Business:  30% growth in 2020 expected just from ramp of already booked business with flat auto sales, and 40% growth if add expected additional New Business (both also assume growth in AWP).

• Potential share repurchases:  They did repurchases in 2006 and 2008, but haven’t done any since then.  They are currently focused on reducing debt to <1.0x Net Debt/EBITDA (which should occur by end of Q2) added during acquisition of Montupet in January 2016 but once that is done I think they could do a repurchase.  Longer term I think they are more focused on just growing the business through organic growth and complementary acquisitions though.

• Potential Spinoff/Sale Of Industrial (Aerial Work Platforms):  I don’t view this as likely (company hasn't given an indication they would do this), but the current stock price doesn’t reflect the value of their Aerial Work Platform business.   Competitors in Aerial are trading at 15x EBIT while LNR is trading at 7.6x (though AWP is only 20% of operating income).

• Decision against US Implementing Border Tax with Canada:  Many companies, including auto co’s & retailers, and many individuals, including the Koch Brothers, Steve Forbes, and many republicans, including several senators, have been outspoken against a BAT in general.  And given the intertwined nature of the auto industry between US and Canada, the damage a tax would cause, and the much lower trade deficit with Canada than Mexico, it seems unlikely a targeted border tax as part of NAFTA renegotiation would pass.          

Business Overview:  

• Summary:  Linamar has two primary businesses. 85% of revenue and 80% of Operating Income comes from its auto parts business, where it manufactures powertrain/driveline components for OEMs. The other division is Industrial (15% of revenue and 20% of operating income, which makes Skyjack mobile aerial work platforms (booms and scissor lifts and telehandlers), primarily sold into non-residential construction markets (primarily to construction rental companies like United Rentals).

• Employees:  24,500 employees (including 8,000 in Canada) in 57 manufacturing locations, 6 R&D centers and 21 sales offices in 17 countries in North and South America, Europe and Asia.

• Facilities:  57 manufacturing facilities in 11 countries:  Canada:  23, USA: 5, Mexico: 5, Germany: 7, France: 4, Hungary: 4, UK: 1, Spain: 1, Bulgaria: 1, India: 3, China: 3

• Customers:  

• Top 4 (Ford, GM, Fiat Chrysler, Volkswagen) = 50.1% in 2015.  (Bloomberg says Ford = 24.2%, GM = 13.6%, Fiat Chrysler = 7.6%, and Volkswagen = 4.8%).

• Top Industrial Customers:  United Rentals & other construction rental companies. (Terex (competitor) says >90% of their AWP sales are to construction rental companies.)

• Revenue By Geography:

• 2015:  71% North America, 23% Europe, 6% Asia

• 2020E:  60% North America, 33% Europe, 7% Asia.

• Long-term Estimate:  55% North America, 35% Europe, 10% Asia.

• Debt:

• Euro (in CAD):  1.1B  ($600M term credit facility and $950M revolving credit facility maturing in 2021).

• USD (in CAD):   340M ($260M USD of Senior Unsecured Notes).

• CAD (in CAD):   191M

• Total Debt: $1.7B

• Net Debt:  $1.2B.

• Available on Revolver:  $506M CAD at 9/30/2016.

• Liquidity:  $970M CAD ($462M Cash and $506M on revolver).

• Leverage:  

• 1.16 Net Debt/EBITDA (higher than normal due to acquisition in early 2016).  

• Plan to get it under 1.0x in next 6-12M and to ~0.8x longer term.

• Segments:

• 

• Powertrain/Drivetrain:  80% ($5.0B) of Revenue and 85% ($540M) of Operating Income

• Business:  

• Segment derives revenues primarily from the design, development and manufacture of precision metal components, modules and systems for global vehicle and power generation markets.

• Vertically Integrated:  Forging, Casting (Light Metal Casting), Metal Forming, Machining & Assembly.  In-house forging and machining allows them to be able to optimize design for customers.

• Main Products:

• Driveline: Hybrid Power Unit, Power Transfer Unit, Rear Drive Unit/Module, Engineered Gears

• Transmission: Shaft and Shell Assemblies, Differential Assemblies, Transmission Gears, Clutch Modules.  Linamar is the largest independent supplier of machined gears globally today with programs running or launching that will take them to more than 50 million machined gears produced annually within the next few years.

• Engine: Cylinder Blocks, Cylinder Heads (A leader in cylinder heads), Connecting Rods, Camshafts (Largest independent producer of camshafts).

• Launch book (Business to be launched at estimated annual peak sales) at nearly $3.9B (highest it's been):

• $2.36B is in Transmission, $970M in Engine, $510M in Driveline, $60M other.

• $2.625B North America, $925M Europe, $350M Asia

• Up from $3.8B,$3.4B, 2.8B, 2.3B at YE 2015,2014,2013,2012.

• YTD New Business Wins 50% higher than last year at this time.

• 5-10% of business rolls off each year as models mature/eol.

• Significant Segment Growth at ~current margins built in:

• Booked Total Revenue in 2020 of $7.8B ($7.5-8.0B) based on current industry volume forecasts layered with new business wins and acquisitions and adjusting for business leaving (5-10% annually).

• $8.35B of Total Revenue in 2020 including estimated new business wins.

• The company has guided to $1.3B of revenue in 2020 for Industry Segment.

• Implied 2020 Powertrain revenue of $6.2-6.7B just on booked business and $6.55-7.05B including target new business wins (30-40% growth).

• Product lifecycles of engines and transmissions tend to be relatively longer than those of other automotive systems; ~5-10 years for components produced by Linamar.

• Growing Content Per Vehicle:

• North America:  $156.72 in 9M 2016 from $121.35 in 2012.

• Europe:  $63.68 in 9M 2016 from $12.24 in 2012.

• Asia:  $8.31 in 9M 2016 from $4.16 in 2012.

• Industrial (Skyjack Mobile Aerial Work Platforms): 20% ($864M) of Revenue and 85% ($141M) of Operating Income

• Business:

• A world leader in the design and production of innovative mobile industrial equipment, notably its class-leading aerial work platforms (scissor lift and boom lift) and telehandlers under the brand Skyjack, which are primarily used in off-residential construction market (main customers are construction rental companies though).

• Linamar’s Industrial Segment is comprised of its Skyjack division and an energy plant in Canada named Linergy Manufacturing and a Hungarian fabrication facility named OROS which primarily manufactures equipment for the agricultural sector.

• Historical:  Linamar bought 48.5% of Skyjack in June 2001 for $22.1M CAD and bought remaining 51.5% in June 2002 for $9.3M CAD= $31.4M CAD total.  Grew the business to $140M CAD in operating income in the segment in T12M.

• Customers:  Terex (competitor) says >90% of sales are to construction rental companies like URI; Skyjack is likely similar %.

• End Markets:  Terex (competitor) says 45% are Non-residential construction; 20% to residential construction; 25% are Maintenance; 10% Other.  Linamar just says primarily Non-residential construction.

• Replacement Cycle:  ~8 Year replacement cycle so weak 2008-2010 market causing some weakness currently but should be strong in a couple years.

• Asia has very low usage of Aerial work platforms (units per $1B of construction spend) but increasing safety regulations should drive demand.  

• Market Share:

• Market Leader in Scissor Lifts with ~50% market share (introduced in 1985 and achieved 30%+ market share in the 90's).  

• Overall only about 8.6% overall market share of $7.4B US (10.0B CAD) market according to Q3 2016 presentation.

• Linamar has been growing market share in boom lifts and telehandlers (and defending market share of Scissor Lifts), and expect this to continue.

• "Skyjack also continues to innovate on the product side by continuing to develop and launch new boom products and telehandlers which are helping to deepen our market share in these products globally. Our rental house customers love the simple designs that keep our product in the field driving revenue and not in the shop costing money".

• Industry:

• $10B CAD ($7.4B USD) market; few (5) players (in Q3 presentation):

• JLG: ~42% (Oshkosh), GENIE:  ~29% (Terex), MANITOU:  ~14%, SKYJACK:  ~9%, Haulotte:  ~6%

• Skyjack Target $1.3B CAD (US$1B) by 2020 (seems like mostly by growing share) by doing the following:

• Maintain and Defend Scissor Share:  98% coverage by product type by 2020

• Grow Boom Products:  95% coverage by product type by 2020

• Competitive Telehandler Offering:  94% coverage in NA by 2020

• Backlog:  Skyjack backlog 10-15% higher than last year at this time.  (While Terex reported 15% decline in backlog from Q3 2015).

• Margins: Currently 16%+ segment margins but had negative segment margins in 2009-2011 as a result of recession.

• Management/History:

• Chairman of the Board:  Frank Hasenfratz (80):  

• Founded the company in 1965.  Apprenticed his daughter through the 90's and early 2000's to take over in 2002.  Still owns 23% of the company (the most he has owned).  

• CEO:  Linda Hasenfratz (50):  

• Became CEO in 2002, replacing her father (who founded the company).  Started an apprenticeship in 1990; first job was working on a lathe machine; worked throughout company.  Executive MBA in 1997 from Ivey School of Business at University of Western Ontario.

• Grown revenue from $1.3B to $6.0B and Net Income from $55M to $520M since she took over in 2002.

• Org Structure:  

• Each facility in a group is operated as a separate profit centre managed by a general manager with production expertise who has discretion, within broad guidelines established by the Group’s management, to determine rates of pay, hours of work, sources of supply and contracts to be performed.  

• The Company encourages its groups and each of their facilities to use Cost Attack Teams (“CATs”) to promote efficiency and continuous improvement. CATs focus on a particular product or process and analyze such factors as the utilization of equipment, tools and manpower, interaction with sub-contractors and the movement of parts and products around the facility to identify potential efficiency gains. CATs have been known to achieve approximately 5–10% in cost savings.

• Recent Acquisitions/JVs:

• 1/21/2016:  

• Acquired Montupet, a global leader in the design and manufacture of complex aluminum castings for the global automotive industry with sales and production facilities diversified across several European countries, North America, and Asia.  7 world class foundries.  Montupet is also a leader in both advanced material technologies and intricate coring capabilities to enable production of very thin walled castings that can optimize fuel efficiencies and reduce emissions dramatically.

• LNR is global leader in machining cylinder heads.  The Montupet acquisition enables LNR to offer complete cast and machined cylinder heads. Formerly, LNR would machine third-party castings.  

• Cost: €836 ($1.2B CAD).  Had $500M Euros in sales in 2015; 92/102/117M EBITDA in 2014/2015/2016E so 8.7x 2015 and 7.3x 2016 EV/EBITDA.  Expensive vs current trading multiple.

• 7/16/2015:  

• JV between Linamar and GF Automotive (leading manufacturer of light-weight cast components and systems for automotive and industrial applications): agreed to cooperate in North America, Europe, and Asia to provide integrated casting and machining solutions.  Together, the parties will utilize combined resources and capabilities to provide lightweight best-in-class solutions for large powertrain, driveline and structural components.

• 1/15/2015:

• Acquired Seissenschmidt AG, in the business of high volume hot forgings and has three primary locations in Germany, Hungary, and the US.  

• Cost:  $109M

Catalyst

Realized Growth in Revenue and Income from Already Booked Business

Potential share repurchases

Potential Spinoff/Sale Of Industrial (Aerial Work Platforms)

Decision against US Implementing Border Tax with Canada