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

Okay. Once again, I'm Ryan Brinkman, the U.S. automotive equity research analyst here at JPMorgan. Pleased to get going with our next presentation, which is from Magna International. And we have with us here, Patrick McCann, Executive Vice President and Chief Financial Officer; as well as at the end, Eric Wilds, Executive Vice President and Chief Sales and Marketing Officer; and in the middle, Louis Tonelli, Vice President of Investor Relations. So Patrick, Louis, Eric, thanks so much for being here. We really appreciate it.

Thank you.

Did you have any opening remarks? Or can I launch right into Q&A?

Fire away. Fire away.

That's what I like.

Okay. So I wanted to get your -- start with a couple of kind of broad industry questions because you are, what, like the third or fourth largest auto parts player in the world, right? $40 billion of prepandemic revenue, make everything for everybody, and every country, including cars themselves, not everything. But I wanted to get your thoughts on normalized demand in the United States, which drives the lion's share of the market for North America light vehicle production. Prior to the pandemic, we were averaging kind of 17 million SAAR for many years. We're at 13.7 million currently, with the most often suggested reason being the clear constraints on supply, which is clearly a factor. But I was wondering if you thought it might potentially be more complicated than that, whether demand in terms of unit volumes is likely to truly come back to prepandemic levels, given the now much higher price of vehicles sold, like 46,000 versus kind of 35,000 previously. And if it does come back, kind of over what time frame? Or if we are in some sort of new period now maybe marked by longer-term lower volume and higher price. How do you think the supplier industry or maybe Magna in particular is positioned for that environment?

I can jump in. And Louis, please add. When we think about what's happening right now -- and hopefully, everybody can hear me, if I go closer. When I -- when we think about what's happening in the industry, it's really supply constraint. That's really what we're struggling with. It's not necessarily the demand side. That's reflected in the low inventories. We're running 25 days versus 75 previously. So if you look back 12 months, I think, Ryan, it was really a drive by constraints. Looking forward, it's starting to stabilize, but probably another 6 months plus of stabilization to happen. So I think we're constrained in that period of time. Macroeconomically, I would say, there is a lot of inflation in the system. There's rising interest rates. So there's risk to downward trajectory on volumes. That being said, what we need is stability from the Magna point of view. So you have a tailwind on the low inventory base. They're going to have to replenish. They do have to sell vehicles. As you said earlier, they do have a nice price point where they're at. And we're not seeing really the stuffing of the pipeline that we would have seen in previous downturns.

I think it's such a competitive industry, and the OEMs are going to want to make sure that they have enough inventory in the pipeline to make sure that they can satisfy demand and not lose share. So I think that's going to lead to an increase in overall inventory levels and production over time. I think that's just inevitable that's going to happen. And if it doesn't happen, if you end up seeing, let's say, lower -- higher price and lower volume, that affects the price equation as well, right? Higher volumes means lower price for us. So that's going to change the profitability mix for us.

Great. I wanted to get your latest thoughts, too, on the pace and progress of customer discussions to recover a lot of the premium costs that you've incurred over the past year, including diesel, freight, logistics, natural gas, electricity, right, and the likely impact to Magna's margin. And maybe you can address it in a couple of different ways. First of all, with regard to the current contracts, which didn't anticipate these premium costs, which I think you're expecting to collect on in the back half of this year. But also secondly, what can you tell us maybe about like the new contracts that have been signed over the past year or are going to be signed amidst this new higher-cost environment? Are you potentially any better protected with regard to newer contracts? Should noncommodity supply chain costs surprise higher again in the future?

So I'll take it at the start. And the benefit of Magna is, since we have so many different commodities in all of our different groups, I think we're impacted by every form of inflation there is right now, right? So we have lots of experience in balancing it all. But if you look at where we are, we started to get recoveries already, right, in -- for this year and are expecting more like the negotiations. And I think the continuity of the conversations continues throughout the whole year. In the back half, we expect to have more settlements than we have now. Now I think that's already reflected in a lot of our guidance for 2022. But the topics of whether it be labor or commodities or, as you mentioned, the freight, right, they are different for us. There's different forms of negotiations and settlement. Some of them are short term, how do we impact 2022, some of them speak to what you were talking about, what's '23, '24, how do we derisk our portfolio going forward? So we have some short term and long term. Some of it -- a lot of it's more on the timing of when those impacts hit. But for us, I think the one thing, if you look at the auto industry, previously, a lot of these items weren't on the table for discussion, but based on the significance of the industry impact, a lot of the -- these conversations are all now part of the commercial discussions that we have, right? When it's tied to efficiency, when it's tied to pricing., And if you look at what we think is long term, like maybe labor is a little stickier and it's going to last longer, right? Those would be things that would be priced into future contracts, future quotes. So it kind of normalizes itself over time. But right now, we've been making -- we've taken some strong positions, but have been making progress with our customers and addressing it right in the different regions of the world.

Okay. Great. Maybe turning to the product portfolio. Could you perhaps remind us of some of the fastest-growing areas within your business, which I imagine are those that are most aligned with the industry mega trends. For example, you've called out potential like 50% compound annual growth in electronic drive units coming out of the LG venture, 30% CAGR, I think, for battery enclosures in coming years with the product already on the Lightning, the Hummer, which is outside the building, some similar vehicles. Are there any other product categories you might like to highlight maybe on electrification or the ADAS side or anything else? And just what are the fastest-growing areas of Magna would you say or the product or technologies that you're most excited about?

Again, I'll start, and I'm excited about everything, Ryan, right? So if you think about Magna, we do so much, and it's exciting. So when you look at our portfolio, we have 75%, 80% is agnostic, whether it goes on to an EV or if it's mega trend related or not. But when we focus on our mega trend piece, there is the powertrain. So when we talk about powertrain, we're talking about eDrives, what's propelling the vehicle. So is it -- how we get power to the wheels? And that growth is going from $300 million up to $4.5 billion plus when you look on a managed basis, including the joint ventures. The second big category would be the battery enclosures. So the Hummer outside you're referring to, we're actually building that battery train, and that's the one that would have been at the Investor Day. And it's a very complicated, highly engineered product that's growing from virtually 0 to $1.5 billion in a couple of years. So it's a fantastic product. And if you want to go crawl under the car, so it's a good opportunity to do it. And I think the third category is ADAS. When you think about our mega trends where we see growth above market. And we speak about ADAS, we're focused on L2, L2+ in that category. And it's the sensor suite that we're able to stitch together and pull it all. And really, what's really driving a lot of the ADAS, that's a newer product, is in the DMS side. So driver monitoring and how do you integrate -- the power of Magna is having a mirror component and you have an electronics piece and how do you marry them together to provide a product to the customer, being either the OEM or the end consumer that they want. And it's nice and sleek and clean. And it's a good business for us, and it's a good business for the OEMs and solutions.

And there's other areas. I mean, if you think about the Investor Day, and we talked about the growing -- the mega trend areas, the aligned areas -- that aligned areas, there's areas there that we see growing faster than the market as well. I think in the mirror side, mechatronics, lighting, seating and those are all the areas that we believe we can grow faster than the market going forward. So we're excited about the mega trend areas, but also excited about the rest of our business.

Yes. I think the lighting on the interior with the reconfigurable lighting, that's where I first started noticing that this is a growth area, but maybe we'll see in the future more of what I saw at your Investor Day, it was kind of this exterior lighting that kind of like blends into the vehicle, right? That seems like a potential new trend. We might see more of that in the future?

Yes, I think so as well. I think it's a differentiator. So if you're an OEM, you really want to differentiate your product. And back to the Hummer downstairs, if you look at the Hummer, it has the Hummer logos built right in, and it's a lighting option. And I think they really -- do that -- I don't think we do the Hummer, right, Louis? But it's a feature you're trying to build in that they're differentiating their product from one to the other. And it's -- I think lighting, in particular, has a lot of growth opportunities in cabin, outside cabin to your point, just differentiators and how does it blend right into the actual Class A services.

Okay. So we talked about the parts of the business that are like the most aligned with the secular trends, the battery enclosures, the EDUs and those grow superfast. And we talked about some other areas that grow faster like lighting, et cetera. And then you talked about -- there's a lot that's agnostic. When you add it all up, and when you take the growth rates, your weighted average times, your exposure to these different areas, and then maybe you layer in, too, some minority of the business that could be negatively impacted, like gas tanks, for example. When you add it all up, what do you think it equals when it comes to your ability to outgrow the overall trend in light-vehicle production or weighted for the geographies that you're also trading?

So we haven't talked about growth of our market explicitly beyond our outlook period. But just based on our plans, we did plans to do the 2027, '28 years that we have in our Investor Day. Based on that, we do expect to be able to grow faster than our overall market. So we're over that plan period. So we're excited about our ability to -- even with the things that are agnostic or things that are shrinking, that we're going to -- overall Magna should grow faster than the market.

Yes. Well, you've consistently grown faster than market and faster than the market relative to what the multiple sort of implies, right? So it will be interesting to the extent to which you can continue to do that. Maybe just delving in one of the faster-growing areas that we touched on, which is this e-Powertrain venture in Korea. When you first announced that in December 2020, it was an incredible market reaction. And in the year or so, it didn't close to, what, like last July, but that's been a year now, right? So in that first year, has this business been up and running? Is there anything you can point to in terms of like additional business wins, for example? What would you say that each partner has brought to the table? Is it 1 plus 1 equals more than 2? I know LG had some solid technology, right? Did they also benefit you from their customer relationships? I don't know -- I'm just assuming they might have been strong with Hyundai, Kia or other customers? And then how should we think about to profitability for the venture tracking? Is it that it's growing so quickly it provides all this operating leverage and so the profitability improves quickly? Or are you reinvesting that technology to prepare for significant future growth? How do you think about all that?

So maybe I'll start. If you look at LG and the Magna partnership, you're right, LG has some great technology. And you couple that with what we bring from Magna, from the technology that we have as well as the manufacturing expertise, it's -- LG has been a great partner, right? And once we started in July, now it's a JV that we don't consolidate, so some of the numbers we don't necessarily share directly. But the -- if you look at and you say, well, what have we done in the last year, right now, right, we kicked off the plant. We broke ground already in Mexico in the Ramos area, where we're going to be making a plant for power motors and inverters and helping to bring the -- one of the designated customers is General Motors, but it's been really positive. The 2 of us in such a short time coming together have already defined a location in Mexico, and we already have that plant kicked off, which shows that the market growth and the volumes that we need to generate is already off to a great start. It's a nice complement to when you talk about what do we get excited about eDrives and we know the change in BEVs, but the LG partnership gives us jointly the ability to address components within the eDrive system so as customers are figuring out, do they do systems, do they do components or do they do none of it, it allows us to kind of play in the field of everything that we need to do. And if you look at the growth, I think when we announced the JV, we had identified a 50% CAGR from -- for the next few years, and we've held to that 50% CAGR for the -- our outlook period through '24. So it's been a really positive experience so far and that the team has been great to work with.

In terms of profitability -- I hate to be the bad guy but we don't control the joint venture, we can't really talk about profitability. But it is an investment mode. We are certainly investing for future programs. So it's going to take some time before it turns around. But we believe, once the business ramps, it should be a meaningful contributor to our equity income.

I just want to add to -- I forgot to answer your question on customers. I think there's only 2 customers that have been publicly discussed, General Motors and Jaguar. But knowing their customer base complements ours very nicely, right, I mean it's core customers that we work with. They've worked with some of them already, and then we're hoping to help them expand even into others that they're currently not -- the JV isn't currently working with. So it really looks like a kind of a good marriage to take that business forward.

Great. And I'd like to ask next some questions around your complete vehicle assembly business, which obviously makes Magna very unique, right, amongst other auto part suppliers that you actually make automobiles yourself. Louis knows sell side is very famous for our multipart questions. I'll take it one at a time. First of all, maybe just give us an update on some of the recent or pending launches that you've got in the pipeline, for example, the Fisker Ocean in Europe or anything else you might like to call out?

Yes. So our operation, I'm not sure if you've been there, Ryan, but it's in Austria. So it's in Graz, Austria, and it's a really -- it's an excellent facility where there's a bunch of flexibility. So right now, we've launched and been running the G-Class, the Mercedes G Wagon for years, I think since 1974. That's incredible. And we also run -- we have sole production of the Jaguar I-PACE and E-PACE, which is an interesting flexibility where you're running down an ICE line and an EV line on the exact same line going through the same paint line. You then have the BMW Z4 and split production on the BMW i series. And then finally, we have the Toyota Supra. So those are products that we've been running, producing for 3 years. To your point earlier, the big launch coming is Fisker. And that's our #1 priority in the facility right now. We need to execute that launch. And that's expected to launch towards the end of this year. It would be my expectation, and then it's going to ramp over time. I think we're there. It's a lot of heavy lifting to get there. Product launches are never easy. But I think that's a success story where we were able to work with a new entrant and bring speed to market. They want an asset-light model. We came in with engineering solutions, system solutions, and we're able to launch the product very, very quickly.

In China, we have a facility in -- with the joint venture partner, BJEV, and we're producing the ArcFox Alpha S and T, and we've got a couple more vehicles that are going to be produced in that.

Yes, a follow-up there. What has been the early experience in China, not just on -- with BJEV, but I think also you reserve the right to use that capacity for other companies. I think there's seen to be a pipeline of companies in China that might want to launch yet don't have factories or whatnot. Are you in discussions with others? Have you actually signed agreements with others? What percentage of the facility, that capacity is already allocated for -- with the programs that you have versus what remains that you could still bid for and produce?

I can start at first. So right now, we're producing 2 vehicles, as Louis said, so it's the Alpha S and Alpha T and there is plans to launch 2 more vehicles on the same ArcFox brand. As far as discussions with other customers...

Yes. At this point, we've announced nothing, right? But that capacity still remains, and we're in the process of -- I mean, there's -- it's the whole contract manufacturing business. I think it has multiple irons in the fire that we're kind of working around. And I think once we get a little more -- this is my view -- a little bit more stability in our marketplace, I think you'll start to see some of those decisions start to come to fruition.