Q3 2019 Earnings Call

Please standby the conference will begin momentarily we thank you for your patience and that they you. Please remain on the line.

Greetings and welcome to the third quarter 2019 results conference call. During the presentation, all participants will be in the listen only mode.

Afterwards, we will conduct a question and answer session.

At that time, if you have a question. Please press the one followed by the four on your telephone.

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A reminder, this conference is being recorded Friday November eight 2019.

I'd now like to turn the conference over to Louis Tonelli, Vice President Investor Relations. Please go ahead.

Thanks for either Hello, everyone and welcome to our third quarter 2019 conference call.

Formal comments today from Don Walker, Chief Executive Officer, and Vince Galifi, Chief Financial Officer.

Joining us today, our Swami quota, Gary Chief Technology Officer, and President of our power ambitious segment as well as Eric Goldstein and Jim Florals from our IR team.

Yesterday, our board of directors met and approved our financial results for the third quarter ended September Thirtyth 2019.

We issued a press release this morning for the quarter.

You'll find a press release today's conference call webcast Slide presentation school long to call and are updated quarterly financial review all in the Investor Relations section of our website at <unk> Dot com.

Before we get started just as a reminder that discussion today may contain forward looking information or forward looking statements send the meaning of applicable securities legislation.

Such statements involve certain risks assumptions and uncertainties, which may cause the company's actual or future results and performance to be materially different from those expressed or implied in these statements. Please refer to today's press release for a complete description of our safe Harbor script disclaimer.

As you review financial information today. Please note that all figures discussed our U.S. dollars unless otherwise noted.

We have included in the appendix reconciliations of certain key financial statement lines for Q3, 2019, and Q3 2018 between reported result and results excluding unusual items.

Quarterly earnings discussion today excludes the impact of unusual items.

Please note that when we use the term organic in the context of sales movements, we mean, excluding the impact of foreign exchange acquisitions and divestitures.

Beginning this year, we adopted a new lease accounting standard that replaced previous lease guidance under GAAP.

The most significant impact of this new standard on our financials, what's the recognition of approximately 1.8 billion in red abuse assets and lease up at least liabilities for operating leases.

The adoption of the new standard done prospectively with no. Prior year restatement did not have material impact on earnings or cash flows and has an approximately 140 basis point negative impact on return on invested capital.

Lastly, priory prior period comparative had been restated to reflect the transfer of certain assets out of corporate another two the company's operating segment to better reflect the utilization of these assets.

Now I'll pass the call over to dawn.

Thanks, Louis Good morning, everyone.

Our third quarter was a noisy went with the number of puts and takes impacting their results all things considered including a labor strike at our largest customer our adjusted third quarter results came in relatively in line or their expectations. The GM strike, which continued into October will also impact our fourth quarter results.

Or briefly discuss some of the noteworthy items since our last call, including our continued growth in excess of global vehicle production.

Our non cash impairment charges related to could drags equity accounted investments.

Our recent announcement of a new dual clutch transmission business with BMW.

In the third quarter ourselves on on an organic basis grew 2% well in excess of global light vehicle production, which declined 3%.

Each of our power invasion seeding the complete vehicle segment outpace global production well body exteriors and structures was in line.

In the past couple of years, we've highlighted a few of the challenges. We're facing are good trade joint ventures, including the decline in manual transmission take rates, both in Europe , and China as well as a number of China's specific factors, including lower than expected volumes, particularly for certain significant domestic customer.

As the in sourcing a dual clutch transmissions by certain domestic customers and take rates for de Cts by consumers on certain customer programs.

As we have moved through 2019 vehicle volumes in China have continued to deteriorate during the third quarter, we began to develop a business plans, including volume projections and cash flows for future years based on this we concluded that the carrying value of our investments in Threeg could trade equity accounted.

Joint ventures, Werent paired resulting in a 537 million and noncash asset impairment charge after taxes in minority interest.

We are disappointed in the recent results in future projections in the <unk> in the good track joint ventures in particular the growth in the Chinese joint ventures. However, the growth in our wholly owned and transmission business based in Europe has exceeded our initial expectations and we see continued growth here.

At this point BMW has awarded US a production contract for dual clutch transmissions, including hybrid to de Cts for their entire front wheel drive platform.

This is the largest production order.

For transmissions in our history. The contract reflects the benefits of our D.C.T. technology, including enhanced dry the ability and optimal efficiency. It also reflects BMW is confidence in our technology and our ability to deliver high quality flexible and innovative solutions with that I'll pass the call over to advance. Thank.

Don and good morning, everyone.

The third quarter had a number of doctors that positively and negatively impacted our results.

Among them was the GM strike that led to lower sales and earnings.

Excluding the GM strike, our consolidated sales and adjusted EBIT were in line with our internal expectations with higher than expected launch and warranty costs, partially offset by favorable commercial settlements.

Some of the key details of the quarter included our consolidated organic sales.

Growing by 2% compared to global vehicle production, which declined 3%.

Each of our power and vision seating and complete vehicle segments also.

Growing global production, we returned 451 million to shareholders in the quarter through dividends and share buybacks.

And our free cash flow expectations remain in the 1.9 to 2.1 billion dollar range, despite lowering consolidated sales and margins in our outlook.

I'm going to cover each of these in more detail.

Our consolidated sales were 9.3 billion a decline of 3% from the third quarter or 2018 compared to global vehicle production, which also declined 3%.

Excluding currency translation.

Which was a 216 million headwind and the divestiture of that PNC.

Netted the acquisitions of all sub and Vseven, which reduced sales by 263 million.

Organic sales grew 2% year over year.

This was largely due to the watch a new programs.

In particular are good organic growth was better than global vehicle production and each of our parent vision seating and complete vehicles operating segments.

Organic sales in our body segment fell 3% inline with local production.

Our adjusted EBIT margins declined compared to last year, we reported 6% in the third quarter 2019 down from 7.3% in the third quarter of 20 chain.

80 basis points of this decline relates to lower margins in our power ambition segment.

20 basis points is due to a decline in CD margins 20 basis points relates to lower profit incorporated.

And 10 basis points related to our body exposures and structure a script.

And of course, the GM strike contribute to the margin declines for B S.

Power and vision and seating.

I'll get into the specifics specifics of these margin changes in the segment review.

Adjusted EBIT declined to 558 million from 699 million largely reflecting the GM strike.

Higher engineering cost in our eight AST business favorable customer pricing resolutions in Q3 of 28 chain.

Lower scrap steel recoveries and higher commodity costs are the pie and equity income an increase spending associated with electrification autonomy and research and development [noise].

These were partially offset by higher foreign exchange gains and the closing of class that were previously incurring inefficiencies.

Equity income declined 25 million year over year to 37 million that third quarter of 29 team. The decline was largely in our power envisions segment.

This related primarily to lower unconsolidated sales and a write down of assets at a certain facility.

Partially offset by the improved operational performance at a particular facility.

Excluding equity income our EBIT margin declined to 5.6% in Q3 of 19 from 6.6% in the third quarter of 2018.

Our effective income tax rate declined slightly to 19.6% from 20% a year ago.

Net income attributable to magnet was 438 million compared to 535 million in the third quarter last year, reflecting the lower EBIT, partially offset by lower tax rate lower interest expense and lower minority interest.

Diluted EPS declined 15, SAS. So dollar 41 for the quarter compared to $1.56 last year. The decline reflects the lower net income partially offset by 9% reduction in our shares outstanding.

Now, let's look at our segments.

Body serious and structure sales for 4 billion in the third quarter, a 5% decline from 4.2 billion a year ago.

The decline in sales reflects lower vehicle production. The G.M. strike you enter production of certain programs, including the Chevy Cruze.

A negative impact from foreign currency translation of 62 million and that customer price concessions.

These were partially offset by new program launches.

The segments organic sales change was in line with global vehicle production.

Body accessories and structures EBIT decreased by 20 million in Q3 of 19 compared to Q3 2018.

Margins declined by 10 basis points to 7.7 for side of the third quarter.

This decline reflects favorable pricing resolutions in Q3 2018.

The impact of the GM strike, lower scrap steel recoveries and higher commodity warranty and launch costs.

These were partially offset by earnings and higher sales at a number of facilities. The closure of class that were previously incurring inefficiencies.

Productivity and efficiency efficiency improvement and higher foreign exchange gains.

Our envision segment sales declined 251 million or 9% to 2.7 billion from 2.9 billion last year.

Decline, primarily reflects net divestitures of 297 million 69 million negative impact from foreign currency translation.

Lower vehicle production, the GM strike and net customer price concessions.

Organic sales increased 4% year over year far outpacing the 3% decline in global vehicle production driven by new program launches and further increase D.C.T. cells from European transmissions business.

Parent vision EBIT was lower by 92 million and EBIT margin decreased to 6.2% compared to 8.8% and then third quarter of 2018.

Just decline primarily reflects higher engineering costs in our Ada Es business.

Essentially associated with three programs that will be utilizing new technologies.

Lower equity income higher spending associated with electrification autonomy and R&D.

The impact of the GM strike hired launch cost and the impact of acquisitions.

These were partly offset by the divestiture F PNC, which ran at margins below segment average and higher foreign exchange gains.

Putting equity income EBIT margin applying for 4.8% from 6.8% 20 chain.

Sitting sales were 1.3 billion.

It's up 4% from the third quarter of last year, reflecting the launch of new programs and the acquisition of visa. These were partially offset by lower vehicle production in key regions, including certain high content programs into production of certain programs, including the Chevy Cruze, the GM strike and an 18 million negative.

Thing and foreign currency translation.

Net customer price concessions also impacted sales negatively in the quarter.

Ceding organic sales rose 3%.

Ceding EBIT declined by 13 million 56 million for the quarter, while EBIT margins declined by 130 basis points to 4.4% from 5.7% and 2018.

This reduction substantial reflects reduced earnings due to lower sales at a number of facilities higher costs at our new South Carolina facility as we wrap up BMW business higher commodity costs, the impact of the GMV strike and acquisitions.

These were partially offset by higher favorable commercial settlement.

Lastly, complete vehicle sales rose by 125 million from last year to one and a half billion.

Representing a 9% increase.

The increase is primarily due to the launches of the BMW is that for and Toyota supra programs as well as the continued ramp up the Mercedes G class and Jaguar I pace.

These were partially offset by lower volumes in the BMW five series.

As well as foreign currency translation, which reduced sales by 73 million.

Organic sales rose by 14% from last year as assembly volumes rose, 6% to approximately 36000 units.

Complete vehicles EBIT increased by 5 million compared to Q3 of 18 EBIT percent increased 20 basis points to 1.9% in the third quarter of 29 team as a result of earnings on higher sales and lower launch and other costs, partially offset by lower favorable commercial settlements.

I would like to take a moment to discuss accounting for them that noncash impairment charges against the carrying value of our investments in our contract joint ventures.

The total pretax charge related to these impairments is 700 million and the largest of these relates to our joint venture with Jangling motors known as GJ T totaling 511 million.

Our investment in GJ tea is held through an entity known as GE a team.

Our economic interest in GDP is 75%, while the remaining 25% is with Ford.

We control GP and consolidate its results.

GDP has 66.7% non controlling interest in GJ tea and us G. P equity accounts for its operating results.

Because we don't own 100% of GE ATP. Our consolidated results include minority interest associated with any income or loss EMG Pete.

In Q3, GP had a 511 million pretax impairment to the carrying value of its investment in GJ tea.

Consequently, our results include a minority or non controlling interest recovery of 127 million.

I know that's confusing I'm, sorry, I guess some questions on it so I can repeat that again and acute recession.

Lastly, the U.S. GAAP EPS impact on Magna of the total to track impairment charge is a dollar and 73 cents.

I will now review, our cash flows and investment activities.

During the third quarter of 2019, we generated 750 million cash from operations compared to 1.1 billion initiative.

2018.

Investment activities amounted to 432 million, including 340.

9 million in fixed assets, and then maybe 3 million increase and investment other assets and intangibles.

Free cash flow was 385 million in the third quarter.

We returned 451 million to shareholders in the quarter through the repurchase of 342 million of our stock representing over 6.8 million shares as well as the payment of 109 million in dividends.

So far in the fourth quarter, we bought back another 1.8 million shares for $95 million. This brings our year to date return of capital to shareholders.

It's approximately one and a half billion dollars.

Our adjusted debt to adjusted EBITDA as 1.26, providing continued balance sheet flexibility.

We announced today that our board approved subject to approval by the Toronto, and New York stock exchanges, our new normal course issuer bid to purchase up to 30.3 million of our common shares representing approximately 10% or public float of common shares.

The stupid would expire in November of 2020 .

Let me remind you that under our current and say be expiring. This spot we were authorized to purchase up to 33.2 million shares and we bought back 29 million shares.

In terms of changes to our outlook.

We have lowered our assumption for light vehicle production in North America, primarily to reflect lost production due to the GM strike.

We narrowed as slightly reduced our sales ranges for body exchangers and structures and seeding largely reflecting the impact of the GM strike.

We narrowed our sales range for power envision, reflecting the impact of the GM strike largely offset by improved mix and we narrowed our and lowered our complete vehicle sales range, reflecting lower anticipated assembly volumes have Magnus sire.

Our adjusted EBIT margin range has been narrow and reduced and is now 6.3% to 6.5%, mainly reflecting the impact of the GM strike and higher launch cost in our body series and structure segment.

Interest expense has been over to approximately 85 million from approximately 90 million previously.

Equity income has been narrow and slightly reduced mainly reflecting continued weakness in China.

The income tax rate has been lowered mainly to reflect the lower than expected rate in Q3.

Net income attributable to Magna has been narrow and slightly lower mainly reflecting the lower sales and margins for the year.

Capital spending is unchanged from our last outlook and our free cash flow expectations of 1.9 to 2.1 billion are also unchanged from our previous outlook.

In terms of segment margins, we have raised the low end of our margin range for a complete difficult to 1.9% to 2.2% from 1.7% to 2.2% previously.

We have narrowed and reduced our ranges for power envision NCD, primarily reflecting the impact of the GM strike and we have narrowed and reduced our bodies jurors and structures margins largely reflecting the impact of the GM strike and higher expected launch costs for the year.

Thanks, very attached and this morning.

I would now be placed answer your questions.

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One moment please for the first question.

Our first question comes from the line of John Murphy from Bank of America Merrill Lynch. Please proceed with your question.

Hi, Good morning, guys I'm just a it first question on on the guidance and you pick the midpoint of the guidance was.

You know on on the sale than in the meet the margin side. It seems like the decremental margins at the midpoint range or about 22% I'm. Just curious means that you have that sounds about right. I mean, obviously the ranges on either end can be much higher are much lower onto that sounds about right. You just in that calculation of the way of thinking about it.

And it and if so given as we kind of a shock. The system. These units are being pulled out very quickly abruptly in sort of somewhat unpredictably.

How should we think about the decrementals going going forward, if we start sort of a cyclical downturn because it seems like is the kind of a tenant case any performed incredibly well and pretty stressed situation.

Well, John I think there's a couple things that you know if you look at.

Okay.

The sales at the midpoint drop and.

EBIT margin dropping.

You've got certainly the impact of general Motors strike.

Some of that was in Q.

Q3 bigger chunk of that is going to be in Q4.

You know decrementals when I look at the decremental margins in our estimate on the GM strikes about 30 basis points to margins and Oh, Yeah I guess.

If as volumes come off you've got a lot more time to kind of reacted and take the appropriate actions and really not knowing when you got to start up again for GM. So it's kind of hard to to flex costs over a short period of time.

The other thing that's impacting margins, that's not necessarily associated with cells that I talked about this in my comments is.

Yeah, we got higher than anticipated launch costs in a couple of facilities.

Both in our the scrip.

And that impacted US you know probably about.

30, 35 basis points and ER.

In Q3, and I think the impacts going to be about the same in Q4. So I think those are the.

Two biggest factors the other thing just from a margin perspective as a sort of stands out to me is just commodity costs in particular scrap and I look at kinda, where where we thought we were going to be on on revenue from selling excess.

Or scrap in Q3 in Q4 and more scrap pricing is today and the scrap pricing is it I think as a premium pretty well to your low so versus expectations, we've had to bring down.

Some margin as a result of that so those are the three bigger items. So I wouldn't necessarily concludes John that.

Yes represented decremental margins declining environment.

Okay, that's incredibly helpful.

We ended the second question as we looked at the seating business and declined to about 4.4%.

EBIT margins I'm, just curious as you run that business going forward, what kind of margins do you need to be at you generate adequate return on invested capital there recognizing as a big chunk of it it's Jeff So margins can be a fair amount lower and potentially drive pretty good returns.

Yeah, I mean, I or returns even.

Even given the results are sold or.

Not that but they are depressed I think what's we've talked about this for we started the beginning of the here that we have this big BMW program watching up in South Carolina.

It was just a jet program that was going to want to came on stream is gonna be dilutive to overall margins and we're seeing that but coupled with that.

In that facility and we've talked about this in previous quarters.

Our launch costs are at elevated levels that program has been little more complex than what we anticipated a whole bunch of things that we've covered in prior calls so that's going to go away and I look at the progress that we've made this year and I think the process has stabilized and we're starting to cease.

Some better things in that plant so as we get to 2019, sorry, 2020, we should see some margin enhancement just in that facility. There's a couple of other things you know a in the in the quarter impacting margins.

GM strike and just overall.

Look at volume reductions.

They have had a negative impact on margins.

I do want to say that we did have some positives in the quarter we had.

Some some of my comments I talked to but its commercial settlement.

And with commercial settlements are.

Things that are or kind of hard to predict you don't have that an expense and one period prior prayer.

Then work with a customer try to recover that you never know when it's going to come and it's it's choppy.

But we did have some favorable commercial settlements.

In the quarter that did offset some of those negatives I talked about.

Okay and then just lastly me one of your big customers.

Yeah, Chrysler sounds like there might be staring down the barrel about a strike with the upcoming negotiations negotiations. It will start heavy your next week. So just curious if there's any.

Preference thought in front of that given what you went through with GM and then also considering that customer is potentially going to merger combined whenever way. It occurs with blue Joe if there any opportunities in that you know that potential merger for you or would that create some incremental pricing pressure for you from that combined net.

So maybe that if there any spread crap added time and what you think the merger might mean for you.

No John it's done Guy I am not up to date on what the other discussions are going there's not really much we can do and would just set to follow it if there if they have.

The strike than we just have to react to it the best we can said earlier, it's depending on how long if there was a strike how long can last a in them, but love what point in time to think shutdown. So we really can't do too much until we do we know what's happening as far as a merger.

Hard to say.

Chrysler is a very big customer of ours, we don't do too much business would you say.

I would things can take a while to see what happens there and then we'll just have to see what their plans are for product standpoint from distribution standpoint, but there's really a theyre pretty distinct businesses as far as what PSC has in North America, and what price or via Chrysler has as in North America. So I I.

I don't know what the impact would be over time I would note to be too much short term I think three more figuring out what they want to do from product standpoint, and what they're going to do for getting various vehicles into different geographic area. So wouldn't anticipate anything in the near term to change much quite frankly.

Okay, I mean, it seems like.

For community than an issue for you just given little exposure to be Joe.

Just just my characterization is that seems like that's about writing there's all sorts of things that could happen, but having little exposure to Peugeot and then all of sudden having potentially good Ted or if this goes through would probably provide more opportunities in issued for you is that that a reasonable way to think about it.

It's hard to say.

There's there's not a big supply base or PSC in North America, obviously, so just not as if theres a whole bunch in new new suppliers. They have that would be going after the business in North America, but they're probably be some pros and cons do it and I think we'll just have to wait and see what happens.

Okay. Thank you very much.

Thank you. Our next question comes from the line of it take Mackay Lee. Please proceed with your question.

Great. Thanks, good morning, everyone.

Just first and then I apologize if I missed this venture to just quantify the revenue and EBIT impact from the GM strike on on a full year basis.

Yes are asked about right. It is just in Africa.

Probably difficult when look at what we thought we were going to do versus.

The impact of the strike is probably about $500 million.

On the revenue line and I.

I would think about that as being kind of 148.

150 in third quarter or.

The balance in the fourth quarter.

From an earnings impact again, a very hard to just got an exact number but it probably around a negative 30 basis points to consolidated margins in Q3.

And for the full year, probably about again, a 30 basis points negative to consolidated margins.

That's very helpful and when think about beyond 2019.

On equity income is any change or any kind of thinking around how we should think about.

You revised the 2021 target for equity and come back in May any updated thoughts around what what to think of that maybe even more broadly some of the puts and takes you to think about in terms of margins.

The next let's say you're too.

Yeah, you know I don't really want to get into kind of 20 or 21, where we're in the middle of business plan. The only kind of thing I'd want to highlight to you as we did take a pretty significant impairment.

In the equity accounted investments in could track and and a big part of that is continued softness in China.

Versus previous expectations, So I hope that translate into some headwinds on equity income as we go post 19 are compared to previous expectations.

Got it and just lastly, I'm, hoping you talk more about the launch costs in the exterior and structures or is that tied to.

Just a slower ramp a program or is there any kind of timing around the recovery of that it sounds like that was also if I heard your quick about 30 basis point impact on the year.

Yes, it's two two facilities one is a in our and our body group our metals group. So huge launch we replaced most of the plant and we've added new business. So.

We're going through a theres a lower volumes from the customer which is impacting the pull through of margins I think that.

They're pretty all over the bottleneck and we've had a capacity issue with one of the casting operation.

I would think by the end of this month will be on top of that so I think that when turns around in Q1. The latter part it probably in December in Q1 other ones in operation in Europe .

It just.

We've got some extra business now we thought was going to run I would just went into a lot of God.

Detailed operational issues that that's going to run through probably probably into next year.

Great. That's very helpful. Thank you.

Thank you. Our next question comes from the line of Peter Sklar with BMO capital markets. Please proceed with your question.

On the good track write down.

All the Don in your commentary all the issues that you talked about that are negatively impacting good track I mean, there's nothing new there you've been talking about those issues for a number of quarters. So I'm just wondering what has changed since Q2 in terms of the outlook that caused you to take the write down now versus previous periods.

Yes.

You know a Peter Thats, a good morning and.

There's a couple of things I think as we've looked at that bringing down equity income or your into your.

That will face number one on estimate.

We now and the joint venture has completed a longer term plan.

Thats been approved by.

Board and and the respective shareholders.

So we've got much better information I think when you look at manual transmission take rates continue to come down.

Five in general have come come down further in China and in particular, what our customers.

It's been some program cancellations.

That are also impacting our outlook.

And some of the newer programs.

Our pricing perspective.

Our competitor the Mark this year in the past so when you start putting that all together through a horrible business plan.

We were required to take an impairment on the asset.

But you know Peter I guess.

Talk to the board about this yesterday, our board presentation that it's kind of interesting if I could.

Go back and have the information I have today on good track.

I wouldn't have an impairment and the reason I say that is I would allocate purchase price differently.

Because what we've written off is excess purchase price on accounting so back to track two years ago. When they can estimate a value and reallocate excess purchase price to the various pieces. So you fast forward to today and.

Fortunately China's underperformed our expectations in Europe's outperformed our expectations, if I could magically go by over time and have the information that day and reallocate. Thanks I saw come up with the same value I would just put more purchase price excess purchase price into Europe .

So it's disappointing that the accounting rules require us to take this write down.

But you know.

Myself as well as the team here feels comfortable that.

It was the right opportunity for us to take advantage of and if we had to do it again, we do it again, we allocate purchase price differently, but we would do it again.

Okay, I understand that and I'm, how do you feel about like how does Magna management feel about that the DCT product I'm just wondering what was the product.

Generally engineered in Germany for the the China market and I know I'm speaking in generalities, but I'm just wondering the German stand to apply very high level of engineering and I'm. Just wondering if you feel the product portfolio is over engineered for the China market and.

Need to reengineer the product so it's more suitable for that market.

So I mean do you want to answer that one.

Yep, Yeah, I think one of the it's a good question just in terms of a product like this you know I do see tila transmission.

There are certain building blocks, which you know you need to have the platform technologies so that.

Engineering efficiencies out there.

To your point I think we mentioned in the last few calls.

We are looking at a product, which is the 60 DCT with direct lunch that is most suitable into them. So the park and the technology for China market.

So we are working on that but I think.

I would say did a mass, but still fit which you have to.

Make it's specific to the markets like China, but the larger piece so the architecture in the building block.

I think you know is based off the common architecture.

You know putting too much pressure on.

On the product that's required for local applications.

Okay.

And then lastly.

Like is in your commentary at the beginning of the call you referred to this BMW contract DCG contract in Europe that sounds like a big win.

You're a little bit vague on how big of the contract can you smell quantify what are the annual run rates I wasn't to share with Don was saying was saying this was the biggest DCT award.

That you've ever been awarded or can you just kind of put that the magnitude of this contract in some kind of context.

Yes the.

Reason, where Vega is the customer doesn't want us to talk about any details the volume the start time. It is a it's a DCT contract.

And it is partly replacement that but a substantial amount of that as new as well that's or if you want to add things when they're not but the customer doesn't really want us saying much one includes the hype and hyper densities and includes hybrid yes.

I think that though when you find that it is a hybrid we're going to which we have always been saying that the DCT technology actually very amenable to electrification going forward.

Okay. Okay. Thank you.

Thank you. Our next question comes from the line of Mark can avail with Scotia capital. Please proceed with your question.

Hi, Good morning, maybe just on the guidance.

Maybe help us this bridge the gap between me sort of the drop in the earnings guidance and.

No the free cash for staying at the 2 billion at the midpoint.

Yes so.

Good luck at.

Okay and net income.

We we dropped kind of bottom end by about 100 million and.

From our previous outlets top end of a 200.

Midpoint.

But 120 $550 million.

But I I think when you.

Look at.

Hey, refiner forecast method operating cash flow.

Now this is I think a little bit of reduced investment we got capital at about 1.6.

You know probably come a little bit love the lower end of where we thought it was going to be and that's going to contribute just tying up working capital.

Generally its.

Cash flow really hasn't changed.

When we talk about opera operating cash flow.

No that excludes some proceeds that.

We're going to generated from the sale of.

Shares Holden left.

And we had a small sale in Q3, and we continue to sell shares in Q4.

And you'll recall when we made this investment years ago and it was a 200 million dollar investment, we said that impacted negatively cash flow, so over and above kind of the guidance.

190 to one on cash flow to the extent, we're gonna get proceeds on the live shares that's on top of the one nine to two wine.

Okay.

I guess and.

This is further on that I think year to date proceeds from dispositions 169 noises that included in your calculation or is that sort of excluded the 2 billion. Yes. It's included in the calculation Yep.

Okay, but that's that's normally that's normal this normal course stuff as maybe we're netting against capital essentially right sure I think that's where I wouldn't think about that but is that it gets capital.

Okay.

Just maybe other write down.

Vince I didn't fully follow everything you said, but.

It's the point, it's it's a pretty material sort of number.

So to sort of just trying to think of the context of the size of the carrying value sort of pre write down of that I said, just trying to just contextualize.

And the size this write off.

Yeah. So.

Mark just on the idling accounting for US just right after that so.

We have a kind of Oh Gee.

The I call it gap.

And we control gap.

Through 75% economic interest. So if you think about a consolidated entity.

[noise] you consolidate the result of I've got into Magna so to the extent as any income or loss in gap you require a minority interest expense recovery.

Okay.

And in gap than when you look at it sources of income substantially all of its incomes associated with GJ tea and.

We don't control Gvhd, we it's a non controlled entity. So we equity account GJ TV, So and magna's consolidated results. If you go back over time.

We've got our in equity income, 50% of the net income J.T. flows through the Magna results, but we also have a minority interest.

<unk> expense typically because GTS profitable against towards interest and got an awkward accounting because some of its consolidated sums equity accounting.

So when you look at kind of.

Asset values.

Our well I look at.

Through joint ventures.

Magna's book value.

Those investments.

Prior to the impairment was about $1.4 billion.

And.

We took a 700 million dollar impairment so we've got about $100 million left.

On our books and when I kind of look at that 700 million. This does as you know I think it's about $225 million 700 to sell excess purchase price accounting.

So the underlying book value of.

The joint ventures, if you know on historical cost basis, those values haven't been.

Much it's just the purchase price.

Excess on.

The accounting of this when we bought it that weve written down, but we still have some of that on our but even after this impairment.

Okay, that's actually quite helpful.

Yes, just can you maybe just one last one just to point to a point of clarification.

But if there was a 27 million impairment in the Alex products Division.

Just curious was that sort of adjusted for in the equity income or not equity comes through the justice for in your segment did.

Operating income it didnt seem like it was but I wasn't sure.

Yeah, it's it's about it we called it doesn't unusual so yes. It's not included our segment margins because our segment margins are at the EBIT line, which include unusuals.

And that the 27.

Relates to the right abuse assets essentially a that are paired as it relates to the ongoing or three programs that we've talked about we just need to impair that asset as well.

Right. Okay. Thanks, Thanks for taking my other questions. Thanks.

Thank you.

Next question comes from the line of Rod Lache with Wolfe Research. Please proceed with your question.

Good morning, everybody.

Just if you can can you clarify what the revenue run rate is for the unconsolidated part of good track.

Is right now what percentage of that business Nowadays is manual or some of these on these challenged segments.

And you mentioned in your remarks that you just completed over a longer term plan what kind of.

Equity income run rate should we be thinking about as realistic there is it more or less than lined with what we're seeing today.

Right So oh.

Our vision.

Equity income.

From.

A couple of sources one.

Try joint ventures, and there's another joint venture it's actually has operations across the globe. So we haven't completed that that's a sizeable joint venture as well.

So.

I don't know what the outcome of that we've got a fair a regular business not process, but when I look at the contract joint ventures.

I would say that.

Our European joint ventures.

It is manual transmission said it produces so when you look at anger transmission take rate they've been coming off so no longer term you'd expect rep revenue is expected to come down which will impact obviously profitability in a negative way in the joint ventures, I I'd say it.

Where we are today in our Chinese operations.

We're seeing revenue kind of flat to growing a bit less some opportunities that we're going after that could potentially revenue.

But I wouldn't count based on our card business by a significant ramp up in equity income coming out of the Chinese joint ventures.

Correct.

Okay.

And on good track God.

Is this settlement with for that that you guys did maybe two or three years ago on the Dps six is that the extent of the liability that magna has.

Associated with that is that issue in the rear view mirror at this point.

Yeah that it's in the rear view mirror and then that was something that was cleared up before we completed acquisition <unk> okay great.

And then.

Could you just clarify maybe what the seating and the power envision margins would have been because it sounds like there there were obviously a number of different.

Impacts there the strike, but there was also a settlement that you are that you called out.

What what would it be adjusted for those.

Kind of unusual items.

If I look at a prioritization.

The.

Eight at the parent vision, our estimate of sales loss was that.

40 to 50 million.

Probably.

Good to assume.

30 basis points impact on profitability from those lost sales.

And I look at.

Commercial settlements and our parent vision segment year over year were negligible I mean, it's the biggest items there are looking through the role here.

Which we talked to that was.

Our.

Hey, guys.

Spending on those three programs, which.

Was pretty significant consists of kind of last quarter, they should spending autotrophic location.

That's a whole saws pluses and minuses really on that segment.

When you look at seating.

Sales impact and CDIM from the GM strike Brown $20 million to $25 million are less than that but 25 basis points on EBIT.

That.

There are being hurt by a bigger impact and then the GM strike was actually higher commodity costs on a year over year basis.

Offset by some.

Commercial settlements I think there as you look a year over year kind of where they were last year, where they are this year, it's a net positive.

The margin in it.

Well that was.

Look at the commercial settlements and the sort of commodity costs in GMV strike pretty well being a wash.

Okay.

<unk>.

And just lastly, any just broad comments on on pricing.

Trends that you're seeing.

In the marketplace at this point it's.

I'm, assuming you're you're you're in the midst of negotiations on on a number of different things looking out to.

Settling up this year as well as looking out to next year.

Oh, there's always negotiations going on I think were relatively settled for this year, we typically we'd be looking at what are the.

Requests and when are we going to do and what are the tradeoffs and what are we going to get awarded for 2020, I'd say generally.

Casing pressure certainly hasn't let up I think there's more pressure on warranty claims, but I think.

No step function.

Worse it just ongoing.

So in negotiations.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Brian Johnson with Barclays. Please proceed with your question.

Hi, yes, good morning. Thanks.

I want to Cook I continue to talk about.

The launch pressures both in seating and then make a gas business I think two questions.

One.

Just.

How comfortable you with the underlying pricing and those sorts of contract.

Seeding.

The business was onboarded.

One large competitor was relatively aggressive.

By their own later admission and pushing the price level of sitting down.

And of course, eight at sweeps either being there unexpected development costs are unbudgeted development costs and ramp up so are you comfortable as the underlying pricing in that second as we look into 2020 are there other launches.

You know keep you up it died in terms of potential for <unk> cost over runs, especially relative how they were initially price.

The let me start with BMW or contract, we've talked about very difficult launch a lot of complexity a lot of things set up.

Change in the product so not it is a it was tight pricing is a new customer wins absent from the beginning and we don't have a lot of value added there, but there is ongoing.

Discussions about pricing quite frankly, because it's been a lot of changes so not comfortable where the prices right now, but we know what would those those are ongoing.

As far as.

New launches we always have.

I don't want the number is 6 billion $8 billion, a replacement and new launches going on with the size of our company. Thank for the most part we're confident not aware of any major launch problems were worried about.

As far as the the contract and the.

Ada Es area, which is a lie dollar we got good we've got a couple of different things were done one is a lie Dar which is a brand new technology, the customer and ourselves both understood. The time it was sort of an R&D, we want to bring it to market, it's proven to be much more difficult much more expensive to get the testing done in the validation.

Not comfortable with the pricing on that.

But we are having extensive discussions with their customers because they really like the product the that big hurdle you had to do is get over the the product validation the development the testing, which is a lot more money. That's what we've been talking about from the that's been hitting us financially, we do like to product they like the product.

So I think the as as you see in the industry I think on Ada Es with these the launches the difficulty getting validation the cost have been higher than it would most people expect and we have ongoing discussions with customers on both how do we.

The development cost the testing costs as well as a piece price.

And just a follow up given the investments on the Ada side do you have made in CIT got very.

Our your customer agreements such that you can we use the IP are generating so as you onboard other Oems you don't have to recreate the wheel.

There are certain extent you can say, there's core affleck core core development work and specific application to it to our product so the core.

Uh huh.

You typically if you develop and new product it and successful in that technology is good and nothing else comes out that's better and the customers like it you can reuse the core because as we call it sort of off the shelf, but there is also quite a bit of work depending on on the the customer.

Specific application I'm not sure Tom if you want to add anything to it at this we could probably type, but this for eight hours, but just wanted me doing any more clarity.

I think you covered it done some other key core platform technologies, something that we would go through and being censored intones. So.

You know whether its testing validation data storage and all could be.

Used for the other pieces.

Specific application pardon.

I mean program relevant I think you covered it.

Okay. Thank you.

Thank you.

Next question comes from the line of then Levine with Credit Suisse. Please proceed with your question.

Hi, good morning, and thanks for taking the question.

Just wanted to start out on on the GM strike sounds like.

Implied you're saying it was call. It 120 825 million dollar EBIT impact.

Sure.

For 2019, so the for the purposes, the folks who are trying to build up the bridge into 2020 should we just look at the 120 825 million dollar hit as a as a full molnar Peter they are there any efficiencies they carry into 2020 and also would ask although not at the base case.

Yes can produce extra units in 2020 with extra overtime.

You have.

The capacity.

But that really efficient manner in a manner that.

To be.

Consistent with the prior GM margin profile.

Yes, a little bit difficult, let me try and answer the to the extent that they've lost volumes, obviously they've lost volumes the.

I'm not going to speak for GM, They can say, what they're going to do but if there was a program that was going up I know they may extended.

For their high volume selling I think they were running full out so they might be able to add some overtime and the releases will let us know what they can do certainly weakened support whatever generated general motors is going to build I would expect to supply community could.

So the when you have to strike, it's an inefficient way because you don't have time planet. One let everybody go you lose you did people. So it's not very efficient but to the extent that those volumes. The vehicles are sold to end consumers General motors will make them up a point in time in 2020, and we get the normal country.

In addition margin if they are running extra shifts over time, you might have some overtime premiums that may not be quite at the margins. We would normally have and regular time, but it's still a good for us if the run the extra volume.

Okay.

But there are no sort of.

Inefficiencies that linger into 2020, otherwise correct.

No I don't see inefficiencies as if they run over time it failed time premiums, but that's not.

That's it great okay.

Thank you and then second just wanted to follow up on on the free cash flow piece and I think you talk to it.

A little bit but.

Well I just want to be very clear is to maintain free cash flow, even though you're putting the net income somewhat and I think capex is maybe a little better is that more so just a function of timing of working capital and how to think that reversing.

In to potentially 2020, and then just more more broadly on top of that.

Just in this period of greater macro uncertainty volatility you do you think this is maybe some you know sign that your free cash, Oklahoma, perhaps a bit more of the goal.

Yeah, Dan it's been just couple of questions. Yeah, just with respect to kind of the drop in yeah earnings and cash flow being maintained I think when you look at the range. We had a range of 1.9 to 2.1 maintained a range, but I'd say that if where we were we thought we were going to be in that range.

We're probably at a tad lower in that range. So obviously there is.

Some impact.

Our targets are still our power them, we're comfortable going to be in there, but probably little less than where we thought we were going to end up in that target.

I think some of the offsets to the reduction in revenue and profitability I think a chunk of probably come from.

Fixed and spending and other assets spending again you know.

We started the year with that's going to be approximately 1.7, what kind out approximately 1.6, I mean look at approximately 1.6 as a 1.6 to five 1.65 or is that 1.575, you know I think when you start on the capital side. When you start booking at 25 or $50 million here little bit on working capital.

Yeah, that's high we're able to maintain that range.

I think as you kind of think about cash flow and.

Our we've been saying for quite some time that there's been a lot of focus on free cash flow generation. This organization. A you know we're pretty disciplined volumes have been coming off a lot from the start of this year as to where we are out how we've been pretty good on free cash flow I think just focusing the organization.

I expect that their cash flow going forward is going to be very healthy.

Great great. Thank you very much.

Thank you.

Next question comes from the line of James Picariello with Keybanc capital markets. Please proceed with your question.

Hey, good morning, guys.

So for a for either spending you've quantified in the past what that incremental spend is.

Which I assume is on track with your prior expectations, but you'd Justin in General terms can you talk about how this year's launch related engineering and testing investment shipped potentially trend over the next few years I mean, I believe you're working on three key programs right now if nothing else hits in the near term in terms of in terms of an additional probe.

I am does this spend ramped down in 2020 and beyond.

Yeah, I think when you look at I guess two components are you guys fan.

We are investing in some core technology and new programs coming on.

Yeah, Yeah, I'd expect that that spending is going to continue as this is a growing segment at the it's an important segment for us. So we're continuing to invest in this area I think in particularly with the three programs that we talked about the additional.

Spending in 19, I think that's going to continue into a 20 and 21 compared to where we thought it was going to be and once these programs ramp up that's going to go away.

No we haven't.

Updated our outlook for 20, or 21 or more or in the middle of business plan on doing so, but I know our team has been working internally and with our customers on trying to look at the engineering testing validation can we do things more efficiently.

I'm hearing some good things in terms of reduce expenditures in the outer years.

But I'm just at this point, it's just too early to talk about that give us a couple more mass as we get through business lines, and we'll give a little bit more clarity in that area I'd say high level, we certainly have.

A lot more knowledge about what's required for some of these really complicated new technologies. So today I would think the we misunderstood.

The costs associated with the these two are really three programs I think we have a much better handle going forward, how we're going to quote.

And we're still in the middle of discussions of the customers on some commercial relief.

So I would hope the numbers would come down depends on how much we win.

Understood. Okay, and then you just so it sounds as though.

You are beginning to supply electric drive systems for a for Vws NBP platform in China.

Based on what's out there can you provide any color on that relationship held.

Volumes are trending well you know what your expectations are regarding then thanks.

Oh, Yeah program has watch yet we're in the Middle watch So I mean, I don't know if you want to add some color to that.

I think you're right, it's not launched yet but from a program perspective, it's proceeding well I should say.

But you get to the volumes and the other part of the answer is we get in and stop producing and going forward. So not much to common didn't come so take rates or anything other than the program is tracking.

Progress as expected.

Hey color around again potential timing or.

The other thing Swami the a and B the product itself is being well received and other people have interest in as well.

Yes, I'm definitely so I think there was.

The other programs on the list and you know the product like you said is being accepted wells.

By the customer that we're working with in terms of specs and validation and performance.

But there's also a interest from other Oems.

Thanks, guys.

[noise].

Thank you.

Minder to register for your question or comment. Please press the one floor on your telephone now. Our next question comes from the line of Armintas Sinkewitz, Yes from Morgan Stanley . Please proceed with your question.

Great to two questions here. One is you talked about the the sale of lift in the third quarter and your you continue to sell shares in the fourth.

Does that have any implications for your relationship you're working relationship with lift.

No just I think they are completely different oh, we continue to work with less.

But the equity investment as a separate and apart from that.

Okay, and then one of your peers discuss the.

The changeover is related to the F 150 in the Ram.

As as it relates to their forward guidance.

How are you thinking about that you know into 2020.

I think it's a meaningful impact on us.

Hi.

Right.

And it doesn't take the round margins or anything of that nature, just you know.

Yes.

None of them as a very significant program for us.

There's a significant.

Yeah like relative to I mean, more average or below average content for us.

Okay.

Okay appreciate it.

Thank you.

There are no further questions at this time I'll now turn the call back to Don Walker, Chief Executive Officer. Please continue with your presentation or closing remarks.

Okay. Thanks, everybody for dialing in Ah, Thanks, Vince or go into this was a very noisy quarter. So hopefully a he was adequately explain it we can answer any questions. You have a there's certainly lots of puts and takes in including the GM strike.

Some of the same factors going to make Q4, it a little bit noisy as well, but we'll continue to work through the challenging environment and as well as a launch is impacting our b E segment, but overall everything consider I thought it was a.

Reasonably.

Recently, what we expected, but there's certainly lots going on so thanks for calling in and they have a good day everybody bye.

Thank you that does conclude the conference call for today, we thank you for your participation and I'd say you. Please disconnect your lines.