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

Okay. Good. Welcome back. I hope everyone was able to get a fresh cup of coffee. We're very pleased with us now to have Magna International. Magna, we're representing today, represented by Vince Galifi, EVP and CFO; as well as Louis Tonelli, Vice President, Investor Relations. They are safely sheltered in what seems to be the very socially distant suburban Toronto headquarters for Magna. They're in different rooms, so don't worry.

Speaking of precautions and speaking of COVID, I just want to kind of get an update on where you think market conditions are, frankly, since your reported earnings because we've seen a second wave of lockdowns in Germany and the U.K., growing restrictions in North America on gatherings and activities, which may or may not affect sales. So what are you seeing both in terms of as you look through and talk about your OEMs about the retail sales are doing, but then more specifically, the risks to sales and production -- to production levels and, hence, your sales in the EU in 4Q 20?

Yes, Brian. Louis, I'll take that then. Brian, we just provided our outlook a couple of weeks ago, which reflected the best information we had at that time, including really our customer releases for our top programs. I did talk about it in Q3, as you kind of look at it into Q4, one of the risk factors is COVID and are cases going to go up or going to go down. The cases have been rising around the globe recently. So I think that's something we've got to be aware of in terms of supplier disruptions, impact potentially on consumer demand and shutdowns. We continue to monitor it. I don't have anything at this point that I can point to. In the back of my mind, Brian, I kind of think about the time of the year we're in. If we get through kind of a pretty good October and November and you move into December, if there are supply disruptions or even disruptions at our own facilities, I think it's actually a good time if you had to try to catch up. But maybe you could catch up given the break. It's kind of ideal timing. We'll have to just continue to keep our heads down and see what's going on and react accordingly just like we did in the balance of -- or the beginning part of this year.

So you're not seeing any changes in schedules in Europe yet or any issues with supplier factories?

There's a -- I'd say, across the company, Brian, there's a list of suppliers that we're reading red. So they're being monitored. Nothing's come up to my level that sort of says it's something I've got to worry about at this point in time.

I mean we really only collect schedules at our level kind of to prepare for our forecast. Obviously, the divisions are getting regular updates. But we're not kind of checking schedules at our level every week. So we have nothing really new to report, really.

Okay. Let's move on to the biggest -- one of the big strategic issues, which is the electrification strategy. Obviously, you've made some very interesting progress. In fact, in about an hour, we'll have Henrik Fisker in to talk about Fisker and, of course, their relationship with you. But maybe just to kind of start, as you go through your -- the Power & Vision division or even other segments of Magna, what percent of the revenue is for parts that really only have use if there's an internal combustion engine in the vehicle? So it could be a hybrid, but once you go to pure BEVs, that product line is basically gone.

Brian, if you look at -- look, let's pull out our Magna Powertrain group for now. And their sales list last year were about, I guess, on a managed basis, $6 billion or $7 billion. If you look at the bulk of our business, it's not going to be impacted by the type of power source that's in the vehicle, whether you're on the exterior side of the business or you're in the Cosma side of the business, whether you're in mirrors or seats. A vehicle is going to need all those things. As you look at even our traditional business, Cosma, for example, when you look at battery trays or battery cases, and we have some business in that area, that's an opportunity for us. It's a pretty high complex overall component in a vehicle. Structurally, it's got to be sound. It's got to fit in the vehicle. Our expertise with different types of materials and/or any engineering and safety testing is a real big asset to us. And on those types of products, our content is actually higher than some of the things that we'll be replacing. So that's kind of -- think about that as a business that's indifferent to power source. I think when you look at our powertrain division -- and remember, when we talk about powetrain, we're not in the engine. What our strength is, is looking at -- or taking power and bringing that to the wheels as efficiently as possible, providing performance and safety for the driver. If you kind of look at the transition from kind of an internal combustion engine right out to an EV, what you've got along that way is hybridization. On the hybridization front, we've talked about these numbers before, our content per vehicle potential increases. For example, we are introducing some hybrid double-clutch transmissions. And when you look at a DCT that's hybridized, the -- our content increases, i.e., our selling price also increases over a traditional DCT, which is -- so that's content accretive. And you start thinking about these hybrid DCTs and you got low voltage and then you get into high-voltage, and the high-voltage market actually gives us an opportunity to actually work with front-wheel drive vehicles to increase overall penetration. So that's an opportunity for us. And then you have -- along there, we're still producing 4-wheel drive and all-wheel drive systems and manual transmissions in DCTs. If you take the extreme and say, okay, now we got a pure EV. What happens to your transmissions? What happens to your 4-wheel, all-wheel drive? What happens to your manual transmissions if everything was pure EV? Well, certainly, a transmission becomes from a very complex, highly technological product to a more simplified box. So I think there, you lose some content. When you look at some of your 4-wheel drive, all-wheel drive products, it's going to be -- this is going to be powered differently. They're going to have e-drive systems. So that's a negative. But on the plus side, we take our capabilities and grow with e-drive systems. And we have couple of programs today. When you think about an e-drive system, you can have a front-wheel drive. You can have motors in the front. You can have motors in the back. You've got gears. You've got shafts. You got motors. You've got inverters. You've got whole system integration. And our understanding of how a vehicle handles and how you take power from a source and bring it to the vehicles is a big advantage that we have. It's a business we've been investing in. Unfortunately, as you invest in businesses, they're going to ramp up with new business. You're spending money on core technology, and you're spending money on application engineering, on launch costs really for the new program. That's all being expensed. So as the revenue starts to come in, you'll start to see a positive impact on margins and return on capital. And if you...

You talked -- if you go back to our Investor Day, Brian, if you recall, years -- it feels like years ago, but it wasn't. It's only 2 months ago. I talked about the building blocks that we have in our traditional business and how we're able to use those building blocks to go from the things that we do for internal combustion engine to a hybrid DCT and to an e-drive system. So we think we've got the right building blocks to move forward in the whole powertrain area.

Well, then let's talk about the EV building blocks just for pure BEVs because I think your relationship with Fisker, which I'll get to in a moment, but just they did point to the sort of EV platform -- I don't know if you want to call it skateboard but the collection of EV, e-drive and other capabilities. Could you maybe talk about what you would call the Magna EV platform that you'll be providing Fisker?

So Brian, we've been working with Fisker for quite some time on some engineering. And Henrik himself has visited our Graz facility several times. So we've been working at Magna on developing an electric platform. And if you kind of think about some of the other business that we do today, for instance, in China with BJEV, we've got an electric platform there that is being used today on a product, the Arcfox for example, that's launching, and they're not the same. They're different, and they're going to be completely different given the software capabilities that Fisker wants to put into this vehicle. And that's an electrified vehicle that's on the road. Think about some of it in our more traditional customers that we're doing work in Graz and you look at what we're doing with Jaguar on a complete electric vehicle platform. And our engineering capability, working with a number of customers and integrating systems and vehicle architectures, certainly gives us a tremendous amount of capability to work with Fisker to bring this vehicle to market.

And how are you source -- are you involved with the battery sourcing, battery pack design? Or are you really sort of the motors and the control elements coming after that?

Well, our involvement is on the overall engineering and working certainly with the Fisker team on sourcing a number of items for the vehicle. Some of that sourcing will be some opportunities for our overall Magna organization. But that's still work in process in terms of doing all that. But it's going to be a cooperative effort going forward in trying to get this vehicle all in place for the important launch date.

And are you talking to other either start-ups or established companies? And kind of where do you think -- many of us had the dream for years that you could become the Foxconn or Flextronics of automotive. Do you think this is a trend that could continue?

Brian, we've -- Magna Steyr over the years, if there's somebody that's got an idea in terms of what they want to get into the space, a lot of times, they turn to us. We have that capability. We've talked about that in the past. I mean there's -- Canoo's gone out and talked about sort of having some discussions with us as an example. Even when you think about BJEV and what we're doing with them, I wouldn't call BAIC a start-up. But certainly, if you think about what we're doing with BJEV on the EV side, I think that's an opportunity for us going forward. And I -- it's quite a unique opportunity for a supplier to be able to work with a customer not only on providing components and systems, but working with them on the design, the engineering and actually building a complete vehicle, which really sets us apart. And I think that's going to be more important and more relevant going forward as this industry changes.

So if we think about the trade-off just within powertrain, around electrification, can you remind us of your effective CPV in the powertrain business, sort of if every -- if an OEM bought everything, but more realistically, what your typical ICE car from a customer would have? And then how does that compare to the potential CV for e-drive units if you're not doing the final assembly but providing some of the other components?

So we said that...[indiscernible] with that.

To start with, in internal combustion engine, you have the products that we can put on like a dual-clutch transmission and a 4-wheel drive system. Content is about $1,900. And if we go to all the way to electric vehicle where you've got 2 e-drives on it, its content opportunity is about $2,400. And then between there, you have hybrid -- hybridization, which provides, in addition to go up on contents, whether it be a 48-volt or high voltage, there's different pricing points, but they're both higher than where we are with the traditional ICE vehicle.

And where are you on e-drive pipeline for BEVs? Because we certainly understand that if you're doing Magna Steyr and really helping out on a broad scale, there's an opportunity there. Yet when I think of the major OEMS, several of them, for example, 6 of one of your competitors top -- top 6 customers have all announced very publicly that they're doing their e-motor assembly design in-house. So where does e-drive fit into that world? Are there other OEMs who are more than happy to outsource the e-drives?

Well, I think it's going to vary by customer, and it's going to vary even with the same customer by region. Let me give you an example of some business that we have in China where we're doing the e-drives in China, and the customer is doing e-drives outside of China. So -- and over time, Brian, you have to think about whether that's going to evolve and it's going to change. And this is sort of -- Magna Steyr, right now, some OEMs want to keep that close to them, not for their own strategy. But that doesn't mean that we're not doing any work, even if there's a customer that wants to do as much as we possibly can. And how there's still a big opportunity to provide a number of components related to an e-drive system. So the growth is going to come in both areas as a completely integrated e-drive system, and we got some of those contracts and providing components for our customers on the e-drive. So...

And we actually provided at our Investor Day in February that we have a couple of programs already on the e-drive side, one in China, one we have yet to announce, but we got a couple already in the booked category.

And in terms of components, what's the real value-added component that you -- or components that you could supply to an OEM who has to take his or her XYZ engine plan and repurpose it into EVs, so might be doing the assembly? And can you -- what are the components that you could still provide? And are -- is there -- are they attractive areas? Or is it a very crowded space?

If you think of some of the capabilities that we have today in our powertrain group on gears and shafts, which we are incorporating into our overall transmission, that's certainly a big opportunity to support our customers. Even on -- think about some software capability, understanding the dynamics of vehicle handling, that's an opportunity for us to work with our customers on the engineering side. In terms of motors today, we're not manufacturing -- we've manufactured some motors in smaller quantities in the past, but it's not an area that we're involved in today. I get some capability on the inverters, but I think the biggest opportunity is look at what our strengths are today would be on the gears and shafts and complete integration of e-drive systems.

We are supplying some electronic components to the e-drive in China as well.

And final question on electrification, then I'll get to the more traditional post-quarter growth and margin questions. The frame business comes up when I talk to investors about Magna. Obviously, you're a major provider of frames for a major pickup truck platform, yet that very same -- there are 8 electric pickup trucks coming out that we think will lead away at some of the higher end volume on that. How do frames go? How will the frame business evolve if more and more of those heavier light trucks move to EVs?

I think you have to think about -- in terms of the frame business, if overall the frame market comes down and it impacts some of the business we're on, that will be sort of a headwind. But I talked earlier on about some of the opportunities with battery trays, for example, or battery cases. And you kind of look at the trade-off between the frame and you look at a battery tray and what that does to the chassis and is that added content or reduced content. Based on our experience, that would be added content to us, if you did swap one for the other. So I view that as kind of an opportunity to be able to grow the business, continue to be in the frame business, but look at battery cases, which is more than just frame-type vehicles today.

There's definitely companies talking about electric vehicles, but our view is there's going to be some time before that high volume is displaced in any meaningful way. So I think we have a long run to go with the frame business.

And you mentioned the battery pack trays, but is there an opportunity there to take the -- what you know in hydroforming, et cetera, on frames and bring that very aggressively into the battery pack business?