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

[Presentation] Please welcome, Vice President of Investor Relations, Louis Tonelli.

Good morning, everyone, and welcome to our Investor event. We're going to start this morning with a short presentation from Swamy and Pat. Then we'll have time for questions from our live audience and, time permitting, people listening in virtually. Then those of you that are here at the track today will have a chance to experience our demo vehicles and review our technology displays outside with our technical staff. Please feel free to ask them any questions about the innovations. Lunch will be served at 11:30. however, our demos, the tech displays and our technical staff will remain available until we wrap up today around 1:00. For those of you who signed up for our plant tour at our Holly ADAS facility, whether you have your own travel accommodations or we're providing it for you, let's plan to meet at 1:00 at the registration desk. In addition, we have several members of our management here today, and they will be around until early afternoon to answer any of your questions. Please use the QR codes at your table to access the presentation materials. Just before we get started, please note that the management presentation that follows and the Q&A session today may contain forward-looking information or forward-looking statements within the meaning of applicable securities legislation. Both the screen and the handouts provide the details of our safe harbor disclaimer. Okay. Thanks. I'll now ask Swamy to come out to the stage.

Hello, everyone, and good morning. Welcome to those who are joining virtually. And for those of you here in person, it's great to finally see you face-to-face, and I see a lot of familiar faces. I know Michigan's weather can be iffy in May, especially, but looks like mother nature is cooperating with us, and it should be a fantastic day to experience some of the products that we have for you waiting outside. But before we get to the demonstration, let me talk about our vision and not only the progress we have made in the last year but going forward, the role we intend to play in the high-tech transforming industry. So let's get started. We have reached an important milestone for Magna, turning 65. That's more than 6 decades of building on our strengths, making us not only one of the largest, but one of the most stable suppliers in the industry. And we pride ourselves on thriving through change and oh, boy, I don't even have to talk about the last 2 years. The word "black swan" has lost its meaning, I think, and we look forward to getting back to the boring normal. But as we look back and try to characterize Magna, one word sums it all up, "resilience," which speaks really to our culture, the ability to consistently manage through dynamic and challenging times. Our success and growth is enabled by what I call the foundational strengths; the manufacturing expertise and really a deep relentless focus on operational excellence, our decentralized structure that drives an entrepreneurial mindset and a disciplined approach to investment. Our operating philosophy has been based on really simple principles from the start; operate efficiently and responsibly, treat employees fairly and be a good citizen to society at large. And this principle really is the essence of ESG. And we continue to expand our commitments here. Last year, we committed to being net carbon neutral in our operations in Europe by 2025 and globally by 2030, placing us among industry leaders. And I'm proud to say that 11 of our divisions have already met those ambitious goals, including our largest operation, our Complete Vehicle division in Graz, Austria. On the product side, we're delivering technologies that help our customers achieve their sustainability goals. On the people side, we are cultivating a more diverse and inclusive workforce who can contribute their broad perspective and talents to improve our organization. And we are doing all of this now so our company and the next generation can have a future. So what does the future look like? And what role will we play? Well, for Magna, we want to advance mobility for everyone and everything, making it more accessible with vehicles that are cleaner, safer and smarter. We do that by staying the course with our strategy, which focuses really on accelerating deployment of capital towards high growth areas, driving operational excellence and unlocking new business models and markets. And we rolled this out a year ago, and I'm really happy to report that we are executing on that strategy, and in many areas, achieving even beyond our previous expectations. So now let me take you through our progress. Starting with the first pillar, capital deployments in high growth areas. Last year, we indicated that the majority of our portfolio is aligned with or positively impacted by the megatrends driving the car of the future. Addressable markets are expanding, shown in green here, and we continue to increase our investments to grow well over market. A large part of our portfolio is highly relevant to the car of the future shown here in the picture in blue. Here, we expect to continue to grow in line or better than the market. Simply stated, we are on track to grow our portfolio in areas positively impacted by megatrends. And now let me talk about some of those areas; electrification, battery enclosures and ADAS. This is where we are forecasting the growth for Magna. So I'll start with powertrain. As the EV market expands, the opportunities for our powertrain business are increasing since both content and addressable markets are higher in an electrified world. We leverage a set of scalable building blocks to develop systems to support our customers on their road map to electric vehicles. This includes creating an ecosystem to support platforms and subsystems. For instance, we talked about it. Our JV with LG provides 2 electrification enablers: motors and inverters that strengthen our system capabilities and allow us to participate in the growing eDrive subsystems market for those OEMs that choose to produce in-house. As electrified vehicle market expands, our powertrain electrification business is starting to grow rapidly. We are launching integrated eDrives for VW on their MEB platform. Starting next year, a second high-volume eDrive program for yet another global OEM. And we are also launching high-volume hybrid DCT business with 2 global OEMs. In addition, our LG Magna JV is growing sales at an average growth rate of more than 50% during our outlook period. And you likely saw the JV is adding capacity in North America to support its growth. In the past year, we have been awarded significant new business. Primary and secondary eDrives on a new entrant vehicle that launches this year; primary and secondary eDrives with a European OEM that launches in 2024; hybrid DCTs as part of a transmission family for Mercedes launching in 2025; and in addition, just 2 months ago, we were awarded yet another eDrive program with a Chinese OEM that launches in 2023. As we all know, there is a significant increase in activities in electrification, creating a lot of interest in our products. Now truck fans will migrate to EVs, I believe, only when they can, without losing capability, convenience and affordability. In just 18 months, our engineers developed a unique system, retaining all attributes such as full payload, towing, durability and handling with little change to vehicle design. In fact, this drop-in installation doesn't change the architecture of the truck or vehicle assembly operations. So let's have a look. [Presentation]

That's a beautiful video and the pictures are good, but I can tell you one thing. It doesn't do justice until you go drive it. I've driven it, and I know how it feels. Now all I can say is that you have to experience it yourself today. And I'm glad you'll be able to do that as we go out after the event is done. Our goal in the transition to electric is to offer same or better functionality as today. And Magna is working closely with many OEMs. Our differentiation shines really in the integration and the optimization of the vehicle attributes, not just build to print. Last year, we highlighted that our managed sales in powertrain electrification should exceed $4 billion by 2027. We now expect to exceed $4.5 billion based on recent awards and increased opportunities. Now let's switch to our growth in electrification beyond powertrain. Working from a clear position of strength, we are capitalizing on the emerging battery enclosure market. This large, high content, highly engineered product can measure up to 8 feet and weigh over 200 pounds, and it is critical to the structural integrity and safety of the vehicles. But as we go through this, I'll just give you some statistics. Over 200 stampings in 1 case, hundreds of fasteners, MIG welding or laser welding and ceiling in tens of meters and spot wells in thousands. It kind of gives you the complexity of the product that you see, and the best is to go out and see it. So this -- manufacturing this product requires expertise in many processes and joining solutions, including stamping, roll forming, ceiling, laser brazing, MIG welding, e-coating and also critical leak test on 100% of parts for final inspection. All of this expertise resides within Magna today. And what really makes it even more interesting is that every EV will have a battery enclosure, and that is a huge addressable market for us. And we plan to invest capital while leveraging our existing know-how and installed capacity. We are currently launching on the GMC HUMMER EV and the F-150 Lightning, and we are excited to show you these products today. To give you an idea for business awards and opportunities in this product area, consider that last year, we had almost no sales in battery enclosures. By 2024, we expect over $600 million, and by 2027, over $1.5 billion, far exceeding what we had previously expected. Now turning to ADAS, where we are currently focusing on advanced driver-assist functions. Here, our capabilities include the full sensor suite, compute and software in order to provide fully integrated ADAS solutions with various features. We continue to increase investments to further develop our capabilities, leading to new business opportunities. This year, some of the major launches are the front camera system for global OEMs based in Europe and Asia; near-field perception software for a global Asian customer; surround-view camera system for a European OEM; and later this year, we will launch our complete ADAS solution on the Fisker Ocean. Just like the powertrain, we have also been awarded significant new business. Advanced camera programs that leverage core investments already made for a European OEM; surround-view systems announced recently on the new Toyota Tundra; and we have a great traction growing in a new product area, DMS or driver monitoring system. We have been awarded 3 programs with established global OEMs based in Europe, North America and Asia. Two out of the 3 are high volume, and we see continued interest as we get ahead of regulation. Our ADAS capability is brought together by a complete sensor suite, including domain controllers, cameras, the industry's first solid-state LiDAR and the first digital radar. Our modular and scalable system approach enables us to deliver advanced driver assist features like personal park assist, highway assist, traffic jam assist, just to name a few, bringing really the enhanced experience for our customers and end consumers. Last year, we said we expected ADAS sales growth in the range of 15% to 20% on average between 2023 and 2027. We now expect an average growth rate of 20-plus percent over this period based on recent awards and new opportunities. Now I just spent the last few minutes talking to you about high growth areas, but I want to also emphasize that we have global scale and leading market positions in many of our product areas that are aligned with the megatrends. Our body and chassis, exteriors, mirrors, latches, seating, many of these product lines are larger than other publicly traded auto part suppliers. These strong, stable businesses continue to grow and help us invest for the future. We are in a competitive transforming industry that requires solutions that are cost-effective and optimized by integrating all technical possibilities in electrification, in active safety, connectivity, lightweighting, aerodynamics, just to name a few. Our ability to do so illustrates the true power of Magna. No other supplier compares. It's how we will continue to grow and create value. Let me show you some examples. Seamlessly integrating ADAS cameras within the interior mirror to actively monitor, predict and help reduce distracted driving; bringing together vehicle exteriors, mechatronics and lighting to offer unique experiences for consumers and brand distinction for automakers; taking our electrified powertrain systems and combining with our complete suite of ADAS products to increase range and efficiency. This also offers consumers predictive route planning, torque vectoring when they want and need it, and not only that, also improving the safety margin by about 10% by controlling each axle and tire individually in all road conditions. I believe no other supplier can do what we do here. Magna brings a holistic approach to our customers by thinking like an automaker without being one. That's the power of Magna. Before I move on to the next pillar in our strategy, I want to emphasize that we are on track to shift our portfolio as our business continues to grow. In fact, we expect that shift to be meaningful from 18% to 24% of our business by 2027 based on our plans today. Now let me update you on how we are driving operational excellence. You've heard me say this before. It's something we leverage as a competitive advantage. Given all the challenges we have faced over the past couple of years, our results have remained strong because of our focus on operational excellence. I am an engineer, so I have to have analogies that are related to technology. Just as a computer has an operating system to manage complex tasks, we have a well-established process around program management, launch, quality, delivery, health and safety that comprise Magna's manufacturing operating system or, as we call it, MAFACT. MAFACT, which we deployed globally, is the foundation of our operational excellence. The system defines objectives and key performance indicators that are really used to measure and track each of our facilities, providing us with important insights. As a result, despite the challenges, we delivered continuous improvements and helped offset ongoing pricing pressures, productivity givebacks and cost inflation headwinds. We reduced cost of quality year-over-year as a percentage of sales by almost 40 basis points, representing over $75 million in savings. We managed about $7 billion of average annual sales in launches and shipped 1.7 billion parts out of our facilities just this past year. The ultimate validation, however, comes from our customers. In 2021, we were awarded more than $9 billion in average annual sales of new business, and we set a Magna record with 122 customer recognitions. Now we continue to enhance our operating system through digitization and factory-of-the-future tools to deliver further efficiencies. Let me briefly touch on a few of these activities. Factor digitization provides really real-time visibility to data across equipment, systems, applications, products and people, allowing more timely data-driven decisions that further improve quality and reduce costs. Data analytics has become another critical part of every aspect of the business in things like finance, purchasing, quality and operations. A good example in one area, we use it in manufacturing today, is to determine optimal tool maintenance schedules as an example. This is a far more robust approach compared to the traditional fixed interval method for tool maintenance. As a result, we have a cost-effective approach that results in improved quality, lower scrap and elimination of post-process operations. Another one is augmented reality tools. Another -- this is another good example that allows us to achieve really a streamlined, standard and high-quality product inspection process. The technology has led to 40% reduction in inspection cycle time as well as improved quality control. What I'm really proud of is within 6 months, we deployed the tool in 65 divisions. It's also one of our 4 PACE Award 2022 Finalist. As we continue to enhance our successful operating system with these new tools, we see opportunities to reduce our cost structure and further improve our competitiveness over time. This should also allow us to continue to win business; manage ongoing pricing pressure, cost inflation; and, overall, contribute to margin expansion. Lastly, I'll update you on the approach we are taking to unlock new business models and markets. As we consider new opportunities, we are able to draw on our long established track record of success. In our Graz facility, we've produced more than 3.7 million vehicles for 10 OEMs across 30 different models from ICE to EV. We integrate systems and platforms, and we enable speed to market for our customers. Now as we examine the broader market, we really see an expanding ecosystem for us to go beyond the traditional supply and manufacture of vehicles. The market includes micro mobility, robot shuttles, robot taxis and everything that can move people and goods. Just in the next 5 years, some expect the total market could surpass $500 billion. Magna will not play in this entire playground, but we do see a lot of opportunity here. Our building blocks, the products and processes from across our entire portfolio, provide a strong foundation to support new mobility. Our holistic approach, the ability to design, engineer, integrate and manufacture major systems and complete vehicles, is really what makes us an ideal partner to participants in this new space. We plan to leverage these capabilities to unlock new business opportunities and grow further. While the new mobility landscape is evolving, we see a fast-growing market over the next number of years. In particular, we are really focusing our efforts in areas like product manufacturing beyond just autos and vehicle systems, entire lifecycle services connected to these products and mobility infrastructure. We have dedicated resources within Magna to focus on our new mobility strategy to capitalize in this large and growing market. To sum it up, we are optimistic about the future of mobility and Magna's role in it as our addressable markets grow and we execute on our strategy. With that, I'll pass it on to Pat just to give a little bit more color on the numbers and our financial strategy. Pat?

Thank you, Swamy, and good morning, everyone. I'm happy to be here today and have the chance to meet many of you face-to-face. It's hard to believe our last in-person Investor event was in February 2020, just before COVID shut everything down. I was at that event, but wearing a different hat than I do today. I'm honored to be the CFO of such a dynamic and capable company and excited about the enormous opportunities available to Magna at such a time and in the industry. Swamy has taken you through our recent progress on our go-forward strategy. As always, the strategy is underpinned by consistent set of capital allocation policies. We want to maintain a strong balance sheet with ample liquidity and high investment-grade ratings to provide flexibility to invest for the future and manage through downturns. We will continue to invest for profitable growth, focusing on car of the future areas and new mobility. We are identifying gaps and growth opportunities and will further strengthen our portfolio through both M&A and internal investments. And we intend to continue returning capital to shareholders. Overall, our disciplined profitable approach to growth has served Magna and our shareholders well over the years and will remain a foundational principle going forward. Reviewing financial highlights from the past 5 years, you can see that despite the remarkable challenges recently, our results have been strong. We outpaced weighted global production in each and every year and by 6% on average over the 5-year period. We also generated $8.3 billion in free cash flow and invested almost $11 billion back into the business. We returned $7.4 billion to shareholders in the past 5 years in the form of share repurchases and dividends. And earlier this year, we increased our quarterly dividend to $0.45, our 12th straight year of dividend increases. And our investors have been rewarded with a total shareholder return of 112%, outpacing the increase of 29% on average for our peer group. In February, we provided our outlook to 2024 based on our business plans that were approved by our Board. Our plans reflected assumptions for volumes, foreign exchange and costs, which have not been updated. My comments today are based on that outlook. We expect continued growth in both consolidated and unconsolidated sales. We are planning further investments for growth, including an increase in engineering spend in megatrend areas to an average of about $900 million per year for the 3-year period. We're also expecting increased capital spending to support our growth. Our outlook included margin expansion to a range of 8.1% to 8.6% by 2024, reflecting, amongst other things, contribution on higher sales and ongoing operational excellence initiatives. Our sales growth and margin expansion are expected to result in about $6 billion of free cash flow, even after reflecting increased investments in our business. This outlook is expected to support further growth in investments for the future as well as return capital to shareholders. Here, you can see our projected uses of operating cash flow generated from our business over the 2022 to 2024 time frame. We plan to allocate the majority of our operating cash flow to internal investments for capital and other assets to continue growing our business. This includes spending for megatrend areas and is in addition to the higher annual engineering spend I just highlighted. Consistent with the past several years, dividends should account for 10% to 15% of cash flow, which leaves 35% to 40% of our operating cash flow available for further growth investments, both organic and inorganic, as well as share repurchases. And of course, debt capacity increases as EBITDA grows, which provides additional funding to invest to further grow sales. Thanks for your attention, and I look forward to answering your questions. With that, I'm going to pass it back to Swamy to come back up and close out the presentation.

Thank you, Pat. With the progress we've made to date and the plans we put in place, I'm confident that we will continue to outgrow the market, expand margins over time, generate strong returns on our investments and further shift our portfolio towards the megatrend areas. And we will do all of this while maintaining our disciplined approach to growth. I'm excited about the tremendous opportunities we see for Magna in the coming years as the industry transforms and our addressable markets continue to grow. We plan to drive further efficiencies on our path to the next generation of operational excellence. Our capabilities and expertise allow us to capture high growth opportunities. And we have the financial strength to execute on our strategy while continuing to build value for our shareholders. Thank you, everyone, for your attention this morning, and we'll be happy to answer your questions. Louis, you can help us how this is going to work.

Sure. So for Q&A, please raise your hand. We'll come, provide you with a mic, so your question can be heard. For those of you listening in virtually and want to ask a question, please dial into the number on your webcast screen and follow the prompts. Just be mindful, there's a lag between the webcast and the live event. So you'll have to mute the webcast and pay attention to the instructions from the operator on a phone line. We'll start with questions from the audience.

John Murphy from Bank of America. First, you mentioned about expanding outside of auto or -- so that's kind of interesting. So I'm curious, is that sort of mean going upmarket to commercial vehicles or going to smaller vehicles? There's a lot of delivery stuff going on right now without potentially passengers in it. Just really, what does that mean because that's kind of a big statement?

I knew you would ask that question. It's really -- I think it's captured in our vision when we said mobility for everyone and everything. The intent was to capture the delivery aspect of it, whether it is the bigger vans that are doing the delivery, and how do you make something customizable and efficient for that part of the operation. But as you'll go out, you'll see some of the other things that we're investigating or looking at, still using the building blocks that we have. So whether it's a sensor suite, whether we have the software platform that is there, looking at possibilities of recurring revenue, it's actually the possible micro mobility of last mile or last few miles. There is multiple versions of that. And we see a lot of synergies coming from the portfolio that we have that can be changed to address that huge market that's coming up. So it's not just the commercial vehicles, but everything that moves either for moving people or goods with a different form factor.

And to be clear, that's not in your 2027 numbers at all?

No.

Okay. And then just a second question on the rear beam eAxle plus the iDM for the front. I mean it just seems like you have a simple straightforward elegant solution ready to go for the light-duty trucks at this point. Where are you on this? We're hearing stuff from companies like Rivian, the F-150 Lightning, what will come out from Silverado and Sierra. I mean it seems like you've got a plug-and-play solution here ready to go for anybody who wants to do this, but it doesn't sound like you have any awards yet. Maybe you can tell us today if you have awards. But like what is really the opportunity set there? Because I think you're ready to go there.

Yes. I think as I said in the presentation, John, I think the development was using the existing blocks, integrating and coming up, as you said, for an elegant solution that has the least disruption in the last 18 months. There's been a lot of traction since the demonstrations we've had in the winter test up North here. A bunch of OEMs are going through the different power phases and what they require. What we are getting a feedback is really the impressive capability to retain all the attributes in terms of vibration, handling, durability and so on. So there is multiple OEMs that are going through this evaluation phase. And we hope to come back and say the details of the program.

And then just lastly, on the slower growth stuff that's small right now. I think you said that, that high growth is going from 18% to 24%, I think, by 2027. The slower growth stuff that's sort of at the bottom of the portfolio, will those be fixed, sold, closed businesses? Or are those good cash flow generators that will generate or will stay an important part of the portfolio over time?

So I would say there are 3 pieces. The highly positively impacted high growth areas than we had in blue, which is a large part of the portfolio, which is aligned with the rest of like the body and chassis and seats and so on. They continue to grow with market and sometimes even better, very good businesses, cash generating. And you will see some of the products that also are evolving and give you the -- call it, the customer differentiation and the consumer delight and experience side of things. The small piece that we have, for example, manual transmissions and so on, they still have a long tail. Even if electrification gets to a really good number of 40%, 50% of the overall market by the end of the decade, we still have a lot to go on. But we are not investing in that actively, unless it's very program-related. So we are actively managing that.

Swamy, Michael Glen from Raymond James. Can you just outline for the LG JV? As you look at that 50% CAGR forecast, what's the type of capital deployment needed to support that? And what are you thinking in terms of plants, regions for facilities and return on invested capital in that business?

I think -- when we started this, I think we talked about the 50% CAGR. You must have heard recently, we started a facility in Mexico to meet the increasing demand and the traction we're getting in some of the sub-systems. The way we look at business usually is there is this building block core platform strategy, which is agnostic of the customers or this is the portfolio, this is what we believe is needed as a road map, that investment is different. That kind of comes in the $900 million plus application engineering. And each program, we look at it in terms of both returns and profitability. In a faster growing new technology market, that might vary in the initial phases as we continue to reinvest. But I think our hurdles for returns and profitability still remain the way we have looked at business for the long-term sustenance. I don't know if anyone add color.

Yes, I don't think we would differentiate whether it's an equity investment or if it's a business acquisition. We use the same return metrics to drive it. I think in the short term, it would be a drag on earnings just given the launch phase of where they are in their business cycle. But I think long term, it's going to generate value as expected.

This is Chris Dendrinos, RBC. You highlighted no change to your '24 outlook, but some increased opportunities in mega growth areas. So maybe can you kind of comment on what's giving you that confidence today? And, I guess, anything that might come before 2024? Are you seeing new business wins there that kind of accelerate that confidence?

Yes, Chris, I think we're not really talking about car lease or the outlook change. But as you've seen, I think it's a long road map. We talked about the awarded business that we are getting over the last year, and we look at the 4 months or 5 months that we have under the belt, we seem to be on good track. So I think if you take a long-term view a little bit, mid- or long-term view, we see that traction continuing. We look at the booked and unbooked business ratios. We look back the last 5, 10 years. And that's what gives us the comfort that we'll continue to do what we have in place and hopefully better. But when we come back next February, I'm sure we'll give you a more granular outlook.

Ryan Brinkman from JPMorgan. Relative to that, I think it was 35% to 40% of future capital still available for allocation to other opportunities. Just wanted to check in again on your appetite for larger acquisitions such as was demonstrated by your interest in Veoneer and how you sort of weigh those potential opportunities relative to a number of smaller technology bolt-ons, et cetera. And when you evaluate acquisitions, are you doing so with an eye toward improving the growth and margin profile of the business, hoping that you would get rewarded in the marketplace with a higher multiple, considering you would likely be paying a premium to acquire something that's accretive to growth in margin? Or are you simply economic animals and managing for cash on cash returns and would consider even purchasing one of these low-valuation suppliers with lower growth and margin but still attractive financial returns?

Wow, a bunch of questions. Let me try to see if I remember them. You talked about the unallocated piece of the pie there, Vince is sitting here. It's a continuation of the strategy that we always talked about. Invest in the business, first and foremost, and go through the dividend and other things that we have been doing for a long time. And the rest of the unallocated capital, as you saw, is really true for the growth of the business, whether we invest organically as the opportunities come or inorganic opportunities. So I think we stay open for that. I'll come back to your economic animals question. But I think if you look through, we are not really looking whether an acquisition is in millions or billions. We are actually looking at every year as we go through the process, whether it's geography, whether it's customer footprint or a technology growth area. And similarly, as we talked about building blocks, the right thing for us was to do a partnership with LG on some of the e-machines and inverters. We talked about the M&A that we tried going through, and the explicit reason there was sale and the complementary footprint. I think those are the kind of things we look at, the technology building blocks, the customer and the geography. Your third part of the question, it's a bit hypothetical, I think. And -- I don't think we'll be looking at it from a perspective of what the market will perceive versus what we think is needed for us in the long term, and it has to create long-term shareholder value. If, in the short term, it has a drag effect but we are convinced that it helps us in the long run, we would consider it, right? Are we economic animals? I think you would want us to be economic animals to a certain extent, but not constrained by it only. Like I said, in the long term, it has to make sense of what we do and for us to be executed really well in the long term. So I hope I answered your question.

Colin Langan, Wells Fargo. Just wanted to follow up. The guidance for 2024 is now plus 8%. I think it was before at 8.18% -- is that -- are we -- should we read into that? There's a little bit more caution because I think input costs have gone up or -- because I just want to make sure there's any change there...

No, it hasn't changed. We haven't updated our '24 guidance. So that's based on what we would have guided in February.

Okay. And is there any risk then? Because if the costs, obviously, since February have gotten off a lot this year, you got to work those stuff.

Yes, we'd have to -- to be honest with you, it's 3 years out, and our process is we do an annual update, right? So we issued in February and then we have the 3-year guidance when we have the Board-approved plan. We haven't updated that whatsoever, '24, at this point in time. When you consider all the factors that are out there, you're talking about commodities, and they've obviously gone up, we've guided on that on the short term, and inflation. But we'd have to put everything back together. We have all the operational excellence stuff we talked about. We're still negotiating with our customers on recoveries. And we don't know where the markets are going to be in '24. So we have -- that's one of the reasons we haven't updated '24.

Okay. And I think you made comments about adjusting the portfolio, would that -- did you mention including divestitures? And how would we think about the consideration of maybe divesting some of the lower growth business and the timeline that might be?

In the normal process, you've seen -- if you look at the last 5, 10 years, we've done both, right? Divestitures as well as additions, whether it's small or big. I don't think there is a definite explanation. We'd be open to both and do what's necessary as a part of the normal process.

[Operator Instructions]

Adam Jonas, Morgan Stanley. To Swamy and Pat, your business relies on a global just-in-time supply chain. That's worked so beautifully for so many decades. And certainly, over the last couple of years and definitely over the last 2 or 3 months, we're seeing that, that supply chain is broken in a lot of areas. Tell me what Magna is doing to help re-architect the supply chain and work with your customers, too, to do so, whether it's onshoring or taking geopolitical risk and kilometers out of that supply chain, particularly for EVs, which I think you would agree, in many ways, is even less secure and more ridiculously outside of the control of the countries in which you operate compared to even the thermal supply chain economy.

A very important point. And I think just-in-time in the industry has evolved over time, right, whether you're trying to look at efficiencies and so on and so forth. And I, at least in my view point, looked at just-in-time at where. Is that at the assembly plant? Or who is holding the buffers? So where do the buffers sit or is it just, just-in-time all the way through? I think with the dynamics that we see in the supply chain today, with the volatility and everything else, we are starting to look at how can we add that buffer system so that a small ripple doesn't cause a bigger effect in the process. That's one part of it, and it's been considered in all parts of the business, and John Wyskiel, who is the President of Seating, is sitting here, which is a good example of JIT business. He's also starting to see some different thoughts going forward. On the other aspect of looking at where you have these suppliers, definitely looking at plan Bs and redundancies, if you want to say, you can't shift overnight. But as we look, going forward, for new programs and so on, that's definitely a consideration. And I think our customers are starting to look at that. But more importantly, the one big change I see is looking both upstream and downstream of the value chain to understand not just your next tier, but actually down and what the possible impacts could be. So I think it becomes imperative to have that discipline for all of us to be really differentiated. The last part of your question on the geopolitical. Yes, if you start looking at the rare earth elements and critical minerals and so on and so forth, I think it's a pretty, call it, emerging very fluid condition. And I think we're all learning through that yet. I don't know whether there is a definitive strategy on that.

Dan Levy, Crédit Suisse. Two questions. First, I want to ask on active safety. And I want to go back to when you originally announced the Veoneer -- the planned Veoneer acquisition last summer, I think the idea was to give more scale. Obviously, that didn't play out. I want to confirm that you think you still have the resources in-house to get the scale that you need. And specifically, I think we know there's a dearth of talent out there, especially on the software side, that you feel like you have adequate talent to get to scale. Second question is just broadly, we know one of the trends amongst your customers is given all of the disruption that we've seen and given the ramp on EV and given what we saw with the semiconductor challenges over the past year, there is much more of a push to go to be vertically integrated within EVs, within electronics and for automakers to really control all the critical areas that they need to define their vehicles. So how does that change in philosophy or mindset amongst your customers, change the way that you think about your product planning? Is there any concern that some of these megatrend pushes that you have are going to see some risk from vertical integration or in-sourcing?

To answer your first part of the question, the explicit reason we talked about was scale when we considered the acquisition at that point. But we were also very clear that we have the building blocks that are necessary to supply just the components or the entire system as you need, including feature functionality. And Fisker is a good example here. And there is various levels of that, that we are doing today with various customers. I think the war for talent, absolutely, yes, right? Last year, when I spoke to where I'm sitting now in a year, we added just about 500 engineers or so only in the ADAS area. And if you ask me next year, maybe it's 1,000, right? But I think it's more important to look at what type of talent do we have for what reason rather than just the numbers. There is -- that is also very important for us. Do we have the scale? Absolutely. Does that mean we are complacent? No. There's a lot more work to do. It's a very fragmented market still because it's a new area. It's a growing -- fast-growing and emerging area with all the changes that are happening. Even if you look at the cadence of how these programs are awarded, it's a very short cadence, right? So you've got to be up to speed on all of that stuff. So I'm confident we have the building blocks. We just did the Optimus Ride. It's an acqui-hire. We felt it was the right talent in the right place. A lot of academic institutions, a good way to attract talent. We'll continue to do that. And really, is there a prescriptive? Is it a string of pearls or is it 1 answer? Don't know, right? But I can tell you, we are very focused on that area, and we'll continue. We feel we're very well positioned. You saw the growth rate. You saw the number of programs we won. We're starting to see the effect in the synergies of the platform and core technology that we have done over the past years. So we feel very good about it. The last part of your question on the industry. Every time there is a new technology, I believe the OEMs, rightfully so, have to look at having the capability in-house to a certain extent to understand how to differentiate themselves. But there are certain base software functionality where synergy and capital efficiency and scale will become important. So if you're there at the table, we'll get to have the conversations. And Magna being a little unique with our Magna Steyr full vehicle engineering and so on, we get to have those conversations way ahead of time sometimes, right? So we feel we have an edge.

This is Shreyas Patil from Wolfe. Two questions. Just one on -- the consolidated Power & Vision business is expected to grow by 8% to 10% CAGR through 2024, but the market is growing by 9%. So it does suggest that your legacy business is declining. I was wondering if maybe you could talk about just how big those businesses are today, whether it's in transmissions or all-wheel drive. What are you expecting in terms of the sales decline? And how should we be thinking about the consolidated margin implication? Because I believe your consolidated margins in Power & Vision are still going to be going up, even if I stripped out the JV income. So that was my first question. And the second was on the Seating side. I mean this was a 7% margin business several years ago, now it's a 3% margin business. This year will be in the mid-3s. So what gives you that confidence that you're going to see it move up towards that 5.5%, 6% range in the next few years?

So I think I can start on the Power & Vision one. So on the Power & Vision, when you think about what's happening, we had highlighted down in the block section that one of the deteriorating businesses is 4-wheel drive, all-wheel drive. And what we're seeing is a mix of issues that's happening that, that's a consolidated sales impact coming off. And most of our -- not most, but a large chunk, about 50% of our sales increase in e-mobility is coming through unconsolidated sales. So it's a bit of a mix issue. I think that's first. On the Seating side, I think Seating business is -- we were disproportionately hit. I think we came through the chip issue. So we were up at the 7% ratio. What's also happened is there's a little bit of a different sourcing strategy on the JIT business that's happened where it's called direct sourcing. So there's -- it tends to be -- it's the same margin dollars, but you end up with a lower margin percentage. So as we start to ramp some of our business, we're expecting to come back up into higher margins.

Peter Sklar from BMO. Can you talk a little bit about this eDrive business? It's like in some cases, you have this full Tier 1 capability. In other cases, you're supplying critical parts; inverters, motors, et cetera. So how is that going to play out? Like where are the OEMs going to play? Where is Magna going to play? It sounds like everybody is in the sandbox everywhere right now. And where do you think we're going to end up on that? So that's the first part of the question. And the second part of the question is, like in terms of the eAxle, like there's a lot of competition there. You have the global OEMs themselves and -- plus, as you know, there's other suppliers who are playing there as well. So what unique capabilities do you think Magna has in terms of eAxle that gives you an advantage that you bring to the table?

Two great questions. So if you look at the eDrive, if you get -- when you get a chance to see it, right, I look at it, 3 or 4 key blocks that make it up. One is I call it the mechanical, the gears and shafts and differential part of it. Then you have the inverter and the e-machine, and then you have the software and controls piece of it. It's interesting, if you look at the content per vehicle, all-wheel drive, 4-wheel drive and the differential hardware piece of an eDrive, it's kind of similar. So that's carrying forward. Now the other piece is the inverter and the e-machine piece of it and the software actually almost more than doubles the content that we have as addressable. So that's one big piece of it. OEMs always, I believe, look at, like I said, what differentiates them? And I think when we come to the table with the heritage that we have in all-wheel drive -- 4-wheel drive systems, and how the interfaces work, as an example, torque vectoring, right? And in one of the transmissions, it's interesting, it's my favorite. You have these 2 or 3 newton-metres of torque that you get when you are passing, right? And it's all done in software. And we bought it, right? We brought it to the table. So there is those attributes of the vehicle from a driving stability, vehicle dynamics. All of that have to be engineered in, not just built to print. And I think that is a big differentiator for us, and that's what we hear from the OEMs as feedback. As the penetration of this eDrives increases and you get a larger market, I think scale synergies and efficiencies will come to play, transmissions, right? A lot of OEMs made them. We had a large share in that market. All-wheel drive, 4-wheel drive systems, OEMs made them. We have a large share in the outside market. So as it scales, I think if you're there with the right technology, the LG JV is exactly that. It provides us, I think, the seat at the table to talk about inverters and e-machines, which is a significant piece of the overall eDrives. And as we bring different solutions and as the scale penetration increases to various platforms, I think Magna can play a big role. And as we talk about different variants that the OEMs are looking at for electric vehicles or new entrants, we can bring these platforms together, and you'll see it today on the eDrive. You can be 3,500 gross axle weight rating to 7,500, right? We can bring the different pieces together, or if they want only certain pieces, we can do that. I think that's the advantage. That's where I see the integration, the overall holistic approach is our edge.

And does Magna tend to be a player both in primary and secondary? For some reason, I'm under the impression, and maybe I'm wrong, that the contracts that you've been awarded are primarily secondary eDrive.

Yes, maybe we didn't do a good job articulating it. No, we won both, primary drives as well as secondary drives.

Okay. And then the other area I wanted to address is I can't remember all the details but, Pat, a few years ago, there were -- I think it was a couple of ADAS programs that you were initially launching and they had a lot of engineering and tests that were being expensed. And it got to the extent where it was negatively impacting Magna's earnings. Can you -- do you know what I'm -- do you recall what I'm referring to? Can you just review, what was happening with those programs? And why were the costs so significant? And -- like is there a risk we're going to see that again where you have programs where costs are $100 million plus and you have to call them out because they're noticeable?

Yes. I'll let Swamy jump in. But when I -- Peter, when you're quoting something, there's always risk, right? So it's never going to be a -- if there was no risk, everybody would do it. So when you think about those programs that are -- and they're coming closer to launch, right? So you've seen some of those costs come off, and we're seeing that the last few quarters. As you get closer to the launch and the application of what needs to be done, there was just a lot of work to get to that point. I think it was a great learning experience. I think everybody can look each other in the eye and say we came out. But I think beyond that, Peter, we've also built something, right? So when you think about those programs, it wasn't we just forgot everything. We built something. We have a knowledge. We have a core technology that we can use and reuse in different areas. And just, Swamy, jump in, but I think we already have reused that technology on multiple occasions. So when you have heavy engineering the first time, you get into the second, third program, it's just a fraction of what you would have spent otherwise.

I think let me add to that, Peter. One of the key things, you have what we call as the platform customer-agnostic engineering that you do, which we call the core engineering, right? And this is such a fast-moving area that Pat talked about. As we've gone into it, we realized there is some of this core engineering that we were doing at that point of time. And some of the programs that I talked today about where we won other programs are actually the proliferation of what we ended up doing in that program. So it actually became a platform, and we are taking advantage of that to win more business on that with European OEMs and others. So it's a little bit of that in how do you characterize what's core, and are we doing some core engineering while we are on a program? So that's a big lesson learned. And to go through in a little bit more detail to understand what that is, that's a big lesson.

Okay. And then just lastly, Pat, the 18% going to 24%, I wasn't quite sure what those percentages represent, if you could just explain.

So you remember the chart we had, black, blue, green? So the green currently is 18% of the total sales. So those growing areas, our megatrend-aligned areas are 18%, and they're growing to 24% in the future of our expected sales in 2027.

Swamy, we have call -- we have a question from the line there. So operator?

[Operator Instructions] We have a question from Brian Johnson with Barclays.

A couple of questions. One, kind of just strategic capital allocation and the other kind of around your new kind of manufacturing operating system. On the strategic one, you're definitely a multi-business company. You're fairly diversified relative to everyone but some very large Japanese and privately held German suppliers. You've certainly done a good job of bolting on higher growth areas. But what is your thinking around pruning the business portfolio, either any criteria, either where the margins on ROIC isn't what you need; b, where there -- to use a consulting buzzword, might be a better natural owner that is a strategic who could take the product line and do things that your corporate -- that you couldn't do with it because they're a starting point? or c, because you want to reduce the long-term exposure to things like ICE or other product areas that are in decline? So without going through what you might divest, I'm just trying to get a sense of are those the kind of things you're looking at? Are you open to strategics or financials approaching you with offers? Or is it just growth and not pruning anything?

Brian, it's difficult to catch all of it, but I think I got the gist of it. So let me give it a shot. I think your question was the rationale as we look at different things, whether it's bolt-on or different types of acquisitions on different areas, whether it's megatrend, high growth or other areas of Magna. Did I get that right?

No, excuse me. It was absolutely the opposite, which is to what extent are you open to pruning the portfolio, either for strategic, financial margins or for just finding a strategic who might be a better natural owner of an asset.

Got it. Thanks, Brian. Thanks for the clarification. So I think we remain open to both, right? If you've looked a little bit into the history, we have done both. When we feel the relevance over a time horizon is an important variable we look at for a given product to see how much do we invest, how do we manage the investment or divest. And we kind of looked at the overall spectrum. To answer your question directly, we would be open to divest certain areas of the business. Again, based on the time horizon, based on the relevance and if it makes sense, of course, we will, that's part of the process. Just like we add on things and they have to make sense for the long term, I would say we would definitely be open to both.

Okay. And second question, just following up on the Magna operating system you outlined. If you think about the electronics industry, and this is kind of a longer-term strategic question, a lot of the components are just plug-and-play. If you don't like this DRAM, you can put in another DRAM. In software, they're containerized services with common APIs. Yet, when I look at auto parts hardware, it's all very customized to a particular OEM. It's difficult to integrate to them. So is there a way to extend your operating system into providing more modular style interfaces with your OEMs and then taking both in terms of the lifecycle cost out of both the design and the production step?

Yes. I don't know whether we can get to the extent of plug-and-play. But when we talk about core and application, that's really what we mean. It's not completely customized to an OEM. There are certain aspects of it, whether it's the application layer or the middleware maybe. But there is definitely a base which is agnostic to the customization. And that's where the synergies and efficiencies come into play. And Brian, we have that. And a good example to Peter's question I was talking about is we had the ADAS system that we've worked on, and we could take various attributes of that and get to customize to specs of an OEM. I think that will evolve further a little bit more. It's not there. It's just at the same level as you have in consumer electronics, but I would say it's made a lot of progress in the last 5, 6 years. And there's still a whole lot of debate on whether you want to have edge compute or whether you want to have all central, how do you address redundancy and so on. But I've seen a lot of progress, and I think it will get there. And when we talk about building blocks, that's what we mean. In powertrain, we have a power spectrum, and we have a low and a mid and a mid-plus and a high from power. That's how we do the plug-and-play, as we called it, on the power module side of things. So we look at each of those blocks and see how much we can scale, but it's not complete plug-and-play yet.

Our next question comes from Bryan Pilsworth with Foyston.

Question just on the sales cycle for some of the new product categories that you're going in. Is it actually longer initially because there's so many new things, and this is such a new category versus selling seats? And then the second question I had was just with regards to complete vehicle assembly with these new technologies. I mean Fisker has spoken quite a bit about how fast they've been developing their product with a lot of help from Magna. Is it actually faster to sell some of these new technologies in a complete vehicle versus engineering them into legacy? Any comments there? And I'm just trying to get a sense on once you sell some of the new ADAS suite, for example, does it get easier to sell to other OEMs afterwards? Any characterization?

Yes. I really don't know whether -- it definitely proves the capability of Magna. And if it helps comfort somebody to see a production vehicle, yes, I'm sure. But a lot of the mature OEMs, I'm sure, have the ability to assess the capability without looking at it in a production vehicle, but it definitely helps. And when you don't have any legacy or you have to look at cross-platform synergies and how many vehicle lines and how do I take what's available and figure out things, obviously, it becomes a little bit more complicated. When somebody comes with a fresh sheet of paper, they have a little bit more freedom to take and adapt more quickly. I would say those are the reasons that we'll be able to do that. Your first part of the question, I think, if you look at our Magna Steyr full vehicle engineering capability, when we are given a chance, we definitely can bring Street to market and can figure out how to optimize the various systems and platforms and the interfaces talking to each other. For sure, right, there is an advantage there. So in some cases, where it's a fresh sheet of paper, great advantage, faster speed to market for sure. The others, we have to mix and match.

There are no further questions at this time.

Michael Glen from Raymond James. Can you just circle back on Steyr in terms of -- first of all, regarding the outlook that you provided, do you have any updates pertaining to backfilling some of that work coming out of when BMW rolls off? And then the second part of that is in terms of expansion, have you thought any more about adding a plant in North America on Steyr?

Yes. I think BMW program -- as programs finish, obviously, we are -- as a normal course, we are in discussions with continuation programs with the OEMs and also new, call it, initiatives to -- or rather a lot of newcomers and others talking to us. Not really talking about exactly the outlook. 2027 is out there, but I can tell you, there's a lot of activity in that. And it actually also acts as a tip of the spear for us in looking at various systems as people come to Magna to talk about it. On North America, we would love to, right? And we have talked about it. We are very open. Still the metrics remain the same. We need to have a little bit visibility. Even if it starts with low volumes, what's the cycle plan? What's the volumes going forward? And we can do, call it, the capital investment in a very phased approach. There's a lot of discussions on it, and we continue to remain optimistic. And with the right set of parameters, yes, we'll have a footprint in North America.

One more question, if there is one.

Great. Thanks for joining us today. I'm really encouraged to see all the possibilities that we have, and I urge all of you to go out, look at the demo vehicles and experience them. There's a whole suite of product displays out there. You can talk to the real subject matter experts, not us. And I hope you enjoy the rest of your day with us. Louis?

Thanks, Swamy. Thanks, everyone, for joining us today. For those of you joining us remotely, please check back to our Event page to see additional content and interviews with our subject matter experts. We'll be posting new content throughout the week as we continue our tech week with our customers and employees. I invite everyone here to join us for lunch, explore the technologies and demos and engage with our subject matter experts throughout the space. There's tech demos on the vehicles out front as well as in the room to my left here and just beyond that in the parking lot as well. Once again, for those signed up for the Holly ADAS facility, whether you have your accommodations or whether we're driving you there, let's meet at 1:00 at the registration desk. Thanks, guys.

Thanks.