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

Good morning, and welcome back to the second -- our second day of the Global Automotive and Mobility Tech Conference. Pleased to welcome Magna International. Swamy Kotagiri, CEO; and Vince Galifi, who many of you know is the CFO but recently also took on a role as President of International, which I'd love to hear more about. Not sure exactly when you passed the baton, Vince.

I want to start with some questions we've been posing to all suppliers. And we can go through at least a couple of them relatively quickly because, on day 2, we've heard a lot about it. But just want to really start on the shorter term, vehicle production backdrop, what you're seeing in 4Q, both in terms of absolute volumes and the choppiness and level of warning you're getting around call-outs?

Brian, I would say not fully out of the woods, but we kind of see the light at the end of the tunnel for the improvement in a little bit more of stability and reduction of choppiness, I think. I would say a little bit more stability towards the middle of next year, if you can call that a little bit of normalcy than what we are seeing today.

And in terms of the other parts, we all know about chips. So maybe 2 questions around supply chains. One, apart from your customer schedules, what challenges have you had vis-à-vis chip supplies? Certainly, it would be critical to things like your ADAS business. And then secondly, are there other commodities and/or inputs you're worried about, whether it's the pricing or just availability to keep your assembly lines going?

I would say, Brian, the 2 key things have been the inefficiencies that are created by the start-stops. Obviously, they're linked to the chip supply, as you've mentioned. A couple of other things that are worth looking at, tracking and monitoring is the commodity costs. They still are pretty volatile. And we are hoping they kind of get to a little bit of normalcy. Again, it's difficult to predict exact timing. And the other one is just the labor market, just the talent I would say. But I don't think there is anything specific that creates a challenge for us besides the start-stops and the chip that you talked about that has impacted us from a production perspective. We've been pretty good in not shutting down any customers. It's been a task force mode to go through, but happy to say that we have kept the things moving from our side.

And sort of a broader question I'm beginning to ask the suppliers. We all know about inflation around commodities, but there's also, at least for now, broader inflation around wages, energy cost, premium freight costs, just kind of everything. So if I think about the supplier industry, for the last 30 years, it's been operating in a 1% to 4% price down mode, which when you had a combination of general deflationary environment as well as ample opportunities to roll lean manufacturing through factories, which is something you're -- Magna has been superb at, it was easy to meet those price down demands. But what happens if inflation proves not to be transitory? If it's not just in volatile commodities where you have indexing but in the cost of really everything on your bill of materials and cost of goods sold, how would you think about dealing with that? And what kind of conversations would then need to happen with OEMs? And even how would the form of contracts that they push out to the industry need to change?

Yes. It's a very broad question. And if you think about it, I think the pricing or cost pressures do not change. I think the industry as a whole have to constantly look at improvement towards the next step. We believe, we call it, operational excellence is a journey, and I don't think it can stop. Like we have been really good at doing that, and we are looking at digitization, looking at automation, different aspects of, call it, operational excellence to take the next step. One lesson learned from what we are going through from a chip perspective is how do you look at the supply chain, how do you get the visibility in terms of looking -- is it 6 weeks, 8 weeks, maybe 6 months, a year and 18 months, working collaboratively with the OEMs. And there is a lot of those discussions, which hopefully helps reduce the peaks and valleys. From a commodity inflation perspective, it's volatile now. I think we have to see what part of that is transitory and what part of it is sticky moving forward. I think that's going to be a continuing challenge, Brian. It's not a discrete event. That will continue going forward. And we just got to look at this as a journey and continue to work on it. And if you bring systems and value to the customers, that gets us to the table to have those long-term discussions, right, in addition to just the short-term cost pressures.

Great. Well, let's -- speaking of journey, let's talk about some of the evolution towards a, frankly, more technology-driven Magna under your leadership, Swamy. Let's start with electrification and the LG JV. Can you highlight some of the key awards here? And then where are you set in terms of capabilities for electrification? And are there capabilities you might want to add? For example, Ford has made a battery pack acquisition for the commercial markets.

Yes. In our Q3 earnings, we kind of talked about -- Brian, about our electrification award, another one, which is actually from transmission side of our product line for Daimler but it includes the hybrid DCTs. And just to put it in context, this is our third high-volume DCT program award, right? Specifically, the EV-related electrification, we've been awarded eDrive business this year with 2 separate customers. Both programs have multiple eDrives on the vehicle. So it covers 4 different OEMs, right? And if you look at our consolidated -- sorry, managed sales, which is both JV equity accounted plus our sales in powertrain business for electrification, it's -- they're about $2 billion by 2023 and about -- or actually, over $4 billion by 2027. We announced the closing of the LG, and I think we talked about it in the past, which is we expect a 50% CAGR in the coming years or the next few years, starting with a baseline of $150 million in 2019. And they still have quite a bit of a backlog so they continue to work on the e-motors, inverters and onboard chargers from a product line perspective. I think there is -- they are focused on executing efficiently the backlog of business. But with the 2 companies coming together, there is a lot more opportunities, and there is a lot of interest from the customers that they're bringing us to the table on many topics.

And within that, a lot of the OEMs are pursuing internally motor development, internal battery pack assembly. So a question we often get is where do your electrification efforts fit into that light vehicle picture, especially with the in-sourcing. Ford, for example, is also taking its motor capabilities in the commercial vehicle markets where, because of the historical nature of outsourced powertrain, that's less -- you're not fighting an internal in-sourcing trend. So how is -- how do you think about that? And how do you think about where then you take these capabilities you have with LG?

I think good question, Brian. As it happens with any technology launch when it is starting up, right, the OEMs look at it as capability building. But when you start scaling and proliferating to a much larger platform, then you start working with the Tier 1s. But the Tier 1s that have the full capability and are at the table get a chance to work with them. With our LG, I think it actually fits in very well with what you said. LG supplies General Motors the inverters and the motors, right? And we were talking about the full eDrive systems that I just mentioned that Magna is doing. As we take that forward, wherever there is a system capability requirement, we are getting the advantage of vertical integration of LG providing us -- the JV providing us the motors and inverters. But in cases where OEMs at the initial phases are looking at doing the systems themselves, then we can participate in the market of supplying e-motors and inverters and onboard chargers. So I think it kind of addresses both sides of the equation.

Okay. And as part of this shift towards electrification, others have divested internal combustion engine assets. So Ford has its charging program. Of course, Aptiv did that with Delphi Tech several years ago. What's your thinking about the ICE side of your portfolio and if there are divestiture opportunities there?

Brian, actually, this question gives me the opportunity to clarify a little bit about Magna. If you look at 70%, 80% of our business, it's really propulsion-agnostic, right?

Right. I'd say neutral.

Seats and so on and so forth. So we really don't make ICE -- completely ICE-specific components like crank shafts and pistons and so on and so forth. The part that we -- are ICE related, I would say like the fuel tank business maybe, which is a very small piece, we talk about manual transmissions, right, which is a very small piece, are the only 2. If you look at the transfer case, the all-wheel drive, 4-wheel drive business, that actually evolved. There is a lot of building blocks there that fit in too as we start making eDrives, right? You talk about inverters and software and e-machines or e-motors, they are also building blocks of our hybrid DCTs. And if you look at how we are working with our customers through their full EV transition, we have -- the significant investment in some of these products is already done. So it's now asset utilization, and we have really great visibility until the next decade, right? Now that provides the cash flow for us to invest and continue to take our product line into EVs. So I really don't think it's as much divestiture. We continue to look at what makes sense over time, every business cycle. But there's not that much, right? And all of these building blocks actually help Magna differentiate a little bit when we talk to a new entrant or somebody coming to us for a much bigger value proposition.

Well, good. So that's a good bridge into -- and I do have a question over e-mail, I want to remind people they can click on the e-mail link or click on my name, you can send me a Bloomberg, on your complete vehicle business. So question is can you expand on your relationship with Fisker? We certainly saw the new car yesterday in Los Angeles. How's the program progressing? And do you have enough capacity to serve Magna -- excuse me, to serve Fisker? Or do you think, and we'll get to that, you need more capacity?

The Ocean program is progressing well, and the teams are working well towards a late 2022 launch. And it was exciting to see Fisker unveil the vehicles, like you said, yesterday in the auto show. We have capacity that's absolutely all planned and pretty good to go. And as you know, we also have our footprint in China, right? If needed, we can use some capacity for additional needs there. Even in Graz, the way we are flexible and the way we design things, not only do we -- can we support Fisker on the Ocean program, if there are other things, we can bring that into play very quickly.

And in Graz, between that and your ancillary facility, how much capacity could be left?

It's difficult to say specifically the number, Brian, but total capacity is roughly about 200 or so, I would say. But most of the businesses that we have are launched. The one that's going to launch is Fisker. It's substantially there. We have to take into account the volume shifts that are happening right now. But there is a little bit in Graz that's left, but immaterial, right? Like you talked about the ancillary facility. We can add if the program does make sense. And if everything falls in place, we can get up to speed and add capacity as needed.

And maybe could you tell us a little bit more about ArcFox, the platform you're using there that's similar and just where your China side of the complete vehicle assembly business is going?

So the ArcFox brand and the variants have -- one of them has launched and it continues to launch in China, Brian. It's a very good experience for us, right? Every program that you work on, you learn something about the market, about the consumer even and how different regions are looking at vehicles and what the demand is and what the pool is. So it continues to progress pretty good. But again, like I said, it gives us an opportunity to address that market and some capacity in China.

And how are the conversations going with other OEMs around either ICE, complete vehicle business or other EV programs?

A lot of conversations, Brian, I think, from different OEMs, both traditional, call it, our existing customers and also the new entrants into the market. If you just generally talk about the overall market, the cadence and the flow has been pretty good, right? Specific to the full vehicle side of things, we believe we are in a unique position, right? It's not just about vehicle assembly. It's about the other system experience that Magna brings. So it's not just about assembling the vehicle. It's bringing the powertrain -- the platform, bringing the ADAS platform, bringing the structural -- vehicle structural platform. All of these things we bring in with a deep knowledge and also integrate it. So that gets us to many tables for discussions there. So I would say it's very encouraging.

And a question I'm getting over the Internet, which kind of ties in -- or sorry, e-mail -- to another question. The question specifically, but I think it leads to a broader question, is can Fisker be competitive in the U.S. if it only has vehicles sourced in Europe? Which then gets to, of course, the bigger question of what about complete vehicle assembly in North America. Another notable contract manufacturer, of course, has purchased a North American factory. But they have limited automotive knowledge but probably a lot of deep pockets. You have extensive complete vehicle manufacturing experience. But maybe the question is are you reluctant to commit to opening a North American plant before you have demand? Or could -- would you kind of build a dream style in the hopes that OEMs would come? Kind of related question is Fisker's expansion into North American footprint and then your own expansion into North American footprint.

Yes. The question about Fisker's competitiveness, I'll let Henrik answer that question. But I can -- from a Magna perspective, we have the footprint in Graz and in China, but we've always said that we are very open to the footprint in North America. So if Fisker or others have a viewpoint that makes them feel it's a necessity to have a footprint in North America, we will be there, right? And your question about volume or capacity, we have said it needs to make business sense in the long run, Brian. So we are not saying it needs to be X hundreds of thousands of volume to start off. It could be a small number. But if there is a road map over the years to say this is where we will grow and we'll work together, the investment can be phased and we can work through it in a very capital-efficient manner. So very clear, we are willing and ready to do what's necessary for a footprint in North America. Again, from our perspective, I think that there's only one aspect of the whole equation, assembling vehicles and putting it together. We have a healthy balance sheet. If necessary, we can do what's right for any program, any customer. But to me, the more important part is our knowledge of the various systems. How we can bring all of it together, I think, has a value that is a little bit intangible just in dollar terms.

Which then gets to a question, with Foxconn coming to the U.S., with the willingness to spend money also with the Fisker relationship, have you considered a JV like with a Foxconn? Because, at least on paper, it would seem to be some complementary skills.

Yes. Brian, it's a little bit of a hypothetical situation. So rather than comment on that, I would say we would consider all kinds of potential scenarios all the time, right? We got to look for what's good for the business and what's efficient from a capital perspective for the industry. Generally, with any sort of an alliance or a cooperation or a JV or whatever we look at, even an acquisition, our question is what does this bring to Magna that we cannot do on our own, right? And if that question is answered, that's the decision matrix that we go through.

And what about the idea, and this comes in e-mail as well, of actually taking complete vehicle assembly and creating a separately listed company for -- either Magna owned or Magna and potentially a partner around it? I could say people are pitching me on that on e-mail. It's likely that people have been knocking on your doors, pitching ideas like that. So what's your thinking here and Vince's thinking on that?

Yes. I'll let Vince add color. But I always look at the contract vehicle assembly manufacturing as the tip of the spear. That can be effective only if you have all the other systems do what they are supposed to do, right, not just every system looked in isolation and brought together. I think there is a certain advantage of keeping that whole together. It doesn't mean that -- never say no, right -- never say never. But Vince, if you want to add color to that?

Yes. Brian, kind of if I look at what some of the other companies have done on spinning things off, there's so much interaction between our engineering, design, complete vehicle manufacturing and what we do on the systems side to split it up. And I have experience with our Decoma and other spin-offs that we've done over the years, and it slows us -- it would slow us down. And I think one of the advantages that we have that it's all in-house is speed to market for customers, and I think that's going to hurt that. So again, as Swamy said, you never say never, but my inclination would be it's got to be really convincing for us to think about it because I see lots of disadvantages, not a lot of advantages.

Okay. Well, speaking of capital markets activity, let's move on to active safety. First, I think there is a little confusion after the call. The Veoneer bid, obviously Qualcomm, the word I know from my British colleagues, has gazumped you on the bid, came in and outbid you. But the clear plan, obviously, with the partner they chose to close with is to put the restraint control and the ADAS business on the market. I think you said you might roll out of that or maybe you haven't [ ruled out ] going after that. So how do you think about what really attracted you? How much was Arriver part of your attraction to Veoneer? And what's your thinking on the rest of the business?

When we looked at that, we were looking at -- we have a really good business. We had the necessary building blocks, whether it's cameras or radar or an alliance in place for addressing LiDAR, the software that we had. It's -- one of it was scale and the complementary nature of the geographic and customer footprint, Brian, but it's not the only solution. We look at various things, and that happened to be a good fit. But we looked at what we felt was a value from our perspective. Your second part of the question, I think the way what we -- Vince and I answered last time to that question, and it remains, is it's premature to talk about it until the deal is closed. But as part of our normal process, we look at all options. If the non-Arriver assets are there, we have to see how they would be brought to market or put in the market. And if it makes sense for us, we are open to all options.

And how are you thinking about your software versus hardware capabilities? Are there future acquisitions you might do in the active safety area?

We are always looking and we'll always continue to, whether it's ADAS or other areas, right, either to complement geography, customer or technology building blocks, Brian, right? Now from an ADAS perspective, we had presence on the front-facing systems as well as surround-view systems, driver monitoring systems and so on and so forth. So the software capability is there. A lot of the features that we talked about in our surround view, in our rearview, rear-facing cameras, the driver monitoring systems are all Magna-developed features. We work with Mobileye very closely, has been a partner for a long time. And we just recently announced another large ADAS program win from a global European OEM. And that's us working with Mobileye in the normal course. So we'll continue to augment what we see from those 3 variables, right, geography, customer and tech.

And as part of that -- and this question I'm asking some of the other ADAS suppliers. We've heard about OEMs wanting to write most of their software for ADAS. For example, GM claims that their level 2 plus system cruise and ultra cruise are -- I mean Super Cruise, Ultra Cruise are largely developed in-house. We have a number of LiDAR makers, some of whom you're involved with, on our second track here, many of whom, Luminar in particular, want to move up the software stack. There's an NVIDIA, Qualcomm announcement about creating some active safety systems. Don't know if you heard that. So a question I often get is what's the role of a Tier 1 in that, between the OEMs wanting to write code, the sensor and chip suppliers moving more into the software. And to be blunt, does that leave -- relegate the Tier 1 to a build-to-print assembly function as opposed to a real value-add software and hardware integration function?

I think good question, Brian. We got to define who you call a Tier 1, right? I don't think you should look at it from a perspective of the Tier 1s as we know and the others who are coming from chips are different than Tier 1s. Now to your question about the OEMs looking at software, I think they are looking at the application layer, which provides the differentiation for them and for their brand, right? But as the features proliferate -- for example, if you're looking at blind spot detection or looking at a lane keep, right, there's not much that would differentiate 4 years ago to now because there are so many cars that have it and the consumer expects it. If that differentiation is not there, to have it continually developed by every OEM or everybody doesn't make sense. So the application layer on the car, which is a differentiator, is I think what the OEMs would want too. The base software which is substantial by itself and how it integrates into the overall system will become a key in the long run. I think that's how I see it. Whether I call them the chip manufacturers and so on, if you look at the overall market that their product is supplied to and how much automotive will play a role, we have to continue to see the appetite they would have, right, and what role would they play. But I think there is going to be a lot of alliances and cooperation coming together. I don't think it's a matter of relegation.

Okay. Good. Let's go on. We just spent a lot of time talking about electrification and active safety. And those are really, I think, 2 of the most interesting segments of Magna. But we don't often discuss the body and structures business. So can you maybe talk about a couple of things ranging from shorter term to longer term? The shorter term is does raw material impacts -- steel is high and remains stubbornly high. Have you largely passed that through? And are there other raw materials, when you think about some of the other metals, certainly some of the, for example, plastics that go into it, that you're worried about?

Yes. To the first part of your comment, I think we should talk a lot about structures. It's also a very interesting part of Magna. And the reason I say that, we touched upon it. It's agnostic to what happens to powertrains and all of the stuff. You still need a body and a structure. So it's very interesting. It's highly complex, dealing with different materials. From a steel and a material perspective, I think most of it, and Vince, you can add color, we are on a, call it, resell program with the customers, right? So that's part of our business process. We work through it, so it's included. So the exposure is mitigated for us in that case. If you look at all the other materials, we continue to look -- as we are doing the quoting process and as the economics change, there is that continuing discussion there. A lot of excitement in being -- where Magna is in terms of process and the ability to handle all materials, whether it's steel or aluminum or composites or different types of thermoplastics. We are agnostic to material. So whatever is right for the product, we can do it. So I think we have an advantage there so we are not pigeonholed into one. And one last piece, we are really excited about our new product line in this domain, which is the battery enclosures. It's a pretty complex, highly engineered safety product that needs to address even thermal management. And the content per vehicle is pretty substantial and significant, and it's a product that will be there in every vehicle that has a battery.

And actually, I want to loop back. I do want to do one more question around -- actually, one more question on body and structures. Then we actually have ADAS questions coming in over e-mail so I want to get to that. How does body and structures fit into EV? Especially -- I see 2 opposite trends there: one, definitely a positive trend towards lighter weight, reduced body panels. Some of them ought to be focused on the core competencies, which shouldn't be stamping out body parts. On the other hand, we've heard from some of the start-ups they like vertically integrating. They like doing a lot of parts internally because, especially in the ramp period, they can get quick turnaround if they have to, for example, change slightly a spec on a part. So can you talk about some of the EV plays of body and structures?

Yes. Like one of the things we said -- lightweighting, you mentioned, Brian. The other one is the new product line that we just talked about from a battery enclosure perspective. I honestly don't see a change. If anything, it's an upswing. And having the material knowledge, having the capital base that is needed, which is a pretty significant barrier to entry, and if you look at the joining technologies and the material knowledge, everything that goes along with it, I'm not so sure whether you can look at vertical integration in that aspect. And the change that you talked about, I think we'll be faster -- we would be more faster doing that change as necessary if there is a tweak versus somebody starting to do a stamping panel or a molding and have that, I call, type of knowledge to be able to do that. So I don't kind of get that logic completely. And the materials and products will evolve and change, but it's going to be present irrespective of whether it's EV or not, right?

And I want to loop back because I got this question on e-mail. Back to the ADAS competitive landscape, and you did mention you're, obviously, a strong Mobileye partner. But the question coming in is how does Qualcomm-Veoneer, especially with -- assuming they build out Arriver, change the competitive landscape? One of the questions that came up while you were pursuing that was what happens to your relationship with Mobileye historically. They cut off other -- they didn't like to work with Tier 1s who are working with their vision competitors. But how will that -- assuming that Qualcomm is successful building out Arriver, how does that change the ADAS landscape?

Brian, there have been other players in the market, right? Mobileye has been predominant, being first to come into the market. We have been partners for a long time. Actually, for a fact, if not -- we were the first, I think, working with Mobileye to bring a volume production scale in North America. And the partnership is intact. We -- like I said, we just recently won a program, right, with a large OEM. So that continues very good. We are progressing. The general landscape, I think, is going to evolve. I cannot speak about Qualcomm, Arriver, what their strategy is. But there has been other Tier 1s that have had the, call it, software stack with their product lines. And you mentioned in a different context but OEMs looking at software on their own, whether it's Ultra Cruise or somebody else with a different name. So there is going to be a shift in that space. How it settles and where the integration of the whole system and what the OEMs want to own is going to dictate that. It's a fast-changing field, so I think significant shifts will happen in the next 5 to 10 years.

Well, there's about 25 questions I didn't get to. So I hope to see you at a future forum, especially our industrials conference in Florida. I'll send you some details, if you can make that. But really want to thank you. It's certainly been an amazing -- you probably never expected the changes that would happen at Magna when you got handed the keys. I think you were the last meeting many of us went to before lockdowns. So thank you very much, Swamy. Thank you, Vince. Enjoy your international travels. And I look forward to keeping the dialogue going. Thanks.

Thank you, Brian.

Thanks, Brian.