Magna International Inc. (MG) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome back. We're really happy to have our friends from North of the border back with us today. So with us from Magna is Sherif Marakby, EVP of Research and Development; Boris Shulkin, Senior VP of Technology and Development as well as, many of you know, Louis Tonelli from IR. Sherif joined Magna early this year and is tasked with managing all aspects of innovation and new product strategy and development, building on 30 years of experience in the industry, most recently with Ford, where he served the President and CEO of Ford's Autonomous Vehicles unit and a Board member of Argo AI. Boris was named SVP of Technology and Development in June of this year, and now reports to Magna's President, Swamy. Boris is tasked with helping to drive overall technology and product strategy in the mobility landscape. And prior, he was responsible for technology strategy, technical due diligence for potential investments and technology incubation and IP assessment of new technologies and high-tech startups. And Louis, again, has been with Magna for -- I can't even remember. I'd have to look it up, but you're an establishment. So…

23 years.

Appreciated. Quick, quick background on Magna for those who don't know. So Magna is one of the largest Tier 1 suppliers in the world, $37 billion of forward revenue. And their Power & Vision division is home to their ADAS and autonomous technologies, where we'll discuss mostly today. From an ADAS perspective, Magna works with Intel Mobileye and camera sensors. They're working on their own internal radar, which we'll definitely talk about. And they have a partnership with Innoviz for solid-state LIDAR technology, which will be launching over the -- in some vehicles over the next couple of years. The ADAS business today for Magna is north of about $500 million, $550 million of revenue, and they're expecting that to grow from some previous targets to about $750 million in 2022. And the growth to then accelerate beyond that as new programs begin to launch. And so with that, we're going to go into a fireside chat, but I would to hand it over to the gentleman at Magna, if you just want to maybe say a few short words, and then we'll go right into questions.

All right. Thanks, Chris. Thanks for having us. So maybe just a few words of introductory on -- specific on ADAS and then just kind of as a reminder to the audience what Magna is and what Magna doesn't is still because we don't know often enough say enough about this. So we're building an ADAS at a time, we're building on existing strength that we have in vision-based ADAS over the years. In Far Field cameras, as you probably well know, we're one of the leading suppliers, integrators of Mobileye technology. And maybe as a reminder, we were the first one to launch a North American program with Mobileye Technology back in 2007, started working with them in 2003. We're a very strong player in the rear SurroundVue, probably one of the largest, very extensive IP portfolio in that field. Certainly, recent years, and we've talked about this several times with this audience, we've taken significant steps to strengthen our existing capabilities to basically allow for a consistent growth for our future in that area. As you already mentioned, I'm sure there will be questions on this. We've been developing world's first digital imaging radar, partnership on a solid-state LiDAR with Innoviz. We've been demoing our vehicle integration capabilities on a platform back a couple of years ago that show not just the sensor and the main control capabilities, but also our ability to integrate the systems in the vehicle, in a production looking vehicle. We've had a number of various partnerships over the last couple of years, into Mobileye, then BMW lift partnership and a few others, just to name a couple related to that area. We've been focusing a lot of our efforts on ADAS Level 1, 2 and 2+, to take advantage of the growing market is -- and continue monitoring, stay involved in L4, L5 market as well, especially given the timing expectations in the segment moving a little bit further as compared to, let's say, a year or 2 ago what market was expecting. We do believe, however, it's important to say that, that area will continue to play a very important role, both in technology development and -- but with commercial deployments, probably starting within the smaller managed fleets in geo-fence areas within the next 5, 7 years or so. Maybe I'll touch very briefly on a couple of the areas, and we can speak in details on this later as your questions coming in. Several large wins in ADAS we've done in this space, it allows us to build more strength, both overall and geographically, in particular, in Europe, with several large-scale software development testing validation, and they're kind of putting us -- give us the chance to build the fundamental building blocks of a system supplier in cameras, radars, LiDARs, the main controls and test and validation. On front camera side, we've been very active with one of the largest IQ4-based program being worked on today. And potentially we expect to be at least one of the first, and certainly the first for high-volume IQ5 -- to launch the IQ5 technology with a one box solution. There are a few others with a more complicated solutions for one box. And then we can talk details on more programs related to that. Same -- we've been very active in the surround systems, adding more and more OEMs to our portfolio. We've talked about the radar and LiDAR. So maybe with that -- maybe just to mention one more thing that often escapes the conversations on this stock because our integration capability and our knowledge not just on the complete vehicle knowledge, but also the deep knowledge in the systems themselves. Take an example of potential technology over -- between the lighting capabilities and ADAS between the sense -- for the sense integration in terms of exteriors and the mirrors and of course, the complete vehicle know-how. So with that, I'll turn you back to Chris and Louis.

Great. Yes. Actually, it's a good intro. And I'll send it over to you, Sherif. One of the first questions we had, which was when we were thinking about some of the backgrounds, obviously coming from Ford's autonomous program, where Argo as very ambitious. You've heard from Ken earlier about they're still on track for a 2023 AV deployment. Clearly, coming to Magna, it's more near-term focus, right? It's more ADAS and slowly moving up the chain of automation. Just maybe a little bit of what drew you to the opportunity at Magna? And some of the things that you're focused on?

Yes. I think I'd maybe look at it a little bit differently. One is, I felt that Magna, with its capability, is best suited to get into any and every technology that would end up in the ADAS, on the AV or even electrification, even data and connectivity, all the trends in the automotive sector or in the transportation sector. So the fact that Magna can make structures, can make sheet metal, can make plastics, can make mechatronics, things that move to all the way to make in powertrains and making electronics and then making full vehicles, assembling full vehicles and integrating, was a really attractive thing for me. The second thing is, I felt that being at Magna, it's also a great opportunity to serve the entire industry, not just one sector. So I think for those 2 reasons, it was very attractive for me to be at Magna. And maybe it's also, as a vote of confidence in Magna, but more importantly, I think a vote of confidence that the acceleration in some of these technologies is definitely fundamental to what -- not only what an OEM needs to do, but also what a Tier 1 needs to do.

That's great. And so maybe, Boris, and Sherif, if we can jump over to the topic of ADAS, with your -- a good introduction for what -- and obviously, this is still a bread and butter, right, of the industry. Units could potentially be up 2 to 3x over the next 5 years. We've seen projections moving from a roughly $9 billion Tier 1 market to something like $25 billion in 2025. Maybe everything COVID aside in the volumes the last couple of months, have you been encouraged with what you've seen in terms of penetration, take rates, awards from OEMs in terms of going a little bit quicker? It doesn't act to, feel free to say, look, we've also seen some promises haven't gone as fast in terms of getting Level 2 to become a take rate be a non-take rate product. So what are you seeing over the last 12 months and 8 months?.

I can take that if -- start. And then, Boris, if you want to add anything else. I feel that -- it's not just I feel, the actual data and trends from the last 2, 3 years of -- in automotive and mobility have shown us that the acceleration in ADAS, whether it's 1, 2, 3 and by the way, the customer doesn't really think of 1, 2, 3. They just think about features, is going to accelerate tremendously. It's already -- when you look at historical data and its history is only the last couple of years, it's approaching half of the market in many cases. And I wanted to maybe point that it's not just regulatory because it's easy to say that it's required by law that you have this in this market, but it's also nonregulatory features. And I would point to some of the features like adaptive cruise, like lane centering or lane keeping. Those are all things that people -- the active safety space, people see it as, I'm only going to buy a car that has this. And it reminds me a lot in the automotive space of some of the features that approached 100% or at 100%, like airbags or ABS or some of those features. And the ADAS space is extremely positive from a potential, and we can look at 5, 7 years out, but I even think it's even shorter term than that, that we're going to continue to see acceleration in this space.

Yes. So maybe -- thanks, Sherif. Maybe just to add to this, yes, for sure, what we see -- generically speaking, we can't really speak the particulars, right, for obvious reasons. But generically speaking, we will definitely see an uptake in a recent time. Whether you take the -- let's say, in the Far Field area, we see significant interest and uptake. Both uptake and the more interest from the marketplace for these solutions. And as Sherif mentioned, this goes beyond what, I would call it, say, NCAP-type of a solution. Customers -- I'm guessing, I'm not a market specialist, but I'm guessing, customers, once they see it, they like it. So both safety-related NCAP-type of features, but also the content convenience features becoming more and more popular, and we see this as a response to the marketplace. So just to get an -- and we see -- as part of it, we see more interest from an OEM to both extend and kind of new program interest on this technology. I started highlighting this on existing, let's say, the fourth generation for the Far Field, we see a lot of interest and a significant volume as well. But also on IQ5, where we've -- as -- I do want to repeat it because it's an important piece. We're going to be the -- very soon the first to launch winner in the middle of a development with a major OEM on this. First to launch is a single box solution on this to the market. We see a lot of interest from OEMs on this type of a technology. I do have to say, we went through some important times building up this capability and building up this bench strength to bring that technology to the market, now puts Magna really in a great position to expand with other OEMs on this specific direction. So we see significant interest from several OEMs. I can say -- I can name a number of 3, at least, right that are very -- looking into this. On the SurroundVue, we kind of see very similar. You probably remember from previous, we had a very strong position with the 3 major OEMs over the years. We've picked up 2 more OEMs since the last couple of years, where we're in the middle of development and launching mid next year, major programs for those 2 new OEMs on SurroundVue technologies. And we continue to see new business as well from these new OEMs. More important, we just recently won a program with a sixth OEM on that, so really, that's becoming a major, major business as well. We were a major player in this previously, and that seemed to continue. And maybe just to give -- I'm sure you're going to ask more specifics on this, but just to give an idea on the radar side as well, we do see a tremendous interest. In particular, in the radar, as you probably know, the technology we've been developing in the last few years, now we're in a stage where the technology really matured to the point where we -- in a very deep discussion with multiple OEMs, the maturity level of technology really increased tremendously, receiving excellent feedback on this technology. I can't say this. Louis, you stopped me from -- should not be, but we do have 2 predevelopment contracts in place already, where we're working one more in negotiations, and we expect to materialize into production programs in the near future, some of them.

Boris, just to the generalist on the forum, can you just describe what you mean specifically by a single box solution? And just why that's [indiscernible].

So yes, as with any technology, including the Far Field from Mobileye, right, the more complicated technology gets, the more power it requires. And power means hit, and that hit means that the packaging problems, right? So which means that can you package it in a single box or do you need a multiple box and to deal with all the temperature-related problems, because you have such a high-power running in a single box, where the compute and optics are sitting in a single solution. So obviously, for all the packaging reasons, you want to keep a single box as much as possible. It's easier, it's better. Sometimes when it's difficult to package it that way because of the thermal-related issues and you want to have to go to a 2 box solutions. That's what I meant by it.

And we could stay on -- because obviously, IQ5 is a great transition into thinking about this Level 2+, Level 2+ plus sort of the nomenclature that, again, as you mentioned, no consumers are using but what we use. For more advanced, aggressive, adaptive cruise control, could you talk about how big you think this could be? I mean, it comes up in every conversation. We had Mobileye on yesterday that they thought to be 20% of the industry could be using this sort of configuration and consumer set by 2025. How do you see it? What could be Magna's content? And clearly, would love to talk about your ability to add an ICON RADAR into that solution set.

Yes. So maybe, Sherif, I'll start, right, and feel free to add to this. I'm not sure if -- when you say '25, you're referring to L2+ or you're referring to L2 and L2+ together. If you mean the L2+, maybe that number is a little bit higher than what we think in 2025. But IQ5 is perfectly capable and probably will be addressing L2 solutions as well. So as a combined, I would say that number for sure, at least that much, maybe even more combined between the 2 levels. The great thing about this technology is that it's fairly scalable. And as you probably know with several architectures out there, that's already happening in the field where you can scale it from maybe -- scale it down to a NCAP or NCAP plus, let's call it, type of a solution, our way to L2+ type of solutions. So I think this is a -- that's an important technology. We're very happy that we were part of this early development, and we're able to use that strength and expand in the marketplace based on this. Yes, when it comes to Magna Radar, one thing that I probably should have mentioned, it's important that it's not a single product, it's a family of products, where we're trying to address multiple leads with it. Today, we already have existing development that we're giving it to the hands of a customer as part of our development contracts. There are 2 types of the solutions, one, addressing the Far Field, where the important thing is the -- all the technical capability of the device, right? And the other one is addressing the mid-type of applications, mid and corner applications, where addressing the high-volume needs and NCAP solutions. So yes, absolutely. So what you've mentioned earlier, the synergies between this capability and our capability in the front camera to address the NCAP and L2+ means that in our opinion, will play a very, very important role in the future.

Yes. I would just emphasize the point that the levels build on each other. So when we talk about Level 2+, you've got to really have -- I mean, if we talk from an engineering standpoint or an industry standpoint, you got to have a Level 1, Level 2 capability before you have a Level 2+ capability. And what it boils down to is -- and Magna, as Boris mentioned, is into most of that, whether it's radars, LiDARs, cameras, those are pretty significant sensors that are needed to make any level work. I think the player that will do well is the one that thinks of it from a customer standpoint, and we're definitely putting the emphasis on it. So if I look at 2 years ago, just 2 years ago, a lot of the luxury players had some of the features that we're talking about as optional, even in Level 1 and Level 2. And now you're starting to see vehicles at half the price for the customer that have a standard. So you could see that this really feels very much like a safety feature that everybody wants. So we think clearly, UX or how people interact with the technology is a key to get to that Level 2+. We think -- we know that Level 1 and Level 2 capabilities are necessary to get to that level, and we're working on all of that. And of course, from a consumer standpoint, which translates into close to 100% one day, it's how much can I let go of my wheel, how much can I do something else in the vehicle. And as an industry, we got to keep working on the Level 1, 2, 2+. And it definitely builds on each other. You could even argue that level 4s and 5s built on what you do in 1, 2, 3, especially if you take the time frame out of things a bit, of course, many players are focused on level 4s, 5s as a separate effort because of the time issues and some of the complexity in it, where you remove the driver from the equation completely. So I just think that there is a strong relationship between them. But they all rely on the sensing and compute that we're working on.

Perfect. I mean, one of the -- we've talked a lot about the opportunities of higher content in Level 2+, and clearly, exciting you work with great, great partners. Maybe we could talk about some of the risks. Magna was straightforward with the investment community over about a year ago, when you started talking about some of the issues on the integration, I think it was -- quite probably, it was the BMW contract with some of the LiDAR integration, you had some higher R&D cost, right, which -- these are complex systems, basically, some of the first-time LiDARs being put on a vehicle for an extremely complex program. Could you talk about the things that you've learned? Scalability, meaning once you've done one LiDAR program, can you take that knowledge set to other the programs? But it's a topic that we've been talking to the investment community for some time. So we would love your guys have an input.

So I can start on this. Well, certainly -- so one important thing is that a couple of years ago when we were embarking on several very large-scale programs, at the time, it wasn't clearly clear, either to ourselves or to our customers, and maybe to the industry in general, what's it going to take to move such large programs, not only in terms of the software development and bringing them in, but also in terms of building the infrastructure and the test and validation, which is very, very important for these large programs. So looking back, the way we look at it is it was a great experience that allowed us not only to develop a significant bench strength to allow us to really build a very strong team they can take on such large programs, but also, moving forward, the scope that we're able to handle with the several programs, and we are in -- some of these problems, we're in, let's say, later stages of development, right? That allows us to really position ourselves in the marketplace with a much greater strength to take advantage of that. So for sure, I would say, over the years, we're able to add significant management resources, the work-level resources. We've gone through a -- at one point in time, we've gone through a lot of hiring and building the large teams that can handle, like I said, both the -- from a development point of view, integration point of view, but even very importantly, in terms of the testing and validation, both the teams at infrastructure. And we will truly prepare as, I believe, for the -- to take advantage of it and prepares us for the -- to take on the next challenge of that type of programs to take on in the future in those geographies. So maybe that's a -- that would be my answer to that question.

Awesome. Yes, this is John Saager from Evercore. [Operator Instructions]. But I'll continue on our path here. One of the things that we like most about the Magna story is just your general capital allocation discipline. And one of the positives of that is that you're able to pick up sometimes cheap assets at the bottom of cycle. But one of the negatives of it is that you may have to terminate some things that you don't think are going to earn revenue in the near term. So earlier this year, you terminated your codevelopment with Lyft, citing the long pathway to development and more of a focus on the Level 1 to Level 3 ADAS feature set. So can you talk to us a little bit about your framework and give us some details behind why you think it's going to be so long until those types of projects are able to actually generate revenues?