Magna, Linamar sales decelerate on weak global auto parts demand
TORONTO Auto parts makers Magna International Inc. and Linamar Corp. are feeling the deceleration of the global economy and warning of lower global demand for vehicles.
Magna cut it sales forecast for the second time this year, citing weak demand and the U.s.-china trade war looming over the global economy. Similarly, Linamar saw its earnings reduced partly owing to “declines in the global light vehicle market.”
Magna, the Aurora, Ont.-based company, saw its profit fall 28 per cent to $452 million compared to the same period last year, on lower operating margins and high expense items. The auto parts maker, which assembles parts for Daimler, Jaguar Land Rover and BMW, has lowered its expectations for the year as the ongoing U.s.-china trade tensions and lower global light vehicle production, which has fallen by 6 per cent.
“I think our view today which obviously will have to fine tune as we get into our 2020 outlook is that, it’s probably going to be a little bit more softening in North America, Europe, as well … China probably has bottomed out,” said Vincent Galifi, executive vice-president and chief financial officer in an earnings call. “But I’d say from a macroeconomic perspective there is heightened uncertainty with the various trade discussions going on in the globe. So something that we’re monitoring pretty closely. And I think the mindset in the organization is really focused on making sure our cost structure is completely aligned with whatever happens in the market.”
Linamar missed analysts’ earnings estimates, with industrial segment sales declining 7.9 per cent, or $51.5 million, to $599.1 million in the second quarter compared to the same period last year.
“Markets are challenging but we are mitigating slowdowns with strong market share gains and careful cost control,” Linamar CEO Linda Hasenfratz said in a statement. “We are delivering on our promised cash generation with a solid $179 million in free cash flow generated this quarter and are expecting EBITDA growth to resume in the back half of the year.”
In terms of individual products, Magna’s seating revenues rose by 2 per cent to $1.5 billion, while complete vehicle sales saw substantial growth of 41 per cent to $1.8 billion largely thanks to the launch of the Mercedes-benz G Class, BMW Z4 and Toyota Supra.
“We think Magna’s Q2 results and outlook generally compare favourably with the peer group, and with the stock trading at a double-digit free cash flow yield, we’d expect a positive share price reaction,” according to a report by Citigroup. Magna close 2.7 per cent higher to $66.16 on Thursday.
Magna’s sales forecast for 2019 now sits between US$38.9 billion to US$41.1 billion, compared with its previous estimate of US$39.1 billion to US$41.3 billion.
The roughly $200 million cut was not as bad as feared and the company’s profit beat analysts’ consensus forecasts. But the numbers were another sign of the pain the North American automotive industry is beginning to face from a series of major political shocks to its supply chains and cost base.
The company also cut its forecast for North American light vehicle production to 16.6 million from 16.7 million. It has also lowered expectations for its other primary markets Europe and China.
These reduced prospects are in line with the decline in Canadian light vehicle assembly in the first six months. Since 2009, Canada has managed to produce over a million light vehicles by the halfway point of the year, but in 2019 only managed 985,501 units. The Canadian share of North American vehicle production fell to 11.8 per cent in 2019 versus 12.4 per cent in 2018.
“What makes the drop in vehicle assembly of even greater note is that there appears little chance Canada will return to its previous level at any point in the foreseeable future,” according to report by Desrosiers Automotive Consultants.
Desrosiers partly blames the decline on the closure of GM’S Oshawa plant, as well as significant job losses for FCA’S Windsor plant and Ford’s Oakville plant.
Markets are challenging but we are mitigating slowdowns with strong market share gains and careful cost control.