Linamar Corp. , which roared back from the global automotive crisis of 2008-2009, has decided to put the brakes on its own growth.
The auto parts maker has seen a spectacular rebound in revenue, which is now rising at a 30 per cent annual rate – even though the auto sector is hardly running on all cylinders. But investments in new plants, new technologies and new markets are putting a strain on Linamar’s balance sheet, pushing its debt-to-capitalization ratio higher than its internal target of 35 per cent.
That means revenue growth needs to slow to between 15 per cent and 20 per cent annually, chief executive officer Linda Hasenfratz told investors and analysts at the company’s research and development centre in Guelph, Ont.
“Thirty-five per cent is a manageable level of debt that can withstand any kind of economic blow and give us the flexibility to absorb some higher growth or do some acquisitions from time to time,” Ms. Hasenfratz said.
Revenue growth of 15 per cent to 20 per cent annually is rapid enough to enable Linamar to meet its goal of $10-billion in revenue by 2020, she noted. Growth at that level can be financed through the company’s cash flow, without taking on more debt.
Linamar, which is Canada’s second-largest auto parts maker by revenue, is an example of how auto parts suppliers – and Canadian manufacturers generally – are adjusting to a new reality: the auto market is stagnant for their North American customers, but excellent opportunities exist in growing markets farther away.
Much of that growth is occurring in emerging economies such as China – where Linamar will open two plants next year – India and Brazil. Plans are on the drawing board for Linamar factories to open in India and Brazil in 2013, with a strategy of starting small and expanding.
One plant in China that is scheduled to open next year is already 80-per-cent booked with new business and the second plant, which is scheduled to open late in 2012, is 75-per-cent booked.
In addition to heeding calls by its automotive and heavy equipment manufacturer customers to follow them into those markets, Linamar is expanding technologies and processes used in manufacturing its engine and transmission components to new areas, such as wind turbines and other green products.
At the same time, it’s keeping growth in check by being more selective about what new business it bids on – in some cases not bidding at all, unless it’s necessary to keep a competitor from getting a foothold.
Linamar’s revenue for the nine months ended Sept. 30 soared 31 per cent from the year-earlier period, but profit rose just 18 per cent.
Growing at that 30-per-cent clip also places a strain on human resources, Ms. Hasenfratz said.
“Growing capably with solid, on-time launches and efficiently managed plants requires a lot of people,” she said. “If you are growing at 15- to 20 per cent a year, you can likely develop enough people internally to promote into necessary positions.”
Faster growth than that requires more outside hiring, which increases risks, she said.
Analyst Peter Sklar, who follows the company for BMO Capital Markets, said in a note to clients that the high level of growth has been depressing profits because of high levels of interest expense, plus costs to launch new product programs for auto makers and other customers.
The investor day presentations indicate that growth won’t be slowed until 2013, Mr. Sklar said.