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

How is it going everybody? Really happy to have Magna represented up here, Pat McCann, Executive Vice President and Chief Financial Officer, and Louis Tonelli from Investor Relations. Thank you both for being here. We're talking about the drinking water in Sudbury. We can continue that conversation another time.

A lot going on, and we have obviously, as you foreshadowed a few months ago, a potential strike action, which we'll get into. But putting that aside for a second, what are some of the key messages you have for investors today?

I'm not sure if you listened in last week, so we did an investor update last week, and it was really focused on -- we closed the Veoneer transaction. So that's a big transaction. We're focused on 3 pillars. And there was an update, and we're focused on mega trends, so where is the car going to be growing; really talking about EV, ADAS. And those are the 2 big ones. There's various categories within it. And then -- but really, if you take a step back, where we've been coming from, Magna is a manufacturer and, with the inflation in the system, getting back to basics, focused on cost improvements. So we're seeing -- we're focused on driving margins up through '25. We reiterated those. And I'm much more confident where we are this year sitting here than we would have been a year ago with where we are with the inflation and all the cost improvements.

Yes. I mean we got $10 billion of sales growth, so lots of growth to launch in the next few years. And I guess the other thing was the balance sheet -- strong balance sheet, bringing our leverage ratio back down by next year, is the important message that we have. And same capital allocation principles apply.

Strike does add a little bit of volatility. But if I ignore the strike, potential labor disruption for a moment, any comments on the quarter and your kind of rest of your production outlook and then we'll kind of talk about strategies.

No, I don't think we -- like we're not in the business of updating quarterly. We -- my takeaway from the quarter would be, I think we had a really strong Q1. We outperformed in Q1. I think we outperformed again in Q2. So we're building a foundation of walking the talk, right? And we're talking about increasing our outlook from 2023 to 2025 by 230 basis point growth. And it's the traction, the execution, the credibility, that would be my focus.

So thoughts on -- latest thoughts on electrification. We've had a couple of car dealers up here today saying it's slowed down by, of course, non-Tesla dealers. But even Tesla, I mean, if you look at them, they've cut price almost 30%, and they didn't deliver the volume that they thought they'd deliver at the start of the year. No more -- no less, but no more. And their margins are -- their gross margins are almost half where they were a little over a year ago. So are we seeing some growing pains here? And I don't know if you -- as you build out your electrification portfolio to support your customers, curious your thoughts and whether you think that some OEMs may have overpromised or maybe got a little ahead of themselves on the pace of adoption in some of your key markets.

I think -- my starting point would be electrification is coming. It might be a little bit slower than people have projected. But when you look at Magna's view of EV penetration rates, I would say we're more within the norm. We're looking at penetration rates of about 24% globally by 2025 and about 34% by 2030. So we're not really seeing this, "There's going to be no ICE by 2035" type view of the world. That being said, it's important to get on to these programs. And it's having the optionality of how do we make sure that we have our ICE business that continues to grow so we can have optionality there, but where are you selective on the EV and which platforms are going to succeed. And Louis and I have talked before, Adam, once you get into like the frame business, if we compare -- getting on battery trays or e-drives, our view is once you get in, you get the first generation, you get successive generation. So if you go back to 1997, we started building the T800 frame, and we're still building that frame today, and we're going to be building it presumably for the next 10 years, we would think.

When you think about the portfolio on the electrification side as enablers for your participation in the long-term trend, what kind of gets you most excited between packs and trays or structural components?

I'll start, you jump in, I think we're not really in the pack or cell business. So we want to take what we're good at, Adam, and how do we use that into the EV world. How do we make our customers better. And our customers want to come to us because we have a certain skill set and that would really be in the metals business. So if you think about the structural body and white type parts, they -- you were there. You see these things. They're huge, structurally complex parts. They need to be e-coated, leak test and crashworthy. And I think that's really a skill set that we bring to them. And as Louis was saying earlier today is we have the balance sheet to support this growth. They're very complex capital-intensive products, but we want to derisk by using a lot of our sister facilities and filling press capacity. So how do you use that knowledge to grow it? So I don't think -- we don't want to just go be -- we're never going to be competitive in cells. In the packs, we don't have a skill set that's really a differentiator. Our differentiator is in the metals business.

And that business has been growing from almost 0 last year, about $100 million to about $2.5 billion by 2027. So it's huge growth that we're really good at. And as we said last week, we're building that competitive moat in that area.

Giga Press. Is it overhyped? Is there something there? And are you studying it? And what do you think?

So we're -- we do high-pressure die casting already. And you'd be shocked at the size of the parts that come out of 6-foot rails. We do a full cradle for an ICE vehicle, out of a cast part. So we're in the 4,000-ton range. A giga cast would kick in at about 8,000. There's positive in that, but it's hard to do. We're definitely working on it. We're experimenting. But we want to make sure that you have a high-quality product when you go to the customer. So we're partnering with 1 or 2 customers currently. And the idea would be, let's work on it, let's develop a part. And maybe it's instead of a 1-piece cast for the underbody, maybe it's a 2 or 3. That's really where we're going. So we're in the process of acquiring a giga cast press that we can treat as an R&D.

And these are -- you're acquiring this from an outside vendor like an -- or something like that, correct?

Correct.

Okay. Before we get off electrification, obviously, an area that's growing pretty rapidly is like powertrain electrification. So that transition to electrification, whether it be 48-volt or all the way to EV, in that business, we're growing from. Now this is managed, so it's consolidated and nonconsolidated because we don't -- we have a couple of joint ventures, but about $800 million in '22 to about $4 billion by $27 million, so significant growth. And that's both related to systems that we can provide as well as components. So some customers want to provide the system, but they don't necessarily build motors, for instance, so we're -- through our LG joint venture, we're supplying them with motors or inverters. So that's another very big growth area for us in electrification.

Listen, maybe you can tell us what type of disclosure are you doing -- are you comfortable giving on the margins and the revenues of your kind of collective electrical products, electric vehicle product portfolio? We've seen some other suppliers maybe provide a little information even if they don't change the reporting structure. Tell us what you're sharing now and if there's room to improve that, increase the scope of your disclosure.

Well, I think what we're disclosing right now is the sales, for sure. But -- so we're disclosing where we have EV product sales. But what we're not disclosing, we talked about earlier was, if we put a seat on an EV product, that's not disclosed. But it's a tricky disclosure. You kind of go down a rabbit hole of, okay, I'm selling this seat, but if that doesn't sell, maybe I'm selling more -- like let's pick a battery tray. So if we don't sell the BT1 battery tray, we're presumably going to sell more T1 frames. I'm not sure that -- the information could be dangerous, Adam, is what I'm worried about.

Okay. That's fair. Any questions? Just I'll give you guys a warning now just I do -- I know at some of these presentations, we don't go to the audience. So take some pressure off of me, if you want.

Adam's taking questions, so you can take off the pressure off me.

I do. I know. So let's go to autonomy and ADAS a little bit. What are your thoughts on what areas of autonomous vehicles or the journey to AVs that might be underappreciated versus overhyped, just tell us that part of the journey, and then, of course, how the Veoneer acquisition helps enable further development?

I'll start. You can jump in. So my view is when you think about the overhype or indeed the reset, I would say, is the fully autonomous. I think the view that fully autonomous is here at really high take rates in this decade are probably not realistic. Our view would be they're going to be very expensive fleet robotaxis, very expensive units, probably 5% penetration rates when you get on to 2035. What I think is underappreciated is just how much the driver assist functions are growing, and we see the market growing from roughly $14 billion to $40 billion as we move out -- and that's where we want to play in. That's where we have an expertise. That's no different than the metals business that we can take our sensors and our software skill set and provide the features and functions the OEMs are looking for.

Going back, ICE versus EV, would you describe yourself -- I mean you've used the term agnostic. Would that mean that even if EV penetration were to really woefully underperform expectations or previous forecast, which I think they will for this side of 2030, would that affect your margin outlook or your return capital outlook? Or are you kind of -- if any penetration missed, would it be good or neutral for you? I don't know if it would be bad for you. I don't want to blow the dam.

It's probably going to really depend on where it's missing. Is it missing on a specific platform...

Okay. You're saying categorically.

Categorically. Listen, we're investing in the future. Louis talked about the growth rates where we're growing on the EV side and battery trays and whatnot. So it's -- the reality is it's never a good situation, Adam, where you have investments for a program and the volumes don't materialize, whether that's EV, ICE. To be honest with you, it was like a seat. It's a situation where you're spending money, and the way the business model works is you spend either capital or engineering upfront and then you recover it through to volumes. If those volumes don't materialize, you're never going to recover your expected investment. Then it turns into a lot of the commercial discussions, low-volume claims, program cancellations. But how fast can you turn the plant over to make it efficient again? So it's really -- when you get out to 2030, that's a hard one to figure out, and we have 7 years to go.

Just my view, I think slower -- I think speed kills. I'll leave it at that. So supply chain, where would you describe -- how would you describe the current environment versus 2019? How far back to normal are we? And if we're not, where's the gap?

I think we've gotten a long way back even in the last 6 months. I mean, last couple of years were tough, '21 maybe was the worst; a little bit better but still pretty tough in '22 with stop/starts; '23, I'd say through -- as we got through the first quarter, which was a little bit bumpy, second quarter better. So I think it's getting better.

You've seen improvement throughout the year.

Yes, I think we've seen improvement. It's still a little tight. There's still always risk, but I think we've seen an improvement.

Comfortable then. GM had major -- we have American Axle, saying 3x the level of disruption from General Motors because of their Mexican plant issues in the last quarter. I don't know if you had any exposure to that.

I don't know why it went down though. So we're talking chips. When you talk more broadly, there was a flooding in Slovenia. There was a fire in -- but we're getting back to more normal...

Things happen, yes.

But these are things that have happened forever in the industry. And what's really amazing with the OEMs is the way they can really pivot and fix that supply chain issue. I think the chips was an anomaly, and I agree with Louis, we're just seeing the chip situation settle.

What's the greatest cost opportunity and capital discipline opportunity at Magna?

Capital allocation?

No, not -- well, I'd say capital allocation, not in terms of return of cash, but in terms of either extending the life of investments you've made or being more efficient and austere in certain areas or looking at systems that might have room to be de-complexified or restructured.

I think it's the latter. I think it's really the -- how do you scale capital as you go. So your EV example, so if customer A comes to us and says, "We're going to build 1 million units per year," but you're not really comfortable with that 1 million units or you're negotiating with 1 million units, maybe it's 5 lines, and do you scale up as you go. So it's only -- it's not only the scale of the capital the second piece of it is what's the flexibility of the capital. So can you run different products, different customers through the exact same line is key. So if you watch last week, that's really the Steyr model, I don't know if you think about our vehicle assembly, when Swamy was showing how the framing station pivots and how you're actually able to bring the exact -- different vehicles to the exact same framing stations. That's a real capital reduction effort. If you think about it, most -- traditionally, you would have put one assembly line per vehicle. And that's -- I'm pausing a little bit, Louis can jump in, because we've been really strong at that. And you really look at how do you scale capital, how do you make it flexible, how do you reuse it. That would be our 4-wheel drive, all-wheel drive transition in e-drives.

Contract manufacturing, Steyr, real-time capacity of that, of the [ crops ] right now.

Capacity.

Capacity and utilization.

Like, we're about 1:6 to 1:7 as our total capacity in there of what we're using.

And I was just driving the Fisker Ocean, I didn't know if you had anything you wanted to share there on that at all. And if you don't, that's fine, too. There was also a story recently about maybe some Chinese OEMs looking at potentially that facility as a way to be more European. Can I say that?

Maybe a foothold, right? To be honest, we speak to so many people. It's -- that framing example, we have large sophisticated customers doing workshops in our facility to see how we do things. So it's not unusual. The fact that one is in the paper, realistically, we've probably spoken to every large manufacturer.

Yes. Years ago, I talked to Swamy and he described the Fisker project as one of the most important things going on at Magna, just really huge, for you to show the world what you can do and the learnings you would have on kind of a clean sheet design and manufacturing from EVs would just carry kind of cultural and strategic value beyond just the role of -- as a customer. Is that true? And what have you learned?

What have we learned? I think we've learned a few things as o 1 is this is going to be -- we're going to be using an e-drive in the vehicle. So it's an e-drive from scratch learning. So great learning, use that as a core build. You have that in ADAS space as well. But the other piece of it was taking an e-architecture and creating a whole architecture for a vehicle. And that's something that we can leverage that now we know -- we talk about the power of Magna, the full know-how of a vehicle. This is where the vehicle is going. So this is a software-defined vehicle, how do you get the various pieces to talk to one another. So I think the learning experience is -- it was a really great learning experience that we can leverage going forward.

What portion of your forward, let's say, electric vehicle linked backlog would be attributed or comprised of the Chinese EV manufacturers broadly. I'm not asking for a specific percentage. I just didn't know if there was an idea or whether...

Whichever.

EV Business.

Yes.

I'm kind of -- no, I mean, the Chinese ICE stuff is dying.

If I think -- China, we have about $5 billion of sales.

$4 billion of sales.

$4 billion of sales, about 50% with these OEMs. So -- but we're dealing with...

I don't know the scope of chain, I would wouldn't know the EV -- let me for it this way. What would be your most visible and important Chinese local EV relationships?

We've been dealing with BYD, Geely, Chery, Great Wall.

And how do they operate? How would you compare having worked with players like BYD, for example? How is the style as a customer and working with you as a solution provider differ from that of western EV manufacturing?

I think, one, the production, it's not very different. It's really the speed of launch and the speed of award to SOP is much shorter than what we would expect with our traditional customers, whether it's G3...

Is it like when you say much, you mean -- is it...

Like 2/3 of the time, so like 1/3 faster.

Okay.

So it's a significant difference. But even in some of the technology, the other piece we see is they're much more willing to do significant mid-cycle enhancements. So the traditional model would be rescan and change a few things. In China, they're more willing to do full-scale technology changes and big changes into the vehicle.

European Commission has taken to investigating Chinese in terms of their initial stages of ramping into Europe. And I've always thought that the Chinese will eventually come to Europe. But if they go too fast, it will blow it up. So they need to go not too slow, not too fast, just kind of Goldilocks. Again, from your lens, being so diversified both geographically and product and being a major force in Europe, what's your reaction? Are you surprised of the European protectionists' direction? Do you think it goes further? And any other thoughts on the outlook of Chinese in Europe?

I think that's a tough one.

And they're listening right now.

Yes, on my phone. I'm just -- I'm pausing a little bit in the sense that I think the way they operate in China is probably going to be different than the way they operate, whether it's in Europe or Brazil or wherever they go, in South America. I think they're going to rely on a supply base. I think the whole way the industry works with suppliers and OEMs works for a reason. And I think us being such a significant player in Europe and North America, probably not North America as much, but in Europe, is an opportunity for us. So the fact that you mentioned earlier, we have somebody talking in a news article about a Chinese, it's not shocking. It's a relationship you're building. And we have a significant BJEV joint venture in China as well for vehicle assembly. So you have to understand the market. We're in China for China. But flip side is, if they decide to come outside China, we're here to support.

And we've always said that. We've always said there's going to be Chinese OEMs going global. They're going to move forward. And we have to be there to support them wherever they go.

Do you think they realistically can have some form of on-ramp in North America?

I think product-wise, they probably do. It's going to come down to geopolitical issues. And I think it's a much bigger issue than auto supply.

Steyr in North America. What's the latest? When can we see a plant here?

It's the same. I'm going to give you the same answer I gave you 9 months ago, it's honestly going to depend on the business case and it's a risk sharing model.

It's not an IRA, but I would have thought there would have been like -- did IRA -- I could be sympathetic to it, seeing how that evolves, seeing it get approved and now dramatically affect the economics of an investment like that. Do you feel you have enough information from the IRA side as one of the inputs to drive that decision? Or is there still some things to work out?

The IRA is -- it doesn't come to the benefit of Magna or the builder. The benefit is going to go to the OEM themselves. So I think their business case gets a little bit more easy. So now you're going to start going through -- does somebody want to come here and localized? Is it a new player? Is it a good product? Is it a high-quality product? So I think there's so many factors. But at the end of the day, it's going to be what's the risk sharing and what's the commitment to the facility? That's the #1 priority.

Onshoring, we're -- how fast can it go? And I'm thinking, with Europe and U.S. separately, some of the impediments or challenges to onshoring that, through your lens, you would say to an outsider or an investment professional, hey, look, when you think about onshoring, and put in practice, here are some things to think about.

I think on the onshoring, it was a real -- when everything was happening with COVID, it was front and center. So you would see the quotes coming through, what your onshoring strategy, we want to quote it from here. I think it's quite down quite a bit. That's my sense of what's happening. But we're not -- most of our -- you can't really offshore big parts. So we're still talking smaller pieces, nuts and bolts, small parts that you can ship efficiently. . Once all that shipping and freight settled, we really haven't been hearing it as much as we have previously. That being said, from our point of view, when you start looking at some of the opportunities, we want to do it for our own purposes. So we're not really listening just to the customers' mandates, but if we have an opportunity and it's relatively cost neutral, do you want to derisk, that's something we consider.

What's top of mind with investors? You spent a lot of time engaging in events like this and even throughout the day, any questions or topics that were a bit surprising or anything that's come up in your other meetings that you would like to share with the audience here?

There's been much in terms of surprises. I mean I think people are focused on the mega trends and lots of questions about electrification, the pace of electrification, margins around electrification, what's going on in the ADAS space, what do they think is really surprising there. Lots of questions about being there because that's a new topic to get their head around, but it's been pretty much...

Yes, on the 20 basis points of margin impact.

Yes, a bit improving from there. I mean we've talked about our margin outlook being unchanged from -- in 2025 from what we said previously. So that was seen as a positive.

Pat and Louis, any final messages before we wrap up that you wanted to share? Or any topic that you wanted to -- any questions for me. I'm here, man, I'm here for you.

Thanks for hosting us. We really appreciate it.

I didn't do much.

No, it's good to get out. I think when -- just the Magna story, I think people -- Louis did a fantastic job last week on the Investor Day, and I think it's really getting the message out there. So we have a clear strategy. We have to execute against it. And I really hope people take away the fact that we're 350 divisions. But it's -- we're more than that, right? You put it all together, and there's a strategy of where we're going. And you mentioned [ fiscal ] earlier and what are we learning. It's not just learning at one spot. How do you take that and cross -- read it across those 350 divisions. That's the real benefit of Magna, and our breadth of process and product is second to none.

Yes. And just like '25, we've set out our sales and margin targets, and we are highly, highly, highly focused on getting there. I don't think people believe it, but we're going to get there.

It's good to be doubted, and the extra detail on the longer-term production of the company was useful. But thank you for your time. Appreciate it. Good to see you. Thank you.

Thank you.