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

All right. Great. Good afternoon, everybody, and welcome to our next session. I'm Itay Michaeli, Citi's U.S. auto analyst. I'm delighted to have Magna with us at the 2021 Car of The Future Symposium to talk technology through a fireside chat session. From the company, we're delighted to have Sherif Marakby, who is Executive Vice President, Corporate and R&D. Sherif, thank you so much for being here. Great to see you.

Thank you.

We also have Boris Shulkin, Executive Vice President of Technology and Investments. Boris, thank you. Great to see you as well.

Good. Thanks.

We also have Louis Tonelli, VP of Investor Relations. So thank you all for being here. We'll go through a bunch of questions in the next 35 minutes. But if you do have questions for Sherif, Boris and Louis, just feel free to e-mail me. I'll be checking my e-mail a lot throughout the session, and we'll get your questions asked. So with that, thank you again.

Maybe we'll kick things off, Sherif, with you. I think the last time we saw each other was 2018, I think, in Miami.

Yes.

It's been a while. How is your first year at Magna? How are things going? Kind of what's surprised you or kind of what have you been kind of working on primarily in the last year?

Sure, sure. No, thank you for the question. And just FYI, I've actually known Magna from outside for many years. Well, obviously, if you're in the auto industry, you're working with Magna. And I can't believe it's almost been a year actually. So one of the things that probably was -- I mean there's a lot of positives in terms of the welcoming attitude of the different teams. Magna has a unique structure of the different groups in Magna, but everybody has been super welcoming and really very open about the type of things that we should work on, what the priorities are, and the openness has been fabulous and necessary, to be honest. I did join Magna in the middle of COVID, and it's still COVID. So it's always a challenge to deal with that and develop a network. But people have gone out of their way to really work with myself with -- and newcomers to the industry. I think the diversity of Magna components and systems and technology and the full vehicle -- the full vehicle knowledge has been very great coming from an OEM and obviously working in this environment. The components and systems and working at a Tier 1 -- a large Tier 1 and the diversity of the components systems have been a bit of a learning curve for me as I've seen it from a customer standpoint or an OEM now, I'm seeing it from a Tier 1. It's also been a very positive to work across the entire industry. So I'm not necessarily working with 1 customer, but working across, which you could see the -- some of the broader view. And last but not least, I'm really excited that the megatrends or the trends in the industry are the same no matter where you go. It's the AV, EV, the mobility and all the connectivity, all the stuff that we know, and it's really transforming the industry. It's very, very exciting to be at Magna at this time.

Absolutely. No, that's great to hear. Maybe, Boris, for you, we often hear about Magna's ability and Sherif kind of mentioned as well to integrate systems. Maybe talk about the advantages that that's offering your customers, particularly as we get more EV, AV and complexity just continues to increase.

Yes. Well, thank you, Itay. That's a -- it's a great question. Look, what I would like to think is a lot of changes, obviously, in the industry. We all believe we're in the middle of what we call the next big revolution, this big change. And we feel and we believe strongly that the changes that are happening in industry, it's kind of going our way moving towards us, right? Magna has always been something beyond of a traditional supplier role in every sense of the way, right? And the way we truly think of power of Magna is our ability to deliver not just component systems, but a complete vehicle. And that's a unique -- that's something that Magna has, unique way. Integration of different systems across the subsystems is also very important. I think you all -- all the audience are aware of many of these examples where Magna is delivering today, whether it's working between the ADAS and the mirror systems, between the powertrain and the body, for example, in the case of battery train. So multiple, multiple examples of cross systems, but -- and all the way to the vehicle itself. But even beyond this, Magna has a significant number of foundational strength that we believe are unique to us, right? Not just the manufacturing excellence, the innovation and working having the start-up mindset as a company, but also financial discipline, our decentralized culture, and most importantly, our people. So a combination of all of that is allowing us to deliver what we're able to deliver and being -- beyond the penetration of Tier 1 is.

Absolutely. You have a great point. And to you, if Magna is a large company, and oftentimes people ask, "Well, how can they operate quickly as a startup? How can they find the right technology partners?" And of course, you've done a lot of that in the past. Can we talk about how Magna is leveraging kind of its open-for-business approach with various technology partnerships. And kind of how you, as a large company, many divisions kind of move quickly through that in-house and also external?

Yes. Well, I can start. So the approach that we -- we've chosen this many, many years ago. This is not new. It takes years to really put it in place. But the fundamental idea, fundamental principle behind it is, first, know where we're going, right? So to fundamentally understand the -- not just the megatrends of industry, but overall megatrends and what it means to the world, things like the topic of the CO2, the topic of the material, raw material done so, and there are multiple of them. So we follow all of this. We try to understand what that means to the industry first, then what it means to the Magna and try to understand what our strategy behind it in order to be able to follow and not end up with a surprise 5 years from now. That's one. On the other hand, we look at our strategy overall, where we want Magna to take 5, 10 years from now and beyond and then where the gaps exist. So the combination of the 2 allows us to map these things out clearly and then to know what are we looking for in order to fill the gaps. Sometimes these gaps are filled within the groups that we have. Sometimes it's between the groups' collaboration between the different groups within Magna. Sometimes, it's something completely new, right? And then we go out and we seek -- I mean not everything can be done within the company. There are obviously traditional M&A type of activities. As you know, we've done many of them over the years, some very large, some smaller ones. And we're constantly looking for these opportunities. But also beyond this, we've been working for many years now. We can say very actively in the venture community, in the start-up community in the university and research community, and it's basically about building your network across all these communities and looking for the right people, for the right type of gap solution. And we don't have a prescribed recipe how we deal with these, either start-ups or the universities. There's no one-size-fits-all type of approach. Sometimes, what it makes sense is a passive investment in a company. Sometimes what it makes sense is having a much more active role in doing projects together and taking to the next level. And you've seen some example of that. We've done things, I would venture to say, as extreme as if we have an idea internally and we believe it's best to be executed on the outside, we would fund such an effort on outside and then let the company grow and let others participate at the same time because the volume is very important in our industry, as you know. So we don't have a prescribed way. The best way we believe to do it is do it in a consistent, systematic way and just keep going.

Yes. The only thing I would just add, I agree with everything that Boris said. I -- the one thing that is very strong at Magna I've seen and I feel every day is they're open for business where ideas come from anywhere. So whenever somebody like -- as proven by some of the recent announcements on new entrants and things like that, it's a -- if there's a good idea, it's much less resistance inside the company about the idea and more openness to figure out. Like Boris said, if it's better done on the outside, we'll do it on the outside. We'll do a partnership if it's better done inside. So it's much more open than what -- than I've seen across the industry.

That's super interesting. Maybe as a follow-up to that. We often hear and I don't think maybe history does prove out that the suppliers who kind of got ahead of the customer trends, meaning to invest in the area before your customers, maybe direct you to invest in it, seem to have a lot of success. How do you manage that at Magna, where you're talking to your customers all the time and they certainly have their plans, and then maybe a good idea comes out internally to not be a bit different than where the automakers are, for now, going but maybe you want to go there to kind of get ahead of your OEM customers and therefore, put yourself in a better position down the road? Is that -- how do you manage both of those kind of sides?

So I can take this. So it starts with the mapping out these ideas, the way we just both me and Sherif explained is understanding the trends, understanding where we want to be, understanding what it means for Magna. But also the other -- the flip side of the coin is talking to OEMs and trying to listen to what they say. The passive conversation doesn't work very well, right? You need to bring something else to the table. So what we do, we use our own internal analysis and put ourselves in the shoe of that particular OEM. And by the way, there is no [indiscernible] answer. What works for a certain OEM in Europe, for example, may not work for somebody in North America or somebody in Asia. So it's not kind of -- mode of thinking of putting yourself in the shoe of that particular OEM takes quite a bit of work and understanding where you need to take your fleet in terms of coming regulations that are geography dependent, what assets you already have, what investments you already made. We try to understand this if we were in their shoes, and then we offer that as our opinion. And very often, that opens up the door for a more open conversation between us and OEM and then a lot of listening as well. So mapping it from both sides and trying to understand. There's -- nobody has a crystal ball. Mine hasn't worked for years, but that's the best replacement for crystal ball that we have at the moment. That's the approach.

Absolutely. That's great. Let's dive into some of the business segment and product. Maybe we'll start with active safety. It's been a key topic at today's conference. Magna is known, obviously, historically as a major player in Vision. I don't have a vision question, but it's not about forward-facing visions, actually about surround vision. Because one thing we've noticed, actually, GM just talked about it recently today at our event is the use of surround vision, the parking cameras for more than just parking, but actually using it as part of an L2, L2+ feature set. What is Magna doing in this regard? What's your role? What sort of content per vehicle? And is this something that sort of has gone from -- is it something that's sort of gaining ground in terms of being a critical part of an L2+ solution?

That is a really good question. So as you probably know, we've been in this business, specifically in vision-based ADAS and even more specifically in the rearview and surround-view business for a very, very long time, probably longer than most of the industry believed that cameras even belong on a vehicle. So we've gone through early developments of this in the late '90s, believe it or not, into the year when the rear camera became, first, as a draft and then eventually took 15 years for it to become an actual requirement. So we have a very significant part of this business in terms of the market. So traditionally, that business has been -- vision-only for many years -- years ago, even in parallel at the same time, with the front vision as well, we started introducing various features in the SurroundVue. Today, we have a significant amount of these features running in the SurroundVue systems as well. They are not necessarily duplicates, but they are certainly very high-level features such as object detection, recognition. There's a rearview requirements and NCAP and so on. So yes, the SurroundVue becoming an integral part of an active safety systems even today moving forward. There's another aspect of it. And the entire ADAS field is feature-driven, not a component-driven. And it's becoming -- we've always had that position. You probably remember us saying this many times, but we feel that the market and the industry finally kind of coming our way and they are understanding as well. What that really means is that sometimes the processing could become a little bit more centralized. The components that you're using on the outside become a little bit less relevant. What becomes really relevant is the features that you're able to deliver. And I don't necessarily believe that one replaces the other, but the role of the SurroundVue just the fact that the hardware is there to do other functionality, that means that you can piggyback on the fact that hardware is there and create new functionality on top of it. We have -- we're having many programs in the past and continue having the programs that involve these type of features on our SurroundVue systems.

Itay, in terms of content, we're not talking about content. But if you start to add up multiple cameras, and then perhaps if you have the ECU included in that, your content is pretty decent for the overall system.

Yes. Yes, absolutely. And then one more kind of, I guess, near-term question, and we'll talk about maybe long-term strategy for active safety. Any update on the ICON RADAR product? I know you've had 1 win recently. And sort of how much work are you doing in-house internally kind of for sensor fusion? Or is that an opportunity still? Or do most of your customers say, "We'll do that fusion in-house."

So maybe we'll start with the first part of your question. Definitely, we were very proud of that development. As you know, we entered the radar business. We did not want to be just a me-too type of a solution. We believe it's a revolutionary solution. It's a silicon that -- very unique silicon with digital -- pure digital processing, digital modulation. The amount of benefits that it brings, we believe, is not just incremental, but much more significant comparing to today's systems. Digital modulation and full digital processing allows for multiple, multiple benefits. The interference mitigation that's basically built in into the system is one. Higher resolution, the heavy lifting is moved from an analog hardware part of it into a digital processing. And if history is any proof of the future, then what happened to consumer electronics, what shrinks is the digital part of it. And so if I were to bet on the future, I would be betting on the digital being shrinking, which means cheaper, which means better, which means more features and so on. So that's the path that we've chosen several years ago. We, at the point today on multiple generations of the chip. And as you mentioned, thank you for saying that, we have the first win of the program. We're in deep discussions with multiple OEMs and production programs, and we believe more to follow up, huge interest from many of our OEM customers on that. And then on the fusion, well, very, very important part of it. We've been delivering fusion solutions on many of our ADAS systems for years now. Not always all the components have to come from Magna. We've delivered systems in the past and continue to do this today, where we fuse the sensors on our system from other suppliers as well and serve as an integrator to our OEM customers where the entire -- not just an integration part of it, but also the validation, testing validation of the entire system is within Magna. So that's a significant work. Only as an example as a proof of it, we recently announced, for example, it's just one of the examples, Fisker announcement on ADAS where we deliver a complete system. Again, I don't want to sound that this is nothing really new. We've been doing this type of work. It's just the most recent announcement. But if you look at the pieces and components of what comes into this, we've been delivering that for many of traditional end customers exactly this for years.

Yes. I would just -- I wanted to just expand on a point that Boris said is it's all about feature based. And when you look at the growth of ADAS at 15-plus percent a year for the next few years, that's not surprising given the history, and the history is short. So even if you look at the last couple of years, you've seen ADAS features. We could talk about some features like lane keeping or adaptive cruise or some others or even lane change, grow from almost nonexistent or vehicles that were $60,000, $70,000 plus to average vehicles, and that's an indication of everything that Boris was talking about in terms of the cost down, the fusion focused on certain features and things like that. So it's an exciting field, and it's literally a very growing field just the last few years, and that will continue.

Perfect. Terrific. Maybe one last one on the active safety and then move to new mobility and EV. I guess how would you articulate the big picture strategy for Magna? You talked about the 15%, 20%, I think, growth through 2027. Is that sort of in line with market growth rate do you expect in that period of time? Kind of what's the big picture vision for Magna active safety over the next several years?

Yes. I mean I can take the first initially, if anybody wanted to add anything. I think the growth, as we described, is real. The Magna strategy is a strategy of building blocks. So as we've proven by having partnerships or collaborations or acquisitions, whatever you want to call it with different partners, it could be a sensor, it could be a compute, it could be a domain, it could be a fusion piece of software. And we believe that the consumer, the end consumer is looking for features. And there's a ton of data, a ton of sensors and a ton of fusion and a ton of a lot of things that come out of the things that we're putting into the ADAS system. And now we have to, and we have been, focused on what does it mean to the consumer and what features could we provide. And we have a pulse on the market and what's happening in the growth. And we really believe firmly that the growth is happening because these are safety. People see it as safety features. They make the drive safer, better, more convenient. And we -- there's no point having discussion on technology for the sake of technology, but technology is delivering the customer features that are making people's lives better. And we believe that's a big piece of what Magna needs to continue to do beyond what we've already done in the last few years.

Itay, we've had some traction in this business. Obviously, we're launching some advanced programs in the near term. We've talked about our sales CAGR of 19% to 22% up to 23%. We think we can grow, I think 15% to 20% on average per year between '23 and '27. We've got the entire ADAS system for Fisker, including the ICON RADAR, as Boris mentioned earlier. So we're starting to get some traction in this business.

Absolutely. That's very helpful. Maybe shifting gears to new mobility. I think at the recent Investor Day, there was talk about a couple of slides around opportunities in new mobility, urban delivery, factory automation. Maybe elaborate a bit more on what you're seeing there? And to what extent does the revenue opportunity for Magna, both within auto -- traditional auto and maybe not traditional, overtime shift from a kind of content per vehicle or to more of an installed base type of recurring revenue? So maybe a little bit detail there.

Sure. I can talk in general about new mobility and what it means to Magna. I mean there has been some changes in recent years around new mobility. And one of the things that we believe in is last-mile delivery continues to grow and maybe driven by e-commerce and the COVID era and others. There's no question in our view that new mobility -- new mobility and EVs make sense together, not for technical reasons, but for other obvious reasons in the marketplace. They're on the way to robotaxi or moving people in a shared mobility type thing -- type environment. And while that may be is a focus, it's one of the complex use cases, and we could easily start with e-commerce and new mobility and last mile. Magna has a lot of capability in this space, whether it's the EV portion of the system, a platform vehicle and you could pick and choose. Do you want to make small, medium, large, depending on the form of mobility, and all the way to recurring revenue and some of the areas that we could be involved in based on building on the capabilities that we already have around -- or building; not just have, but we have to continue to invest in some of these technologies, whether it's hardware or software to continue to serve those markets. So it's an exciting field. It's a promising field, and we feel that e-commerce and moving goods and last mile could come in earlier because of the acceleration of that market, followed by some others all the way to robotaxi, of course, which makes a lot of sense from a business case. And Magna is positioned well from a total vehicle because those vehicles may look and feel different, but they still use many of the technologies that we're building and understanding the total vehicle market and what it means, and the EV space is fundamental to the new mobility.

That's very interesting on that point, because when you think about these vehicles last mile, accumulate a lot of mileage, choice of quality and just the experience you have, I'm sure it goes a long way. You mentioned robotaxi. Just curious whether if all you do -- on the EV platform, engineering, manufacturing that does the -- Magna plays a bigger role as being kind of a robotaxi provider and/or even having a platform that can deliver EVs that are more suitable for human rideshare. Just curious until all the permutations you can kind of offer off your platform.

I can take that.

Sherif, go ahead.

So the robotaxi market is obviously -- it's been some changes in the last couple of years, the expectation of the market in terms of time. Our statement on this hasn't changed. If you remember our discussions about a few years ago, we've always had the view that the ADAS, let's say, L1, L2, L2+ level of autonomy will continue to grow very significantly given the regulations and NCAP requirements and also acceptance of the consumer. So we feel that this is very fast growing, very important part of that segment. On the full autonomy, robotaxi, we've always held the view that it's not a matter of if; it's certainly a matter of when, and the reasonable expectation on our part was always that it will start with fleets. It will start with -- first of all, it's some ways away, right? But also, it will start with highly controllable fleets, which means that the boundary conditions of either certain time or a certain area and so on, but the fleets are controlled and owned by fleet owners. And that's where the opportunity starts. So the opportunity starts with new business models. And this is -- that's the reason we're watching this market very closely. We -- as you know, we're very active in various roles in this market as a partner in many cases, sometimes technology partners, sometimes an investor. We've had publicly several of these relationships. We continue to have these relationships with the key players. We do -- we are a natural partner for anybody who wants to come and outfit their vehicles for their test fleet and so on. As you know, we've publicly announced several of these. But in terms of the larger market and in terms of the volume opportunity, there's many, many things to be solved, both technically and from a regulations point of view and also from acceptance point of view that it will take some time before it will go beyond just a smaller, highly controlled fleet environment.

Perfect. One question really, last one on kind of new mobility and focusing on complete vehicle assembly. And I guess this question a lot from investors, is just remind us how the contracts generally work? I think there's definitely -- it's a number of puts and takes to think about with ups and downs of volume. And then how do you go about selecting which customer to work with? I imagine there's a lot of inquiries given your capabilities. So maybe just a bit about the nature of the contracts. And are these contracts evolving versus what they were in the last few years? So maybe you can elaborate on those 2 points.

Maybe I can start on that one. So generally, the flexibility that's associated with our complete vehicle assets is different than the rest of our business. So as we get into these contracts, methodology that we use to recover our costs is different, and it takes that flexibility into account. So if you think about our paint line, if the volumes on the paint line are short, it's not we can go out and repaint another body, for instance. So we have to take that into consideration. In terms of the business, typically, a lot of the program-specific tooling and capital is covered by the OEM. So that certainly protects us in terms of how much investment we have to make. In terms of the considerations for who we're going to work with, we're lucky enough that we have the ability to be choosy. There's a bunch of factors that we're going to consider. Obviously, the financial strength of the party, the robustness of the concept in the business model, what are the volume expectations, what's the availability of our assembly capacity, et cetera. So there's a bunch of different factors that you have to consider. Do you guys want to build in anything else there?

No, I think you've covered it well. We're in a fortunate position, Itay to be able to choose where a natural place for many of these, whether it's new entrants, a traditional one to come to for such conversation. So I think Louis said it right, we're fortunate to be in that position.

So let's talk about EV and particularly eDrive. Big focus, I think, on the company. So maybe just talk about what differentiates Magna's eDrive offerings that kind of give you the confidence to become a top 3 player in that field?

Sure, I can start there. I think all we need to do is also look at the pre-eDrive business. If you look at just drives before we put an electric motor in it or an inverter, it's -- Magna has a pretty strong position in that space. One is obviously, understanding the customer, working with the OEMs to understand what they're looking for and the attributes are key. We looked at the eDrive -- we've been looking at the eDrive as in collaboration and partnership with others that do electric motors and inverters as an example. And the recent announcement from a few months ago on the JV with LG is a good example of that. So we're not waiting for the market to be established around electric drives. We're actually taking our knowledge, our integration, our software, our capability in eDrive drive and then marrying that with electric motors and inverters with someone that's been doing that for many years as well. So we're using the building blocks to build the capabilities so we can continue to win in that space. Is that space going to continue to be competitive? Of course. But we are -- we're building the building blocks to continue to grow and be strong in that space. And we feel confident and humbled, of course, that it's really important to have those building blocks and be ready as the market grows as well.

Absolutely.

Yes. I think that's right. Maybe I'll add just one more -- a little bit of color to what Sherif just described is, if you look at some of the recent announcements we've made on key technologies there, if you take the example of intelligence where the ability of the software to pick up the information across the system from the cloud, for example, right, or from other information with from ADAS and so on, knowing the path from A to B, an ability of the our eDrive system to put a significant savings. In real world driving, we demonstrate, for example. And one example is up to 38% of the CO2. This is a efficiency, I should say. That's a significant, significant thing just to be done by integrating different pieces of the vehicle coming in the software to 1 place, and ability to squeeze that last less percentage of efficiencies. That we believe that, that's what really differentiates us. And you can look at other pieces within the EV infrastructure of the vehicle itself. For example, our ability to do better trade, right? It's very complex, where multiple domains come into 1 product from not just the behavior of the battery itself, the drone behavior, the crush requirements in the vehicles and so on, right? So there's -- the system approach to make this solutions work is the way that allows us to be more efficient and continue to be competitive. As Sherif said, it's not an easy world today. It's not predicted to be an easy one in the future either. So that's what helps us to stand out.

That's super helpful. And as you kind of put the EV story together, maybe for investors, if you could maybe articulate the assumed kind of content per vehicle and market share ranges in the company's 2023 and 2027. I think it's a managed EV sales expectation that you recently put out there. Any kind of way to think about those metrics that were embedded into those forward revenue forecasts?

I'd say in terms of the eDrive content per vehicle opportunity, it will depend on the system and how many features that are included in that. But we've had to make some assumptions of pricing over time and volumes, et cetera. We've taken a pretty conservative approach that on average, content vehicle for primary eDrive is about $1,100. And for secondary e-drive, it's about $950. So you're thinking about like a 4-wheel drive EV, it would be a little over $2,000. And as I said, it will depend on the feature content. That's excluding what we could do to our LG joint venture. They do other products that are beyond the eDrives like the onboard chargers and the DC converters. That will be additional managed content on top of that. In terms of powertrain market share, Itay, we haven't really gone through the analysis to figure out what does this mean in terms of assumed market share. But based on what we're just talking about, our position in eDrives, our position in traditional four-wheel drive, all-wheel drive and transmissions, we believe we can be a leader in eDrives. And what we're not really picking up here is that a substantial portion of Magna's business is not powertrain. And with our systems and complete vehicle knowledge and capabilities, we have a huge opportunity in electric vehicles. So I think Boris mentioned the battery enclosures, which is an incremental on top of what we can do in cars right now. And of course, in complete vehicles, we've said that by 2023, about 50% of the volumes that we have are going to be on EV. So these are additional opportunities on top of the powertrain.

I would only add one thing to what -- that's right, Louis. And what excites us also is that the numbers that Louis was just quoting. If you think of an equivalent product in a non-EV space, even with Magna today, and if you think of this one, there's a significant upside opportunity for us. And that's another thing that makes us more excited, that this is a significant incremental. I'm not sure -- I think we've highlighted during the Investor Days as well. So that's -- we believe that goes our way. And I'm going to reuse the same phrase I used in the beginning, the kind of trends are going our way in that phase.

Yes, and larger addressable market. That's right.

Absolutely.

I'd love to continue, but by now, we are over time. And so I think we'll end it there. Sherif, Boris, Louis, thank you so much. Really great conversation. Really appreciate your participation today. We learned a lot as always whenever we catch up.

Thank you.

Thank you.

Thank you, Itay. Appreciate it.

It was great talking to you.

Same here. Absolutely. So with that, I want to thank you again for participating, and thank you all for joining us today. With that, we'll go ahead and conclude the session. Have a great day, everybody.