Q4 2019 Earnings Call

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Greetings and welcome to the fourth quarter and year end 2019 results. During the presentation. All participants will be not listen only mode. Afterwards, we will conduct a question answer session at that.

Hi, My question. Please press Star one followed by the four on your telephone.

If at any time during the conference you need to reach an operator. Please press star Zero as a reminder, this conference is being recorded Friday February 21st 2020, I would now like turn call over to Louis Tonelli, Vice President Investor Relations. Please go ahead Sir.

Thanks, Sylvana, Hello, everyone and welcome to our fourth quarter and year end 2019 conference call.

Well, how formal comments today from dawn walk or that's going to defeat.

Joining us say, our Swami quota, Gary as well as Eric Goldstein, and Jim Florals from our IR team.

Yesterday, our board of directors met an approved our financial results for the fourth quarter a year ended December 31st 2019.

We issued a press release this morning for the quarter.

You'll find the press release today's conference call webcast. The slide presentation to go along with the call and our updated quarterly financial review only Investor Relations section of our website at Mac the dot com.

Before we get started just as a reminder, discussions today may contain forward looking information or forward looking statements within the meaning of applicable securities legislation.

Such statements involve certain risks assumptions and uncertainties, which may cause the companys actual 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 disclaimer.

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

We had included in the appendix reconciliations of certain key financial statement lines for Q4, 19, and Q4 18 between reported result and results excluding unusual items.

Our quarterly earnings discussion today excludes the impact of unusual items.

Please also 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 in 2019, we adopted a new lease accounting standard that replaced previous lease guidance under GAAP.

The most significant impact at the standard on our financials, what's the recognition of approximately 1.8 billion in right. If you assets at lease liabilities for operating leases.

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

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

Now I'll pass the call over to dawn.

Thanks, Louis Good morning, everyone.

We faced a number of challenges in 2019 global vehicle production declined 4%.

Driven by 6% lower production in China, North America down 4% due in part to a labor strike General Motors that impacted Q3 in Q4, and Europe down 3% each compared to 2018.

A stronger U.S. dollar drove a currency headwind of $1.3 billion to our sales.

And commodity costs, including lower scrap metal recoveries negatively impacted us.

We also incurred significantly higher and planed engineering and other costs in our eight AST business substantially associated with three programs that will be utilizing new technologies.

Despite some of these factors there were a number of pardon positives for make that they came out of 2019.

Once again, we grew our organic sales faster than global vehicle production was complete vehicles power invasion, and seeding all far outpacing production and body and exteriors. The second with the highest exposure to GM coming in line with gold production.

On a consolidated basis organic sales grew 2% versus the 4% decline in global production.

We posted record free cash flow generation of $2.3 billion bar eclipsing our previous record set last year at 1.6 billion.

We invested $2 billion in our business in the form of fixed assets other assets and acquisitions.

We returned 1.7 billion to shareholders through share repurchases in dividends.

We continue to invest in research and development for electrification and autonomy among other areas in order to further position us for the future.

Despite the significant investments in that business the return of capital to shareholders. Our balance sheet remains very strong, which we see as a competitive advantage.

We were awarded the largest production order for transmissions in our history I production contract from BMW for dual clutch transmissions, including hybrid variants for their front wheel drive platform, representing 170 different vehicle applications.

Lastly, our board once again increased our quarterly dividend by 10% to 40 cents, reflecting continued confidence in Magnus future.

This represents the 11th consecutive annual increase in or dividend.

As we outlined in January we see some macroeconomic challenges this year with lower expected production in Europe, and a stronger average U.S. dollar against certain key conns currencies compared to 2019.

In addition, we expect some impacts from coal that 19, however, I'm confident that we are positioned for further growth in sales margins earnings and cash flow in the years ahead, we plan to demonstrate this to you at our Investor day in on February 27th in Toronto, I hope, you'll be able to join.

Or listen to the web cast with that I'll pass the call over events.

Thanks, Don and good morning, everyone.

Overall, we were fairly pleased with our Q4 results as our consolidated sales and adjusted EBIT. We're ahead of our internal expectations.

However, as Don mentioned, the G.M. strike continued into the fourth quarter and this contributed to lower sales and earnings compared to the fourth quarter of 2018.

Although the impact of the strike were largely in line with our expectations coming into the quarter.

Some of the key details of the quarter included our consolidated organic sales declining 3%.

Mobile light vehicle production was essentially level.

Waited for Magnus sales by region, if a production declined 5%.

This was due to production in North America, and Europe, our two most significant markets declining 7% at 3% respectively.

The large decline in North America was in part due to the G.M. strike.

We returned 365 million to shareholders in the quarter through dividends and share buybacks.

We generated 1.1 billion and free cash flow well ahead of our expectations coming into the quarter and our board approved at 10% increase in our quarterly dividends.

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

Our consolidated sales were 9.4 billion a decline of 7% from the fourth quarter of 28.

Our sales in the fourth quarter of 2019 were negatively impacted by among other factors lower production in North America, and Europe, the divestiture of our EFT PNC business in the first quarter of 29 chain and currency translation.

Excluding the divestiture of that PNC netted the acquisitions of all south and visa.

We which reduced sales by 276 million.

Currency translation, which was 130 million headwinds.

Organic sales declined 3% year over year.

As expected our adjusted EBIT margin was lower compared to last year.

Reported 6.3% in fourth quarter 2019.

From 7.2% in Q4 of 2018.

80 basis points at this decline related to lower margins in our parent addition segment.

50 basis points body, Sears and structures.

30 basis points was due to lower seating margins.

These were offset by 40 basis points of improvement driven by complete vehicles at 30 basis points of improvement due to higher profit and corporate.

And of course, the GM strikes mechanic contributed to the lower margins for yes carbon vision seeding.

I will get into the specific of these margin changes in the segment review.

Adjusted EBIT decreased to 590 million from 730 million largely reflecting the G.M. strike higher engineering cost in our eight us business higher warranty cost that foreign exchange losses, or scrap metal recoveries and higher commodity costs.

These were partially offset by higher net coal commercial items lower incentive compensation and increased earnings incomplete vehicles.

Equity income was largely in line with last year at up 21 million from the prior quarter, mainly due to lower depreciation and amortization related to fair value increments. As a result, Q3 2019 impairment of our investments in contracts joint ventures.

Excluding equity income our EBIT margin declined to 5.7% in Q4 of 19.

Versus 6.6% in Q4 of 28.

Our effective income tax rate was 23.3%.

Relatively in line with our full year 2019 tax rate.

Net income attributable to Magnum was 433 million compared to 542 million in Q4, 2018, reflecting lower EBIT and higher tax rate.

Partially offset by lower interest expense and minority interest.

Diluted EPS was $1.41 for the quarter compared to $1.63 last year.

The decline of 22 cents reflects the lower net income.

Partially offset by 8% fewer shares outstanding.

Now for our segments.

Body, Sears and structure sales were 3.9 building a fourth quarter down 6% from 4.2 billion a year ago.

This reflects the client and vehicle production in North America, including from the GM strike and in Europe.

Enter production of certain programs, including Chevy Cruze.

The negative impact from foreign currency translation of 33 million and net customer price concessions.

These were partially offset by new program launches.

Segments organic sales change with both <unk> global vehicle production, but in line on a weighted basis.

Body, Ics yours and structures EBIT decreased by 67 million in Q4 of 19 compared to the fourth quarter 2018.

Margins fell by 110 basis points to 7.4% in the fourth quarter.

This was primarily due to the after the GM strike.

Lower scrap metal recoveries higher net warranty on launch costs and lower foreign exchange gains.

These were partially offset by.

Inefficiencies during 2018 at a plant, we close in 2019 and productivity and efficiency improvements, including certain underperforming facilities.

Parent vision segment sales decreased $262 million or 9% to 2.7 billion from 3 billion last year.

This primarily reflects net divestitures of 319 million.

Declines in vehicle production in North America, including from the GM strike.

And in Europe, a 48 million negative impact from foreign currency translation and that customer price concessions.

Organic sales increased 4% year over year outpacing global vehicle production and in particular outpacing weighted global production, which was down 5%.

This was driven by new program launches and further increased DCT sales from our European transmissions business.

Our envision EBIT was lower by 91 million and EBIT margin decreased to 6% compared to 8.5% fourth quarter of 2018.

Lower EBIT percentage, primarily reflects higher engineering cost in our Ada Es business substantially associated with three programs that weve that will be utilizing new technologies, the GM strike and higher net warranty costs.

These were partly offset by the divestiture.

C, which ran at margins below segment average at higher net favorable commercial items.

Excluding equity income EBIT margin fell to 4% from 6.6% 2018.

Ceding sales were 1.4 billion down 1% from the fourth quarter of last year as result of supplies and production in North America.

During the GM strike and in Europe.

Enter production of certain programs, including the Chevy Cruze 15 million negative swing in foreign currency translation and net customer price concessions.

These were partially offset by the launch of new programs and the acquisition of visa.

Seating organic sales declined 3% outpacing weighted weighted vehicle production.

Seating EBIT decreased by 31 million to 79 million for the quarter, while EBIT margins dropped by 220 basis points to 5.5% from 7.7% in 2018.

This reduction reflects foreign exchange losses in Q4 of 19 compared to gains in 2018 launch an operational efficiencies at new facility higher commodity launch and that warranty costs and the GMV strike.

These were partially offset by increased equity income.

Lastly.

Fleet vehicle sales were down 226 million or 13% from last year to 1.5 billion.

This was primarily due to lower volumes on the Jaguar I pace and BMW five series and a 46 million negative impacts from foreign currency translation.

Partially offset by the launch of enjoy Toyota Super up and BMW that far as well as improved mix.

Organic sales declined by 11% from last year as assembly volumes declined 7% to approximately 34000 units.

Complete vehicles EBIT increased by 20 million compared to the fourth quarter of 2018.

EBIT margin increased 160 basis points to 3% in Q4 of 19, primarily due to earnings on higher sales of certain vehicles and reduced launch cost and efficiencies.

Partially offset by restructuring and downsizing cost incurred in 2019.

Let me look at our cash flows and investment activities now.

During the fourth quarter of 19, we generated 1.7 billion cash from operations compared to 1.6 billion fourth quarter of 2018.

Investment activities amounted to 635 million, including $513 million in fixed assets at a 122 million increase in investments.

Other assets and intangibles.

Free cash flow was 1.1 billion in the fourth quarter.

Better than expected, mainly due to higher than anticipated Q4 earnings.

Lower fixed assets spending and working capital being better than anticipated by about $200 million.

Keep in mind that we were expecting the 200 million Q1, 2020, so our 2020 free cash flow outlook will be lower by this amount.

For 2019, we generated a record free cash flow of 2.3 billion compared to the 1.9 to 2.1 billion range that we anticipated at the start fourth quarter.

We returned 365 going to shareholders in the quarter through that repurchased 254 million of our stock representing 4.7 million shares as well as of payment of 111 million in dividends.

For the year.

We repurchased 25.8 million shares for 1.3 billion and pay dividends of 449 million.

Our adjusted debt to adjusted EBITDA is 1.21, providing continued balance sheet flexibility.

We announced today that our board approved a 10% increase in our quarterly dividend to 40 cents. This represents the 11th consecutive year of dividend increases, reflecting our continued earnings and balance sheet strength as well as management in the boards confidence in our future.

Turning to our outlook.

We have only make one change to what we provided last month on our outlook call as I noted earlier due the timing due to the timing of some working capital. We now expect between 1.4 and 1.6 billion free cash flow in 2020 compared to the 1.6 to 1.8 billion that we communicated in Chang.

Okay.

We continue to believe we will generate approximately 5.5 billion and free cash flow in the 2020 to 2022 timeframe.

We indicated in our press release that we have not including any adjustment to our outlook related to covert 19.

As it is difficult to assess its genpact.

However, our outlook reflects average quarterly consolidated sales in China in the 400 500 million dollar range at approximately 20% of our equity income outlook range as expected from China.

To the extent of production has disrupted our results will be impacted however, it is difficult to quantify at this time.

Thanks for attention this morning.

Place to answer your question.

Question.

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Question.

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

Good morning, guys. Just the first question on body Eurs and structures.

Given your your content on GM trucks in the downtime around the strike the already kind of would've expected there might be a slightly larger hit what you saw so I'm just curious if there's something else going on.

Or the the positives, which is much greater than what seems to be.

So what you're alluding to in the slide it just seems like you performed very well in a very tough time, you have tremendous content on those trucks. It just it just seems like you outperform in big ways or something else going on here, where there was production still going on you are getting paid for frames and other parts or something like that.

Yes, good morning, John expense.

Yes, when I look at our.

Research and structures group.

Sales were impacted by both.

225 million.

I too.

On the margins about 120 basis points.

So that was the most significant impact.

Kind of look at what's happening in the quarter year over year.

Some of the negatives have been.

As we talked to that throughout the year.

As lower revenue on scrap metals, which was a negative year over year, a little bit higher warranty.

Some additional launch costs.

Some transactional FX.

Some of the sort of.

Positives.

With that come out is one as.

Got it division.

Last year Q4, and less now gone so we've seen some positive impact profitability as a result of that.

We do have some incremental sales is trying to get backup.

The impact of General Motors.

And on incremental sales fall through us.

At this level of kind of when you add pluses and minuses.

With that.

Q4 of at 7.4% EBIT margin.

But there isn't anything in there John that center.

Unusual when it just normal operating results for ER scripts for the quarter.

Got it was impressive but just the second question on the eight adds investment I mean, it sounds like the investment is for three programs specifically I'm just curious if any of this will be leveraged for future programs in the headwinds would fade in 2020 or maybe even beyond.

First step up investments.

I think when you look at that spending that we're doing and in various business I'd kind of in my mind record data to sort of three categories.

One we've been talking invest in overspending on on three programs.

Launch in Europe utilizing technologies.

And as we continue to work on those were certainly developing.

Some capabilities and technology capabilities, we're learning from that so we expect to leverage that going forward.

Our new programs.

The second a chunk of.

When I think about our engineering Stan.

His application engineering programs that are going to wrap up so we've got to business and just like any other business, you've got to startup costs and nurses that generic so.

As that business ramps up costs will local down.

As we continue to win business will have other engineering spend but thats a good thing.

The third chopped up of.

Our engineering relates to.

I think about is developing our our core capabilities.

Across the board.

In autonomy.

Hey, that's driving features and like we've been doing in the past, we leveraged that core capability for program Awards.

So as.

We go forward at sales increase.

If we look out over the next couple of years aid us overspending as as program. So that is going to go away.

Core spending.

We're seeing a little bit of growth and corresponding over the next couple of years.

As expected as a business is strong and application engineering is getting a function of the business Awards.

Okay and vintages lastly on seeding.

Similar to be pretty good performance in the quarter all things considered.

Joke, describing upper sand versus I think youre, my 7% last year or on your margins. Just curious where are you seeing comedian and maybe forget about 2020, but where do you think sort of been normalized margins are in that in that group and then also as we think about what's going on with BMW VW Dialer is there a share.

Maybe either share gain opportunity here for you.

Outsourcing and maybe even gaining share from some of your competitors trying to dimension, what's going on BMW, specifically, but also with VW dialer on the seating sites. It does seem like there's real opportunities for organic growth there.

Onto the very first part of your question I'll have either dawn sort of deal with the second part.

With respect to kind of overall margins.

In the fourth quarter.

Yes, we did benefit from higher equity income and we expect that that continue to grow it as a result.

And our joint venture operations, and we don't consolidate.

As I look at 21, and 22 and beyond as we get by the.

The watch some of the inefficiencies.

On the BMW program, and so are the United States.

We'll see.

Overall margins.

But.

In addition margins continue to grow.

But if you go back to where we weren't 18, John It and look at art and where we were in 18, and where we think we're going to be entwined Dave.

I'd like we're going to guide to the same level over that three year period and.

To that is somebody BMW or programs that we've talked about national increase sales.

But we will have a lot of value add and we're purchasing a lot of the components. So it's on lower margin business.

Return on capital that.

Impact negatively the reported margins.

But as we get beyond that and.

Our able to vertically integrate more and more of the components I don't see any reason why margins can start to creep up 200, we're kind of a C 17 18 level.

Yes, I'll add to that is done here.

Just said to the extent, we do more.

Value added that will impact the margins for sure from the return on invested capital just what we typically look at the more we do in the metals business. The margins would go up a return on invested capital.

As a bit more challenging there, but I think there's going be opportunities based on what's happening in the market with some of our competitors as far as winning more business that we are.

We have won business and we're continuing to launch business with BMW, We don't make sure we're getting a reasonable returns.

I wouldn't comment specifically on on other customers, BMW or or Daimler, sorry, BW or damage.

But I do think theres opportunities for our seeding group to continue to grow were smaller player relative to the into some others are out there and that we got a good reputation. So I would expect the seed business does have opportunities to continue to grow.

With that roughly two markets, where we're we're relatively small in seating.

Yes is it fair to say, though that some of this may be street outsourcing from the Germans in some of it might be share gains from competitors and me, it's kind of seems like it might be combos that is that a fair statement.

Well I think there's opportunities in both of those is.

Hard to tell to the extent that.

Our customers will continue to outsource seedings, a pretty core product for them, but I think in general if you look at what's going on in the industry and the.

The margin pressure that our customers are facing based on what they have to do.

For the electrification of the powertrain as well as amended money, they're spending on autonomous driving and have been hit some of the regulatory requirements for fuel economy. I think everybody is taking a real hard look at how do they get their costs down.

And in some cases through outsourcing they can get lower cost. So I don't know what their end result is going to be but I think your comment there's there's opportunities in both those areas.

Great. Thank you very much.

Our next question comes from the line Thats, Peter Sklar with BMO capital markets. Please proceed with your question.

Hi, good morning on the three eight asked programs.

I believe you mentioned before that all of this elevated costs level is you know preproduction engineering parks. So.

I would add I would expect you think that these costs are going to come down substantially as you get into launch so could you maybe review the app.

The launch schedule for these three programs and when you expect these costs to peak and kind of how the cost changes we move forward.

Yes, Peter good morning theaters fence.

These programs.

Start to go into production in late Twentys Juan.

So we'll continue to.

Status and pre production cost that up until that point in time.

But even when you think of that where we were 19 and where we are.

20.

We're expecting a margin improvement.

20 versus chain that we talked about our January call.

Just to go back to what we talked about is just see lower spending on.

Those three programs.

2020 should add about 70 basis points.

To the power efficient segments in 2020 versus 2019.

That translates to about a 20 basis point improvement and Magnus overall margins.

So as we get to 20, why those costs start to ramp down.

The other opportunity Peter as you guys, we continue to work.

Certainly and with their customers and trying to do things more efficiently.

Please.

Recover some additional revenue from our customers while to take a took out some of the additional spending we've incurred.

That brings the March or move up that margin improvement year over year.

Yes, just to add to that Im not sure. So if you have anything that or not but Peter on these programs.

Safe to say, we've talked about it before what we what we thought we had to do in the scope of the project was more than we anticipated and based on the extra work we were caught with happened outsource trying to find people.

So I will repeat all vinces comments I think year over year, we should certainly be getting better I'm more comfortable even though there's still some challenges here that we've got much better handle on it and the customer also understands.

Collectively with us somewhat some of the challenges are we don't think it's surprising because it a lot of people seem to go through these these are very challenging programs, but overall, we talked but maybe a bit more about this in our investor day, we've been able to attract and build our team up specifically development software people in may.

Most of the work on this is up front loaded because we've got to get to the testing the validation of the of the components well before production. So I think we're over the hump, but theres still challenging programs and as you can see in Q4, we still over where spent what we expected to.

Okay and.

Moving to the.

The lift joint venture.

When does so when does that venture start to wind down and when do the associated cost.

Come down along with that.

Thanks.

I think.

Peter that it winds out at the end of actually already well down.

And then last year.

So were assay.

Reduction in our spending on flat.

Q wise.

2020.

No again, when you look at that.

The impact on overall margins 20 versus 19 apart division.

That should help margins in 2020 by about 50 basis points in that segment.

Yes, the magna level thats going to translate to about a 50 basis points improvement year over year.

Okay.

So it's safe to say then.

Like the with with the wind down of the.

Of the joint venture in the three.

Adas programs.

Those are going to be accumulatively, those are going to be at a tail a tailwind for margin in 2020, I think is what you're saying, yes, that's right Peter but.

When I.

When I look at some of the.

So again, we talked about the size on the junior call but.

Look at.

Our engineering side on.

Electrification autonomy.

These three programs and lab.

Spending is expected to increase a little bit between 20 and 1920 22019.

Just reflects our business activity.

Yes, Peter just just for clarification, what we had was a partnership with Lyft and we anticipate so it wasn't a formal joint venture when we were when we started off we had talked about what we want to accomplish in that I won't go through it all through some questions. We go through a more in Investor day.

We had said, let's review, where we were two years into the program. So I think what we had done with lift is actually pretty successful we learned a lot. We still have a good working relationship with them, but what we've said earlier was.

Were two and half your smarter now.

Where the market is going to go and it became pretty clear to us at the the sensors required for.

Level for.

Level five I guess.

Driving in what companies like lift need are substantially different media specifications from one or other customers needed in l. to L. Three so we're re diverting that the money we're spending there into other core products that we want to develop for level two level three I still believe that level for that.

He is going to come I think it's further out than people had anticipated well. We've been we knew is further out I think that's we were projecting.

But im not sure would the volumes will be when it comes to market. So we've just reassess where we want to spend the money, where we think we're going to get a return.

But I do think the the exposure in understanding what's going on in that market and where things are going with mobility as a service.

There is still going to be some very interesting business models coming up in that space in my opinion. So we're continuing to watch it but we don't want to be expensing, our engineering on on the components. There we want to do more in LTL freight.

Okay, Peter just too just to refresh your memory on power vision that we ended the year at.

6.6% margin our expectation for 2020 as between seven nine and Athree now no the that spending coming down and the spending is clearly a big part of it but there's a couple of other items in there. So we have made nice expansion margin expansion.

Planned and power Division.

Okay, and then just lastly.

As I recall.

When you provided your initial outlook.

For 2020, when you're looking at anticipated European production volumes, you did take into account the new emission regulations and the potential impact that that could have on volumes and.

Now that were couple of months later I'm just wondering if any read throughs you can talk about regarding the new emission regulations and I like how is that impacting volumes volumes and mix and have you changed your outlook at all.

For the impact that that's going to flow through down into Magna.

Yes, Peter.

Good luck to act.

Our our outlook, which which remains unchanged, we looked at north American and European volumes.

Based on.

Early indications there was no reason to change our assumptions in Europe, but let me remind you Peter.

What's built into our outlook for Europe.

First half.

2020 versus.

First happens when 19.

Got it.

6% reduction.

So again the second half.

A little bit of improvement over the second half 2019.

Well.

I think part of that is.

Some of the new requirements coming into Europe, but should our expectations get out of that definitely.

Overall volume assumptions in Europe for Twentytwenty.

And is the mix coming out any different than you anticipated in Europe or is it too early to tell.

Peter its.

Too early to tell at this point.

Okay.

Thanks, so much for your comments.

Our next question comes from the line of Roger Lash with Wolfe Research. Please proceed with your question.

Good morning, everybody I was just first of all hoping to follow up on on Peter's question on on Europe.

I think we all continued to hear about Oems reeling from pressure.

Related to this two rigs there.

You know you made some comments on on production volumes, but have you observed any specific signs of changing behavior there.

Obviously, there you've got time or cutting its dividend and a lot of companies talking about pressure, but just fees would be that relationship with magna.

What are you hearing along those lines.

Yes, all a couple of comments.

Thank you publish this could be a longer discussion I think given the pressures generally concerning season in Europe.

With the new regulation in potential fines et cetera, et cetera, which I think everybody understands was in the industry. There's no.

Note that there's going to be margin pressure on the customers, especially if they have to be selling vehicles or deploying more money into electrification powertrain and then selling those vehicles that potentially lower margins and nobody really knows with the demand is so from our perspective, we are very carefully look at where we think the actual.

Production or the actual selling will be of those vehicles. When you put on programs, but from a customer standpoint everybody's looking to.

Save money, including the the supply base wherever we can you obviously is to look at that is can they spend less on.

Upfront programs, you see more cooperation in that area amongst the Oems and we've been than we've ever seen before and it makes sense, because if you're going to be designing something rather than everybody do their own their own testing and get lower volumes ended the extent they can commonize engineering and production.

They get lower prices from the supply base in the going up the redevelop everything so we're definitely seeing that.

I'm sure, they're all looking at their internal cost to reduce overheads and they are going to be looking to the supply base to reduce cost but.

If you Didnt debts goes through cycles, I mean in the business for a long time ended the one of the reason we've been focused so heavily on world class manufacturing as we call. It internally is to make sure we are as competitive as possible.

So if somebody wants a lower priced and what we were trying to approach. It is well, let's figure out how to other design the the product or the manufacturing process more efficiently because we don't want to take it out of our margin.

As long as we are competitive than we understand their costs, well and explaining the customer work through it and that's the best way for us to not have our margins.

In the second area is coming up with innovative products, where you can either reduce weight or.

Or we increased efficiencies et cetera, so that it helps them meet their targets, but we're still going to have to get our expected return on invested capital keep our margins up so I I would suspect that if volumes go down.

In the pressures continue that we're going to continue to see.

Pressure from our customers to give more competitive prices, but it's not the when say to drastically different I think it will continue.

But it's sort of always been not wait and when they're making great margins are still pushing as hard as we possibly can a good negotiators and we just have to understand their cost and and make sure. We protect margins. We've never tried to go for growth for the sake of growth. We've got we want to hit our targets and it will take on business that way I do think given all this it just means yours.

No, there's probably some pressure, but theres huge opportunities here for people with innovative products and who are competitive to continue to grow because we I think we can be pretty competitive company units that shows, but because we keep on increasing our content.

Thanks, Thank you and just my second question is.

You talked about your balance sheet is an advantage and provides obviously a lot of flexibility for you could you just give us what your current thinking as on acquisitions, obviously, the equity markets or are.

Super focused on growth assets like you know things that are focused on electrification or automation, but potentially some of the best values are going to be traditional powertrain and driveline assets do you.

You know from from magnets perspective view, those as compelling options based on the value or synergies or or less technical risk or are you primarily focusing on.

On some of the other technologies that that might.

Position you better into the long term future.

You're right, we do have the ability based on our balance sheet and our cash flow generation to make acquisitions. A thank you know as well and that that were not to make an acquisition does for the sake and growth is going out to make sense. The first thing. We look at is aligned with their product strategy, but I think we're open to either one of them quite frankly.

When you look at that buying something.

That it wouldn't be relatively inexpensive for the for the EBITDA, you're buying especially if we could take out overheads, we can run and more efficiency efficiently or offset capital or utilize assets a better. If we had a bigger base. Then we will look at that and we continue to look at Oxford.

Introduced into your right some of the value seems to be pretty good the I did.

Offset to that is if we're buying a business that theres not.

If it's flat sales, it's one thing, but if we think it's going to be declining over a reasonably short period of time for the next five to six years, we are very conscious of restructuring costs in heavy lift in that area. So would be cautious what we buy but I do think theres going to be some pretty interesting opportunities as long as.

Isn't that product areas that we were already in or as far as gross.

We have made some acquisitions the pass we're still very interested in the in what we did everybody talks about the growing area. We are looking at mobility as a service with the opportunities are there as well so we're we're.

We are open to both.

Ideally want to get into new technologies, and that's typically what we're looking at from buying new startup technologies and and integrating them in.

As a tier one we're open to all our options to the extent, we find something goodwill by that if we can't will this return chair.

Turning to shareholders through buybacks.

Great. Thank thank you.

Our next question comes from the line of Dan Levy with Credit Suisse. Please proceed.

Hi, good morning, Thanks for taking questions.

First off.

Wanted to start off on on the Corona buyers piece and I realize there's just a great deal of and uncertainty, but I'm wondering if there's any way to maybe frame that the downside.

Risk Corona virus.

A magnet specifically I know you've had some impairments and.

Some of the reduced equity income guide.

It's coming from China, but is there any way to maybe think of what decremental margins might look like or just what.

Some band of sensitivity might be.

Obviously excess supply chain piece of course, which is tougher, but any way to potentially sense applied this and you can have a band what the potential outcomes might be.

Most of those events when in jumping afterwards.

I don't know how to answer that but.

You might be able to I think if you look at that the impact of the virus a lot of our plants are back up and running at least to a certain extent a lot of the customers my answer up and running.

Uh huh.

The impact that will ultimately have on vehicle sales in China I'm sure. It's can have some short term, but is people go and buy vehicles, if they were planning to anyway.

Anybody's guess I would assume they would I'm sure there's going to be some short term impact over there. It looks like the government is rightly so is focused on.

And I don't know the priorities would be let's get the health system backup it's got the food supply back up and running.

But they have their decision, making some pretty good headway in allowing in encouraging plants to get back up and running well, let's see other transportation system works over there we are relatively small in China.

Uh huh.

So the biggest.

Thing that I'm interested in quite frankly is is there.

Production holes in the shipments are coming back to Europe, and North America, because typically things are shipped on on boats I know where customers are all looking at their supply chain to find out what impact it might have.

What are the critical parts what are the critical programs you want to keep running they can airfreight things that they have to if there is a whole coming through from the from the shipping so it's too early to tell.

It's anybody's guess or breeze tracking what's happening with the progress that would hopefully they get this contained.

But it's a very sophisticated industry and our customers are pretty severe skews. It they've all been asking us what what impact might happen in reais using their their best guess is doing plants come up and running so too early to tell but with the long term I'm relatively encourage that we see a lot of the plants coming back up and hopeful.

We can get everybody will get people focused on on the critical parts that are flowing outside of China, and hopefully China comes back up again, but as far as answering the question on the looser Vince I don't know we know we can doesn't want to buy.

Let me just add some some some additional comments.

And with respect to decremental margins.

Yes, it's really tough to kind of think about what the impacts were first got understand what the impact on sales. So you'll see decremental margins and are they going to be additional costs incurred for running plants and officially because we don't have all our people there.

It is too early to tell our plants have been resuming operations, albeit at lower utilization levels up we'll get a better feel as we get that.

Q1.

That's part of your question there this is.

Does have an impact on an impairment.

I don't think so Dan.

This is a temporary in nature.

Industrial give back as you know this this virus goes away I expected.

On that.

Production is going to go back to where it would event. So should have absolutely no impact on how we look at long term value of the assets that we have in China today.

Great. Thanks, and then just the second.

I wanted to follow up on rods.

Line of question on.

M&A in specifically.

Obviously, we've seen some we're seeing some consolidation in the powertrain arena, if I recall correctly. So youre you drive units.

The make versus buy for you on the sub components on the motor and the power electronics.

As mixed.

Technology standpoint is it your view that fully in sourcing these components isn't an advantage or.

Would you potentially look to bring more capabilities in house and that ultimately something that.

It could make you provide you with the technologically.

At or better off.

So.

This is why me I've been good question in terms of looking at.

He drives generally is a.

Key building blocks that come together and as you rightly mentioned power electronics in the machine or two of those keep building blocks.

In the programs that we talked about previously.

We have done that on the platform perspective and design.

The you machine.

And some of the key components have been Inferno to Magnum.

But we kind of look at it from that perspective of the possible by capability.

In the machine looking at comp or looking at reader rabbit.

Where there's an advantage.

Great to mix. So looking at that works is the design technology capabilities. So they design piece will create and Hollywood interfaces with the rest of the system is integral inside magna.

Looking at the component by either mix, but like Don said, we'll continue to see what makes sense as an overall system.

Thanks, if I could just squeeze one more in just a housekeeping you had $15 million.

Positive EBIT in corporate other and I think you mentioned this relates to asset utilization, but just provide us with more color on what this is how things that in future quarters.

Yeah sure Dan.

Yes, we did report $15 million positive EBIT in our corporate segment.

There's a couple of.

Significant I'd be I'm, sorry go Guy if that make up the $15 million not a big number but first of all its a reduced incentive compensation.

Profits are down.

Q4 versus Q4 have been down for the year. So that has a direct impact on overall incentive compensation.

Across the board.

Second is really noise and corporate segment.

Sometimes as positive subtype negative and it relates to accounting for deferred taxes, and Mexico, where our functional currency.

As you us dollars, but our local currencies as pesos and you start to read re value the deferred tax assets and liabilities on the balance sheet and we did it this quarter and it created some income for us. So those are the the private pay system pluses and minuses elsewhere, but those are the two most of it.

Second pieces that.

Attributed to that $15 million a positive EBIT in the corporate segment.

Great. Thank you.

Hi, Dan just so it's going to add one thing to its Rami said, we're going to give an investor we haven't investor day on the 27, if we're going to be giving more more clarity and probably be able to get it today in more detail as our strategy, what we want to make what we want to buy what we want to design in the electrification of the powertrain I think one high level comment.

It's I think it's been recognized by the industry the industry being more tier ones that it's very expensive for everybody to do everything on their own. So you see more because probably see more acquisitions in.

More importantly, going to see more cooperation agreements I think because there's just a lot of people all going after the same business and I think it can be more efficient rather than everybody redesigning to do cooperation agreements acquisitions joint ventures. So.

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We will talk more about what our strategy is a but I think you can expect to see more fancy consolidation of some form in the players in this industry just to get the efficiencies up in the pricing down for our customers.

Thank you.

As a reminder to register for your question. Please press the one followed by the four.

And our next question comes from the line to change Picariello with Keybanc. Please proceed with your question.

Hey, good morning, guys. So you're a you're clearly lowering the aid us engineering component to your spend in 2020.

You account for the lift termination benefit you I believe there's still a an implied ramp in your electrification investments.

Just wondering can you speak some key programs you're most excited about on this front im afraid us we have this this clean framework of three programs that start production late 2021, I know the exercise is not as easy on electrified potion front, but you just would be curious if you had some key promo programs in mind and maybe you have a similar launch curve to your aid us visibility.

It doesn't let me start with kind of just that clarifying sort of expenditures. Maybe you are sort of can deal with the second part of that.

You know when I look at overall spending on paid us.

Electrification, our parent vision segment.

Between 19 and 20 overall.

We're expecting spending to come down, but again, just three components to this.

First part is just left.

Is this going away so that reduces our our expenses and we talked about the our talked earlier about the three programs of the new technologies.

And the engineering spend on that is coming down as we're moving closer to the watch.

Having said that our spending elsewhere and electrification and autonomy is actually moving up slightly between 2020 and 29 team. So can you bucket it altogether, it's coming down.

Excluding that less than the other too the other components actually spending is increasing and 20 versus 19.

Yeah, and I think Rins back your comments when we talk about the three program. The three programs have been discussed here because the doors brand and the scope of the programs. So we have been giving updates on that.

But the normal course of business continues you know in terms of getting new programs, both in North America in Europe and elsewhere.

I think dropping back to Vinces comments in the in the beginning.

The focus on the core or platform ingenuity continues our rich copes.

Leverage and optimize our application spending as we continue to run programs.

In electrification, we look at the building blocks.

You know perspective, which is again platforms, we talked about the programs that are launching.

In the re W program that we've talked about on the driver.

They brought the transmission program, although we say to transmission part of creative hybrid and B.

Piece of electrification there in terms of the hybrid Williams.

So we also talked about a.

Another North American OEM program in China for electrification so.

We see continued progress and we were able to efficiency leverage.

The core as well as the lessons learned from the application.

Hi, James one last comment.

We'll get into more detail in good when you get your Investor day, but we've been pretty careful on because I don't really know what the penetration rates are going to be for the electric vehicles, it's definitely going to be growing but we've been pretty careful do try not to take on too. Many programs. We're doing it as Swami says more due to develop the.

We are actually ability to building blocks and as we as we move further along to see what the actual volumes to be than we know better how to quote the pieces of it so everybody's been sharpening your pencil to get the business. So Bolton the Adas space as well as the last patient power.

And we want to be fairly selective because at the end of the day. There was a balance sheet, how fast are going to grow and keeping the margins up. So we've done the das area were very strong and cameras. We are trying to bring their new radar technology and also.

We've invested into one light our program, which has been very expensive.

But we also think it's one of the better long term solution. So we're pretty selective and how that would take notice we don't grow.

So fast that were just burning cash.

Got it makes it makes sense very helpful. And then just one more housekeeping item on for the equity income it sounds like in the quarter. There was a benefit tied to lower depreciation amortization. So was that onetime related or would you consider the benefit sustainable kind of lapping the first three quarters to the positive.

In 2020 or again more more onetime related.

No James it's going to be ongoing or the reason for that is we took impairment in Q3.

So we wrote off.

Assets that were being amortized.

That amortization is going away. So was it about an 11 million dollar benefit in Q4.

Hey.

We're expecting that benefit to continue throughout each quarter 2020, and beyond and keep keep in mind, that's already in our outlook.

Got it thank you.

And our final question comes from the line of Brian Johnson with Barclays.

Your question.

Yes, good morning, and look forward to see you next week.

I know you commented briefly on Europe in the context of spillover from.

The virus.

My question on Europe is different it's what are you seeing in terms of powertrain mixes in the productions in the production schedules. So far this quarter and on the schedules your slipped into the first half.

What does it imply for.

Overall European production volumes and then.

Our how does it fit in with the power products powertrain products that you're providing.

Yes, Brian.

If you think about our overall product portfolio in Europe.

Around the world.

Really isn't impacted between whether you've got an internal combustion engine or you've got a electric car are or hybrid vehicle.

Generally it's not a per say something thats.

Big focus for us in terms of production schedules, having said that.

You know, what we're saying with the move to.

Better fuel efficiency.

In Europe is.

An increased demand for our efficient.

TCT transmissions and.

Hybrid DC case.

So that'll be a growth opportunity for us and we announced earlier.

Last year that that we've won our largest transmission.

Order ever and Magnus history.

Tied to our technology and capabilities and DC Tees, and how we evolve those into hybrid type transitions as well.

And the anything in particular on the mix.

Plug in hybrids and hybrids.

Versus fabs in terms of the European Oems.

Production mix needed to get to compliance.

Yes.

Yes, I think in terms of what we're seeing this year as you know right you have to so you have the opportunity to exclude Oh, the worst 5% the fleet.

And then which goes away and you take the entire police next year.

But in terms of just the powertrain product as you move unknown.

The impact of whats in production this year.

You know is because the design cycles and probably go through has been decided two or three years ago. So they might be a change in terms of the the mix of the type of.

Engines, and some of the powertrains, there, but it wouldn't be a significant change.

Tom So the production volumes.

Because what you have is what you're balancing so I think it's more to transition as we go forward.

Ben the material change in the mix at least from on product Mclean's explained you want on the Big program. We've talked in transmission, we have both radian. So its transmission both the.

Hybrid as well as the normal DCP.

So we believe we won't see something significant you know as we go through 2020.

Okay. Thank you.

Mr. Walker there are no further questions at this time I'll turn the call back to you. Please continue with your closing remarks.

Okay I appreciate everybody listening this morning the.

Overall.

Given what what what went on in 2019 at the fourth week, there is always moving parts.

We're going to be as I said next week, when we get there to the Investor Day, you can talk little bit more about it but if you look at what's happening in big picture what happened in 19, the U.S.M.C. I expect is going to get.

Passed in Canada, which we get that behind this which was a significant.

Issue, we worked on in the potential impact going forward of getting that done. It think will be positive. We can talk a little bit more to the extent would have clarity on what what impact the RBC and the labor value content. The LBC will have.

But.

The end result of this I believe will be probably more sourcing in North America magnets and biggest supplier in North America. So that should be positive, we'll see how the details rollout of getting rid of the.

The uncertainty there in the duties will one less seem to worry about the trade.

Which between us in China, hopefully will settle down based on what we've seen so far so thats, one lesson to worry about but the opportunities in the new mobility, the new influences the.

Mobility as a service I think there is theres been a lot going on in 2019 so.

Should that be challenges in 2020, but we can have more discussions next week.

We are getting the strike behind is a good thing as well. So I think we have a solid outlook with continued growth and margin expansion and we've talked about our free cash flow generation. So.

We'll watch what happens in the cobot 19, which be hopefully a short term issue.

But overall I'm pretty encouraged about the future and look forward to seeing whoever is going to be there next week. So thanks for dialing and have a great to everybody.

That does conclude the conference call for today, we thank you for your participation and now. Thank you. Please disconnect your lines.

Yes.

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Okay.

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