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

Okay. All right. Great. Thank you very much. As we're wrapping up the Barclays Global Auto's conference, very pleased to have with us Magna. They're largest auto parts supplier globally. So we'll go through a series of fireside chat style questions. Anyone who has a question, please raise your hand in the room, or send my colleagues an e-mail [ [email protected], or [email protected] ]. So with that, wanted to start with Pat McCann, the company's CFO; and Louis Tonelli, who heads the IR efforts.

Pat, Louis, maybe we could just start taking a look at 2024 as we exit the year, obviously, a challenging year, a lot of volatility, customer mix issues, give us a sense of when we look back at the year, how much the customer mix issues, some of the production disruptions or whatever that we've had, have been a drag to you and what the setup is into 2025?

I'll start, and Louis will jump in -- I'm not sure if it's working. But if I look back in 2024, I would say, the biggest disruption was the EV maneuvers by our OEM customers. That's really what we've been adapting to. If I compare just the production volatility in '24 compared to what we would have seen in '21, '22, '23, I think it was better. It was more stable. It wasn't as jerky. On the volume side, I think we've been pretty consistent in Europe. We were probably more conservative than most, from February to where we are today, it was in line. And in North America, it was holding really until the -- our release in October where we took out about 300,000 units. So if you fast forward to what does that mean for the fourth quarter, we went out and looked at our releases, what we had in the system and we just took basically an approach that we feel comfortable with where they're at. We're trying to capture some of the [ WL ] downtime and some of the other European announcements. So I think all in all, that's '24. So we come into '25 and beyond, we're in the middle of our BP right now, Dan. And we gave guidance for '26, in August, we updated it. And when we updated at that point, we're basically seeing no growth in sales in Europe, in particular. And that's going to be pretty consistent, I think, for '25. And then in North America, we're basically flattish. We're in the [ 16 million ] range. So we're not really seeing this high growth. But I think what we are seeing -- sorry for the long answer, too, is you're asking about production. I think we're moving in a situation of being production constraint, not availability of chips and other key components to demand constraint. So I think it's -- even though we have volatility in schedules, it's more planned and there's more line of sight into some of the downtime that's coming.

Great. And then from a customer mix standpoint, obviously, that's been a dynamic. Do you have any preliminary views on how customer mix may factor into '25? And then how do you manage around that? When we saw, for instance, there was a large OEM that was down a lot in the third quarter, how do you plan around that when you see these customers with elevated inventories?

How do we plan around it? I think there's production planning, I would say and then there's also just financial planning. So if you look at the financial planning, in the short term, we have line of sight, really 13, 14 weeks out. And we're working that we want to be able to flex up and keep our operations flexible. I think that's really power of the Magna model that there's not -- Louis and I aren't sitting at the top and we're no puppeteers basically on production. It's down at the local level, the EDIs are right into the divisions and we're -- we coordinate once per quarter when we come up with our financial plan to say, what are we seeing for inventory days? How does that impact what they're telling us for EDIs? How do we make a decision that we drive the organization on the production side? So I think that's that piece of it on the inventory days that we consider. As far as the mix, I think we're so diversified. We obviously have more content on different vehicles. But the mix isn't impacting us as much as we would have. I think where we see our mix issues is, again, it's coming back to the EV versus ICE where there was a pretty strong pivot by a lot of our customers throughout the year. And we were here last year, I remember talking about this issue specifically, you raised it. We were just finishing the UAW strike and then it was like "Let's talk about something else negative." And next year, we're going to talk about something good, right? And so when you -- if you go back and build a time machine to where we were last year, I feel a lot more comfortable with EVs. It just seems that the significant reductions that they've settled their plans, I think the -- their volume projections are much closer to, I would say, what we're thinking, what consensus and you had S&P Global up here, it's more in line. So I think there's less volatility talk on what I would hope going into '25.

We'll give more detail when we get into February and we have our outlook.

I mean on the EV point, maybe looking out a little bit, this is a question we've asked everyone. Look, we don't know what's going to happen postelection but there are indications EV policy may ease. What do you hear, if at all, from your customers? Has there been any change in the bidding activity that you've had?

I would say on the bidding activity, there's been a slowdown just more broadly. And I love the way Louis puts it, is over the last 3 years, every quote that's been in front of us is an EV. So do you want to have a company in the future? You have to quote on it. I think with policy changes, our perspective on high capital, high engineered products, we're quoting on a product that's launching in '28, '29. And I think -- I'm not a political analyst or whatnot but to change something for a 4-year period, to repivot again and then you have state legislation versus federal, I don't know how that all fits together. Again, if you go back to 2016, we live the situation and you adapt to it. I think we're just seeing extensions on our existing programs. I think people are just getting the lay of the land. But listen, there's a lot of rhetoric in the [indiscernible]. We have to see where things really settle.

Let's talk about the margin side. And let's just start, remind us this year, and I recognize incrementals, decrementals vary by segment, can you remind us just briefly what the baseline incremental decremental margin should be, if there should be any variation as we think into '25.

Normally, our decrementals for BES and Power & Vision are roughly 20%, seating closer to 15%. And I think complete vehicles is a bit of a different animal because of the nature of the contracts we have there. So it's typically a lower decremental. But keep in mind that we've been doing a lot on the restructuring side and the cost savings side, operational excellence, which is helping to offset decrementals. And I expect that's going to continue there.

And from a recoveries standpoint, pricing, when we look back at 2024, just in aggregate, how did that fare? What's the opportunity ahead? I mean -- and let's think about pricing in 2 ways. One is sort of recovery of remaining inflation that you incurred over the last 2 years. Two is, you and everyone else, bid and won a number of EV programs over the last few years. Clearly, those volumes have come in below expectations. What's the process of recouping the investment, whether it was on R&D or CapEx for some of that spend?

Let's break it into [indiscernible]. So on the inflation piece first, I think we're tracking to our expectations. We started the year with about a -- we were expecting about a $630 million cumulative headwind over the last 3 years, latest estimate we're about $600 million. So we're really executing where we expect it to be. So that's a combination of primarily wage rates coming up and then higher recoveries against our customer and -- from our customers. And it's a partnership, right? So there's a bunch of things that go into it. I would say what we're -- when you look at our recoveries, a portion of it is embedded with higher pricing and then a portion of it as a onetime charge. We're seeing more and more of that is embedded in the future pricing. And then just on that basis, as programs [ EOP ] and they roll on with the new economics, you automatically reset to current labor rates and whatnot. That's going to happen over time, depending on the type of product. The second category on volume shortfalls, we would call commercial. So that would lump into our commercial category. And that's completely outside our -- the $600 million I mentioned earlier. In that case there, the way the POs work, Dan, in the industry is it's a fixed price contract, no minimums. And if you're flexing up or down by 10%, 20%, life -- it's part of life. When things flex more down, like your example, what we're seeing in the EV world, we do go back to the customers and we do have very constructive conversations with them. And we are able to -- we have and we're getting a lot in the fourth quarter, as recoveries related to lost volumes that are behind us. Another combination would be, are they going to buy capital to avoid the spend? Can we redeploy the capital? And then the last piece is you might have a higher piece price in your example because volumes are so much lower than they used to be. So it's a combination of factors. Some flow through EBIT, some flows right through the balance sheet, if you're getting a check direct for capital, for example.

And some of it just impacts the next year. So let's say we assume -- let's say the volume assumptions was [ 200 ] and now it's [ 100 ] you might have a higher price, so it just ends up in higher margin on the volumes next year.

Okay. How about the megatrend spend? And this year, you talked about $90 million of lower megatrend spending. Is there a opportunity to take more out in 2025?

So we started the year expecting about $1.2 billion per year on average over the 3-year period, '24 to '26. And as you said, we took out $90 million -- we're expecting $90 million out in '24. We've also said that we expect up to $500 million to come out of the entire 3-year period, which implies more coming out of both '25 and '26. So yes, we do have -- we do plan to actually take additional megatrend spending out over the next couple of years.

And then the operational improvements that you referenced. So being 35 to 40 basis points from the 24'-'25 targets, 75 basis points, what's the line of sight on these operational improvements? Maybe you could just remind us what exactly those are, underlying operational improvements you talked about in the margin?

I think -- so your numbers are bang on. So 75 basis points over the 24-'25 period. We're executing against that. So we're on plan. It's pretty broad-based. It would be continuous improvement within the plants. We're seeing a focus on it because there's labor increases. So your business cases on a lot of these CIs, with continuous improvements, are that much more beneficial. The other category would be we continue to take restructuring actions, right? So we took restructuring in Q1, Q2, we're continuing to restructure. A lot of the restructuring is primarily cost avoidance-type restructuring, where you can -- your example where we're flexing down to because volumes are lower. And a lot of that's happening in Europe in particular. But I think what's also changed is focus on automation and whatnot. So if you -- I pick an example of an AMR, if you could put in an automated material mover. You can -- that way there, you can take out a forklift and the cost is -- they're $100,000, $200,000 for an AMR but then you're -- if you're running a 3-shift operation for those 3 operators, payback is 1 year roughly. And then the other one, Louis mentioned earlier, in one of our meetings is, like digitalization. So how do you put machine learning into all these edge devices so that you can start picking up on your presses? Are they running hot? How do you put -- how does that tie into preventative maintenance at 1 location? And then how do you share that information across the 300, as an example?

Yes. No. It takes time to get there on that stuff. But I mean, because we've got 300-plus divisions but that just gives us more opportunity for the future really.

You talked about restructuring, just 2 footprint questions. First, on Europe, 17 million LVP today, obviously, well below 22 million, pre-COVID. I think most people are going to say, we're not going back to 22 million. Do you feel like -- it sounds like maybe you're making some actions on margins. But do you feel like your footprint today matches the current volume levels? Or is there structurally more that you have to do?

It's -- I mean, first of all, I agree with you, I don't think we're getting back to 21 million, 22 million units. And we've been -- we've had that view for a while. So we've been restructuring for quite a while. It's either restructuring, like closing plants, we've actually sold plants and...

Exited Russia.

Exited Russia, that's 1.5 million units alone. So we've been adapting our footprint. And when we talk about footprint changes, Dan, we're talking a lot about plant closures specifically. We don't really have a large group office or corporate structure in Europe or North America. So we're going to flex our footprint. So long story short, when you think about what we've been doing is, we've been moving primarily our footprint in Europe from West to East. We've been doing that for cost reasons. And then the other place is what do we need to change now is from ICE to EV, where we're going to transition a lot of our driveline facilities, from mechanical drives into electronic drives, so that you're not recreating capital. So you get to reuse capital that's already installed. So that's kind of our footprint change. Are we going to have restructuring on a go-forward basis? Yes. It's more one-off. It's not going to be a big across-the-board footprint change. Now that being said, if customers come out and take out restructuring and this one specific facility that impacts us that we're shipping to, that could be a different story.

Another footprint question. Postelection, we've heard a lot of questions on what happens with Mexico, potential tariffs. Again, still very early days but maybe you can remind us, within North America, what your Mexico footprint is and what ability you have to offset any potential tariffs.

Let's start with the sales. So the total roughly $20 billion in sales in North America, it's roughly split $10 billion out of facilities in U.S., $5 billion in Canada, $5 billion in Mexico, just as a starting point.

Trust me, we had all the questions today as well, since the election. I think it's a real hard one. If we go back to 2016, we're living it. So it really depends on where it starts and where it ends. So last time we talked about putting tariffs. I don't know where they want to put the tariffs. Is it on the vehicle? Or is it on the part? Last time it ended up impacting the industry, it was on steel and chips. So we really have to see how it evolves and where it goes. A lot of our facilities in Mexico would be shipping same parts to a facility and customer in Mexico and then the same part goes into the U.S. It really depends on how it impacts, #1, first, our customer. Are they going to specifically move their footprint up into the U.S.? Effectively, I'm not a policy expert but I think they want to move production back into the U.S. To do that, that means the customer has to move. Then the decision is, are you going to do that over a 4-year period? It's almost impossible. So do we then -- do you absorb the tariff in the short term? Does it turn into a commercial discussion? Those are all the things that are up in the air and I don't have a crystal ball. I know last time in 2016 when it all worked through, ended up being a tariff and it was more at the OEM level than it was at the supplier level.

I mean there's a lot of OEM capacity in Mexico. So it will be one hell of an undertaking if you think about trying to move any of that business.

Yes. When USMCA was enacted in 2019, '20, was that any impact to you?

No. At the end of the day, no.

And the local content rules stayed the same. There was some change around minimum wage rates in Mexico. There was some wage pressure. But it was -- I think that wage pressure was happening regardless.

And your components are mostly locally sourced, not much reliance in North America from China?

Right, right.

We generally source and produce locally. We're really [indiscernible]. There would be some chips a little bit.

A little bit, yes. Electronic components.

Electronic components.

Great. Let's just go into some of the segments. [ ES ], maybe just talk about 4Q implies a step-up from what you did in 3Q, call it, 6.8%. What's the right jumping-off point into 2025? Are there still ongoing sort of performance issues at some of these facilities? And then again and I think you said before, like you're sort of watching the inventory situation carefully, that's a consideration.

Yes. So you can't look at the Q4 as the jump-off rate because we talked about the kind of recoveries and how it tends to be back-end loaded. But if you look at what we've said for the full year, the range that's implied, is like 7.3 % to 7.6% for BES. That's actually pretty close to the 7.4% to 7.8% that we started the year at, even though volumes have been off and sales [indiscernible]. So a pretty good outcome. So I'd say that's probably a good starting point. We've done a good job on fixing underperformers. I think there's 1 big facility there that was challenged a couple of years ago and we've done -- made a lot of progress over the last couple of years. I think there's still room to make some progress there, plus operational excellence activities. So there's room to grow. We'll get into more detail in '25 but I think that's your starting point really is, what's the full year margin?

Great. Power & Vision, second half looks like it's doing better after sort of what was a tougher first quarter. Again, starting point. And then how do we think about within Power & Vision, the pace of the Veoneer synergies, which I think you said was sort of $70 million plus annual run rate by '25.

I'll answer in reverse. So on the Veoneer piece specifically, I would say we're executing against our plan on the integration. I think the integration has gone well. Our synergy capture is definitely on track for the $70 million. The $70 million was the exit rate in 2025. So I think we're executing against that. We may be a bit ahead of schedule. On the P&V margin, I'm basically going to reiterate what Louis said, which is the cadence -- I guess it was more pronounced in P&V this year was cadence of earnings really drastically improves from first half into the second half. And part of that -- a lot of that why it's more pronounced is there's more EV exposure in that group that we had. We also have equity income that has high EV exposure. So when you have move on equity income without the sales, it really moves your margin around. And the last piece is there's a disproportionate amount of engineering spend in the P&V group. I guess it's primarily all of it, right, in the P&V group. And the recoveries against that application portion of engineering spend tend to happen in late part of Q3 and into Q4. So it's that pattern, I think, it's going to continue. But if I look at the full year and where we're going to go, it would be the same style that we should have a margin for the full year for 2024 as a good starting point going into '25.

Like north of 5%. 5.1% to 5.4% is the range that we expect for Power & Vision and that compares to like 4.7% we had last year.

Seating, what is the path going forward? It's had some underperformance over the years. And I think a lot of this has been customer mix and key programs. I think Chrysler Minivan, that's been a tough one. What's the path forward to getting this business more on track from a margin standpoint?

I think, listen, the margin in the seating business, if you're between 5% and 7%, it's probably a relatively decent margin. Great return business, low capital. But when -- you mentioned the minivan, it was a lot of -- it was negatively punished by the minivan because of lower volumes. But also the production volatility on that program specifically was harsh. I think going forward, there's a lot of self-help in there as we go through it. I think the operational team that we have in place, I think we've really integrated the Hongli acquisition in China very well. We have a very solid business in China on the [indiscernible] business. So I think it's a focus on that. As we move forward past '25, into latter part of '26, we do have an underperforming program priced on a price basis. It does not -- it operates well but the pricing is not favorable, I would say. And that program has been repriced and it's relaunching at the end of '26 on a staggered basis. So when you look at that path forward, I think a lot of the self-help is controllables in place or you look at the pricing, there. So now it comes down to if the volume is going to hold. And that's probably -- when I say hold, it's, probably, are they predictable and steady.

I'd say for all the segments, you can also add in the fact that we've had these cumulative input costs that we've been eating. We've got some recovery from customers but still eating some. And we've always said that new programs that were quoting in the last couple of years have new economics. And as those new programs kick in at new economics, you get away from the punitive input costs. So I think all of the groups have -- all segments have opportunity to grow as a result of those programs rolling over.

Yes. Okay. Complete vehicles, what is the process of [indiscernible], now that Fisker has gone? Maybe you could just remind us, I think, capacity, who's still there, what's being -- how much that uses and how much capacity you have to fill?

So the pinch point in the facility is the paint line, that's roughly about 150,000 units. This year we're producing the G-Wagon and that's continuing on a go-forward basis. We were producing or we are -- it's running out with the JLR, I-PACE E-PACE. And then we're also continuing to produce through '25 is the BMW Z4 or Z4 and the Toyota Supra. And there's more assembly capacity but it's just the way that the model works. So when you look at what assembly capacity we have, we go out -- so we lost Fisker, we talked about Fisker and that was targeted. We were thinking about 20,000 units, 2024 and 30,000 in 2026. So we're looking to fill that spare capacity. So when you think about how do you fill that capacity, you're talking to people who want to -- we're not selling high volume, we're selling flexibility, speed to market and localization. And when you think about those 3 factors, we are talking to a lot of Chinese OEMs, in particular, obviously, we talk to all our traditional OEMs but you're able to provide lower flexible manufacturing. So you can sell 20,000 units here to 30,000 units here. And I don't want to bore everybody but for example, the BMW Z4 or the Toyota Supra, or the Fisker and the BMW 5 Series were all on 1 manufacturing line. That's what we sell. We sell that flexibility. And obviously, in quality, we're world-class in quality. That's a given. But I think that's pace. Now it's very lumpy awards. I would say from time of award to time of launch, it's probably 18 to 24 months.

I'd just add that if you look at our capacity at 150,000 units, we very often run at 110,000, 120,000 and still run very good returns. So it's not like we need to be up at 140,000 to run profitable there. We could run at much lower and we're taking cost out so that we can run at lower levels of volumes in the near term.

And then maybe just more of a modeling note, if we're looking either an FX perspective, or raw math, based on where we see prices today, if that holds, what does that do on '25?

I'm going to cover FX. On FX, so for Canada and the U.S. about a $0.01 change is about $70 million in annual sales. For euro, it's about $160 million in annual sales. That's the impact of a $0.01 change. So I think we were like [ 108 ], [ 109 ] for the year in euro. And right now, it's a little bit lower than that. So you can do the math on that, that's kind of the impact. So these -- at current rates, you probably have a little bit of headwind from currencies but we'll see where we land for the year.

Okay. Megatrends, help us understand strategically what has changed at Magna versus what is a pivot? Obviously, you and others, sort of geared up for a significant EV opportunity. The volumes haven't played out. You talked about reduced spend. Is the approach at Magna, is this -- should we view this as a strategic pivot? Or is this more just -- the portfolio is in place but you're more so geared around current market conditions?

I'll start, Louis and you can jump in. I think -- I don't think. Our strategy has not changed. The strategy we have now is it goes back to 2013, 2014 and you're looking at what's the car of the future going to be? And when we identified 2 big changes of what content can we attack in a vehicle, it was going to be electronics and ADAS in our world; and B, was going to be electrification. So in the case of electrification, what we're doing is transitioning our ICE-propelled driveline systems, transmissions, 4-wheel drive, all-drive systems to mechanical to EV. If that transition takes longer, we just produce more lines where you have the edge. As we're just putting -- it's all the exact same facilities. So ICE will last longer, EVs are going to trend up. So I have to start with EVs. Our view is EVs are still coming. There's a delay but they're there -- they're here. It's a secular trend. But I think what was new was the battery tray business. And we're the biggest metal fabricator in the world. And how do you take advantage of that skill set and that engineering expertise to manufacture these very, very complex parts. We -- my view is, we have to be on those first gen. This is like a frame-type business where you're in it for the first time, you get Gen 2, Gen 3, Gen 4, just like we see with our frame business. So again, it's not a pivot we're just seeing a delay. We work on pricing, all the stuff, Louis, talked about earlier. I think in the case of ADAS, again, it goes back to 2014, we had an ADAS business. You see the Veoneer acquisition, it ramps out our product portfolio, gives us scale and we're able to act. I think in the case of ADAS, we've seen, not necessarily a delay. Some of it was tied to EVs delay. But what -- the biggest change we've seen in the ADAS space this year would be the China for China type solutions. I think there is a pivot happening in China as far as how ADAS is being developed and sourced.

No. I was going to say, just another example of our strategy, if I go back 10 or 15 years, lightweighting was a very important thing out there. And things like hot stamping and casting were being talked about and were trends that were coming. And so we developed a lot of capabilities around that. We're one of the largest hot stampers in the world. We have strong casting capabilities. So it's looking at a need in the market, a change in the market and how do we fill that? And that's something -- the same strategy we have today.

If EV is delayed, ICE is extended, what's the impact to Magna? Is the point that you can have ICE extensions and the resource outlay on your part is relatively minimal?

Correct. So if -- how would I -- what's a good example? We do a transfer case per vehicle and we now have the eDrive for the exact same vehicle. And if the eDrive version is lower, what we're seeing is that the ICE is being extended. So we have very low investment on that. You just continue to run it out. So it's not a perfect hedge but that's where -- and you have CPV differences between the 2 because you have more sales in the newer products because they're recently designed. But you're able to take that product and run it longer. That's the example, Dan, we were saying, if you go to one of our powertrain facilities, we don't have an EV facility and then an ICE facility. The exact same facility share very, very common practices, right through to assembly.

And as EVs come along, we've already put a lot of capital in for battery enclosures. So as that comes up, we would have -- we already made the investments, so we can leverage that, those investments that we made.

A quick China question and then we'll wrap on the sort of capital allocation. To what extent are you seeing competition from Chinese suppliers in the West?

I haven't -- personally I haven't seen it elevated. We've been competing against Yanfeng in the seating space for years. But as far as the other Chinese competitors, it hasn't -- maybe it's different for different suppliers but we haven't seen it really all that elevated in our product categories.

Okay. Let's -- free cash capital allocation to close it out. Give us a sense on the free cash dynamics because this year, you're going to do with $700 million at the midpoint. When I look at what you did pre-COVID, you averaged $1.8 billion per year, I know you've guided $1.8 billion to $2.1 billion for 2026. So what are the drivers beyond the EBIT improvement to get you to have a more substantial free cash flow recovery?

So the delta at the midpoint to midpoint is about $1.2 billion, roughly. And that's broken down into 3 broad categories. I would say we have capital reductions in the range of about $400 million, which is what we're seeing just with the sourcing cycles. As part of that sourcing cycle, what we're seeing is our other asset spend, which is cooling and whatnot being down about another $100 million. So you have $500 million. And if you look at where people are expecting Magna to be from '24 to '26 at the EBITDA level, it's about $600 million. And the EBITDA, I know it comes back to the EBIT but that, that's -- those are the 3 big buckets. EBITDA is, coming back to what Louis said, we have reduced engineering. We have the improvements on the operational excellence. We have programs launching. But we're not really seeing a volume expansion in that space either. So I think it's a lot of self-help. It's an executable plan. And obviously, we're going to continue to squeeze on the engineering piece as much as we can and on capital. That's really push within Magna at this point.

That would be a large increase in your free cash flow.

Correct. But just for perspective, like we still generate a lot of cash from operations. If I go back to 2018, a lot of the delta has been in the elevated spending on -- related to capital for [ coating ], in the $600 million. Yes. There's a few big buckets you put together and it hasn't foundationally changed. So when people say, is it a pivot on your strategy, is it change in strategy, we're still doing what we've talked about doing. We've had some headwinds. We're going to deal with them. We are. And we're going to come out and we're going to be generating like we should be.

Great. Final one, how do we think about the dynamic of leverage going forward? You have a 1 to 1.5x target. You ended 3Q at 1.9x leverage. How critical is it to be operating in that range? And you resumed share buybacks. Do we just think about this as basically all the free cash flow can go toward share buybacks?

Not all of it. So we do have to -- our strategy hasn't changed. We still want to be in that 1x to 1.5x. How do you get to the 1.5x? One option is delevering. So some cash will go to delever. Another part of it is EBITDA growth, as you generate more EBITDA, you get a push on your debt levels too. So we're seeing EBITDA growth and then you use the balance for share buybacks. But again, this isn't a pivot. This is an acceleration from where we expect it to be. So we've been guiding for all of this year that we're going to be back within our leverage ratio by the end of '25. That's still the case. What we've done is maybe accelerated 3 to 6 months as far as the buybacks. I'll leave it there.

Pat, Louis, thank you.

Thanks, Dan.

Thanks, Dan.