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

Hi. Good morning. I'm Ryan Brinkman, the automotive equity research analyst here at JPMorgan. Very happy to get going with our next presentation at the 2021 JPMorgan Automotive Conference. Thanks for joining us. We're going to get started now with Magna International. We have here with us Swamy Kotagiri, Chief Executive Officer; Eric Wilds, Chief Marketing Officer; and Louis Tonelli, Vice President of Investor Relations. So Swamy, Eric, Louis, thanks for being here. We really appreciate it.

Well, good morning, and thanks for having us Ryan.

Yes. Thank you.

Okay. So first question is obligatory question. I have to try. A couple of weeks ago -- a few weeks ago now, you announced the planned acquisition of Veoneer. And of course, since then, just the day prior to your reporting earnings last week, Qualcomm introduced a rival bid, a higher bid. And on your earnings call the next day, you were limited in what you could say, including not taking any questions on the topic. I'm guessing you're still probably still limited, but just wanted to start by asking if there's anything that you could or did want to say on the subject. And perhaps if you do need to pass on discussing Veoneer specifically, maybe you could remind us again what your approach is to capital allocation generally. And what other opportunities might be available to you in the event that the transaction didn't go through, such as resuming the share repurchase program you suggested would be suspended for time being or potential other acquisitions? What do you think?

Yes. Ryan, I think with respect to the Qualcomm bid, there's not really much that we are saying at this point other than saying we'll continue to evaluate the options and consider next steps. But I think the key, which I would like to repeat, right, we are disciplined as always in our approach and remain really committed to getting the appropriate returns on all our investments. And our merger agreement remains in effect. We will see -- go on with the time, again, based on our foundational strategy. Regarding your next part of the question, I would say we have been very clear and nothing has changed in the capital allocation strategy for years, and I don't think it will. Our #1 priority remains to invest in the business. And when we say that, it includes organic investments, M&A and R&D. And if you just look at the industry and the changes and the tremendous opportunity available in these times, I think we expect further opportunities to invest. And if you go back to our Investor Day, we kind of stated very clearly that we will be accelerating our investments in high-growth megatrend areas. Obviously, again, for the -- keeping in mind the long-term value and the returns of the company. We will maintain a disciplined profitable approach to growth. Now also, we want to have a dividend we can grow over time as earnings grow. And we would like to maintain that through downturns, which we have shown, right? And to the extent that we have excess liquidity, we'll return it to the shareholders. And we followed this approach for many years, and we'll continue to do so.

That's very helpful. I do want to concentrate most of the rest of my question on those high-growth opportunities. Just before I move on, was there any kind of -- I didn't catch before. Any kind of like breakup fees or anything like that in the original agreement?

Yes, there was a breakup fee, and we talked about it. It's $110 million.

Nice. Okay. So let's move on to those high-growth opportunities then. So I wanted to ask, firstly, on the joint venture with LG Electronics that was announced back in December. So a lot of excitement in the investment community, both because it looks to have closed very recently, so I thought maybe you could have an update there; but also because it enhances your capabilities in the exciting growth market for electric motors, inverters and onboard chargers. So just a couple of questions around that, starting with what kind of growth you expect out of this venture. At the time of the acquisition, I recall you're saying it had generated, I think, $150 million of revenue in 2019. Are you able to say how much the business grew in 2020 and how much you expect that it could grow going forward?

So Ryan, yes, you're right.

Swamy, so yes, it was $150 million in 2019. Growth was pretty modest in '20. But given that we had COVID, that was actually a pretty good outcome to have growth in 2020. And we said that we expect to grow kind of over 50% on average per year over the next number of years from that 2019 number. And we're still on track for that.

Yes. And in terms of TAM, now that the transaction just recently closed, right, we'll work with LG and come up with a TAM that reflects the combined views. And the strategic rationale is very sound in saying that we are able to address the overall system diversification in the customer base but also being able to address, call it, the subsystem level, I think, Ryan, as you mentioned, inverters and e-machines where the OEMs are looking at doing the overall integration themselves, right? So it kind of addresses both sides of the equation here.

Ryan, if you don't mind, if I could just jump in. I think too, the other thing is when you look at the TAM, right, the feedback that we've gotten from our customers and engaging in different conversations has been really positive, too. So we're -- as we're working towards it, we anticipate that the market and opportunity level really does grow for us.

Maybe -- yes. Obviously very impressive TAM. Just to follow up on it. I realize that American Axle also operates its integrated electric drive units or eDrive system or integrated drive motor or whatnot via a joint venture or partnership, in their case with a Chinese company as opposed to a Korean company. Although I think BorgWarner has claimed some benefits to having all capabilities within 1 company. So just trying to get your thoughts on that, whether you think that there are any advantages to being entirely vertically integrated or whether there may be advantages to your approach such as if LG were closer to certain other OEMs, maybe nearby Hyundai, Kia for example, or others. Also, I'm not sure 100% of the relationship between LG Electronics and the very large and quickly growing LG Energy Solutions, previously LG Chem, that GM and others are partnered with. But I think there is some sort of affiliation there, some [ chivalry ], right? So does that possibly confer some benefits, for example, if LG Energy Solutions customers could be steered possibly toward the LG Electronics? Do you have any thoughts on that?

Yes. Ryan, I think from our perspective, when we started this and looked at it for all intents and purpose, the JV with LG gives us what we really needed as the key building blocks to develop a complete integrated eDrive. We have the integrated eDrive design system knowledge, and we are doing that, we are producing it. But if you look at the value chain going down, it becomes very important, we felt, to have that vertical integration play and the result was this JV. This JV runs separately from LG Energy that you talked about in terms of benefits. We obviously have to see down the road what it -- how it might play a role or what it might be related to energy storage. I suppose anything is possible, but when we did this, that was not really the intent of the relationship. It was to be focused, as I said, on e-machines and inverters but also looking at diversifying the customer base where the JV will play a front-facing role with Korean and Japanese OEMs.

Very interesting. Maybe just switching gears a little bit here from the components that go into the battery electric vehicles to talking about their very manufacturer, right? Because you also build battery electric vehicles, more than some automakers, right? So it's a growing part of the business. And maybe you could just update us there in a few different respects. Firstly, the relationship with Fisker, how is that progressing? When do you expect to launch? How meaningful of a contributor could that relationship be in terms of units or revenue or economics, et cetera? And also, I think you have a financial interest there with some warrants. Maybe give us just an update on Fisker generally. Then beyond Fisker, maybe remind us of what are the other battery electric vehicles that are in production with you today, Jaguar I-PACE, et cetera? What has your experience been with them? And then thirdly, what does the future hold in terms of battery electric vehicles, particularly with regard to the new plant in China, start-up manufacturers? Any updates there would be great.

Yes. I think Ryan, progress has been good from the Fisker Ocean program. Teams are working really well and kind of working towards the manufacturing toward the end of '22. In terms of units, I think I would let Fisker do the disclosure. I don't want to be stealing their thunder away. But just on -- we've been just not looking at the complete vehicle manufacturing, but we've been awarded the complete ADAS system for that program, the Ocean, recorded a number of other systems. Again, I'm hoping -- and let's leave it again to Fisker to talk about those details. From the warrants perspective, the signing of the manufacturing agreement, the second of our 3 tranches of warrants have vested. The last tranche vest at SOP, right? More broadly, I think if you look at, call it, the complete vehicle segment of our business, I think that is an enabler to other systems, as you've seen here, right? Completed ADAS and other systems that we talked, we can bring all of that to the table. And just stepping back and looking at broadly this segment that you talked about. We are producing the Jaguar I-PACE, and we have mentioned that what's interesting really is we are also producing the E-PACE, which is the ICE-based vehicle on the same line, right, but it's a different platform. And kind of highlights the flexibility that we can bring to an OEM. We also produced BMW 5 Series in both ICE and hybrid electric portions, right? That's public knowledge. But -- and in China, you talked about it. We are producing the Arcfox brand with BJEV. And I think we went through the -- one of the variants last year, which was the Alpha-T, as they call it. And we are producing or going for the Alpha-S starting this year. And there are additional variants of vehicles scheduled off this platform. As of right now, to the extent we can and if we cannot get to the 180,000, roughly, capacity, then -- that we have in China, we have the flexibility to offer the manufacturing for other automakers, whether it's traditional or new entrants.

Great. And maybe just moving, if we could, from the electrification growth story to the active safety or autonomous driving part of the equation, starting with cameras. Correct me if I'm wrong, but I believe you're one of the largest manufacturers of automotive cameras. Can you remind us of your vision capabilities from both a hardware and software perspective and what kind of growth you have seen and expect to see in this area?

Yes. Definitely, Ryan, we are among the largest manufacturers of the camera systems. And we are kind of addressing the overall vision-based systems, which is front, rear and the surround-view cameras. On the rear and surround-view cameras, all the software is internal, which is Magna developed. On the front cameras, there is an element of Magna software but we're also partnered with Mobileye, as you know, on the software side. If you just look at it, we believe there is a really good advantage not just in terms of the manufacturing of the camera systems but what we bring to the table in terms of feature/functionality. And we are really looking at a good business here. We are expecting a 20% CAGR approximately in ADAS sales between 2020 and '23. And even beyond that, all the way to '27, we are looking at somewhere around 15% to 20% CAGR.

Yes. We don't split it out by product area, Ryan, but that's kind of across our ADAS suite.

That's helpful. And maybe just moving from cameras down to radar. If you could review the radar business and capabilities today and maybe weave into the discussion the new digital radar that you've developed with Uhnder, an Austin-based technology start-up, which I believe you've also invested in, that would be great, too. Including -- starting -- if you can help me on what is the difference between traditional and what you're calling analog and what you're calling digital radar, et cetera, whether you're first to market there with Fisker Ocean and if other automakers are expressing interest in that product also and what kind of growth could result from it.

Yes. And Ryan, as you know, like the ICON RADAR is the only automotive radar sensor in the market that we see utilizes a unique digital radar chip, and we expect to be first to market with this product on the Ocean. From a tech perspective, it's really the digital modulation that allows for many unique advantages, significant being interference mitigation, assuming there is millions of cars with radars on it. So we want not to have any interference, so that addresses that part. It has really low-latency imaging capabilities, high resolution both in horizontal and vertical domains. And if you combine that with the automotive power requirements and cost efficiency and you take the overall, we really think it is the next-generation radar technology. And a number of customers have really expressed interest in this stack and we believe a really high-growth opportunity. Just the Fisker Ocean is just the start for the launch, but there is many more discussions we are having with many OEMs.

Interesting. And maybe we could round out the discussion on ADAS sensors by talking about LIDAR, which is, of course, a big growth area, but also one which investors are increasingly familiar with because of so many LiDAR suppliers having gone public or planning to go public shortly. So firstly, maybe just update us in terms of what organic and inorganic investments have you made in this area? And I believe you partnered with a couple of different firms, right, including Innoviz. And then secondly, what are you able to say about what contracts or vehicles you might have been awarded, for example, with BMW or others?

Yes, Ryan. We are working with Innoviz, which is the solid-state LiDAR, and we have a small investment in them. And we've been developing the solid-state LiDAR for an upcoming BMW program, which we've talked about. We are quoting additional LiDAR business. Fundamentally here, Magna brings the manufacturing scale. Beyond the optical module, which is what Innoviz is doing, we are looking at the integrated architectures of 1 box, 2 box and how do you bring the integration into the rest of the sensor suite. We continue to do all of that. Quite a bit of interest, again, depending on what level of autonomy the OEMs are looking at.