Linamar Corp., the third-best performing auto-parts stock in the past year, says the biggest obstacle to its goal of tripling revenue and boosting profit seven-fold is finding skilled workers willing to earn C$80,000 ($80,000) a year.
Chief Executive Officer Linda Hasenfratz, 46, says she can “absolutely” reach C$10 billion in revenue and C$1 billion profit by 2020. The company is supplying cylinder blocks and cam shafts to automakers, who are shifting engine and transmission work to vendors, and is winning more business in Europe and Asia.
The challenge will be finding the people able to do those jobs, including machinists, millwrights, electricians, engineers and accountants, said Hasenfratz, the only female CEO of a publicly traded auto-parts supplier in North America. The hunt has taken the Guelph, Ontario-based company to the Philippines, where it hired about 50 skilled journeymen who started work in Canada last year.
“The bigger risk to us to meet our plans is our ability to find and develop the people we need,” Hasenfratz said at an interview in Bloomberg’s Toronto office on Feb. 5. She estimates annual hiring needs would be comparable to the company’s sales growth. “You can’t underestimate the human capital you need to pull off 10 to 15 percent growth a year.”
Linamar, which has Ford Motor Co. as its biggest customer with 31 percent of sales, will post record revenue and profit of C$3.25 billion and C$146.5 million respectively in 2012, according to analysts’ estimates compiled by Bloomberg. It would be Linamar’s second straight year of record sales.
Linamar’s sales and profit goals are “realistic and very achievable,” Dennis DesRosiers, president of DesRosiers Automotive Consultants in Richmond Hill, Ontario, said in an interview. The company should be able to find workers to fuel growth, he said.
Linamar rose 0.50 percent to C$26.03 at 4 p.m. in Toronto. The parts maker has risen 45 percent in the past 12 months, the third-best performance in the automotive-supply sector after Cooper Tire & Rubber Co. and Denso Corp., according to data compiled by Bloomberg,
Six of the seven analysts who follow Linamar rate it a “buy,” while one suggests holding the shares. Analysts estimate the stock will rise 12 percent in the next 12 months, after a 66 percent gain in 2012.
The stock outpaced Magna International Inc., North America’s largest auto supplier and a company 10 times its size in sales, by 19.5 percentage points in the past year. Investors are paying a 22 percent premium over Magna.
Advanced manufacturing is among the occupations facing a shortage of skilled laborers in Canada, along with health related occupations, the mining industry and business services, according to a Dec. 3 report by Benjamin Tal, an economist with the Canadian Imperial Bank of Commerce.
Unemployment in those fields has dropped to about 1 percent and wages have risen at an average annual rate of 3.9 percent, more than double the rate for the economy as a whole, the report said. The day the report was released Canadian Finance Minister Jim Flaherty said shortages of skilled labor in some sectors was a “serious” issue.
Linamar, which employs 16,772 people, has 352 employees in apprentice programs studying to be electricians and millwrights. Linamar’s average pay in Canada for those positions is about C$80,000, Hasenfratz said. The company hired 1,000 people in 2012.
“In Germany, there’s keen regard for people who have a skilled trade,” she said. “In North America, I find we don’t encourage our kids to go down that path. Maybe there’s a lack of understanding about the earning potential and the promotion potential for those positions.”
They’ve also selected about 250 people globally for a five-year management training program, a formal version of the one she began in 1990, when she joined the company her father, Frank, founded 24 years before. More than 60 percent of the people who run Linamar’s factories began their careers on the shop floor, she said. Plant manager jobs pay as much as C$200,000, she said.
Hasenfratz meets with employees quarterly in the “Frank Hasenfratz Centre for Excellence in Manufacturing,” in the company’s hometown about 100 kilometers (62 miles) west of Toronto.
“We’re working to train our own, but they’re hard to find and hire on the outside,” Hasenfratz said. “We need more involvement from governments, but I don’t know how you change the culture to get people interested in these areas.”
Acquisitions, probably of small- to medium-sized companies, will help achieve the 2020 revenue target, the CEO said. The company is willing to pay C$100 million to C$300 million on such acquisitions, she said.
The company is concentrated on North America, which made up 78 percent of sales in 2011. Asia made up 3 percent of sales. Hasenfratz said by 2020, sales outside North America should comprise half of Linamar’s revenue, split between Europe and Asia.
Linamar sees potential in automakers’ demand in North America, while forecasting more slowing in Europe. Automakers there are lowering output to match demand. While Europe could be down as much as 5 percent this year, the U.S. market could increase 3 percent to 5 percent, Hasenfratz said.
Researcher IHS Automotive is forecasting light vehicle production of 15.9 million in North America, a 2.9 percent increase over 2012. In Europe, IHS forecasts production of 18.6 million, a 3.1 percent decline.
“As we get through these hurdles and get some clarity, people will feel more confident making decisions around where they want to invest,” Hasenfratz said. “I think there could be a little burst to economic activity.”
Linamar, which also makes cylinder heads, gears and other engine and transmission parts, has gained business as automakers have outsourced powertrain-parts production. Ford, Fiat SpA, General Motors Co. and Caterpillar Inc., make up 63 percent of sales. Linamar is also selling more to Volkswagen AG.
About 20 percent of engine and transmission parts are made by suppliers, she said. That figure could rise to 40 percent by 2020, a $160 billion segment of the industry that alone could provide the sales needed to reach C$10 billion, she said. Japanese automakers are also starting to warm to the idea of hiring suppliers to make those components, Hasenfratz said.
That forecast may even be conservative, DesRosiers says. Production of engine and transmission parts are among the last component groups still built by automakers, he said.
“Vehicle companies are so wrapped up just trying to manage their vehicles that they’re less and less interested trying to hold onto some of their component areas,” he said. “So Linamar is in a win-win-win situation.”
Linamar’s revenue target is “still a stretch goal,” DesRosiers said. “But I’d be surprised if they don’t make it.”
The growth probably won’t require raising capital in the debt markets or issuing new stock, she said. Linamar should be able to pay for 10 percent to 15 percent annual growth mostly with cash, she said.
Frank Hasenfratz, 78, remains Linamar’s chairman and its largest shareholder, holding 24 percent of the stock as of May 2012 for a stake worth C$397.2 million. Linda’s 5.8 percent stake was worth about C$97.6 million.
Linda Hasenfratz is counting on growth in China, Europe and the company’s industrial unit, which makes scissor lifts under the Skyjack brand, to reach the revenue target. The industrial unit contributes about one-third of Linamar’s sales, a balance Hasenfratz expects will continue through 2020.