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 in listen only mode. Afterwards, we will conduct a question and answer session at that.
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I'd now like turn the 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 have formal comments today from Don Walker and Vince Galifi.
Joining us today, our Swami coda, Gary 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 fourth quarter and year ended December 31 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 on the Investor Relations section of our web site at Magna Dotcom.
Before we get started just as a reminder to discussion 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 complete description of our Safe Harbor disclaimer.
As we review financial information today. Please note that all figures discussed our us dollars unless otherwise noted.
We have included in the appendix reconciliations of certain key financial statement lines for Q4, 19, and Q4 18 between reported results 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 of this standard on our financials was the recognition of approximately 1.8 billion in right abuse assets and 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 Comparatives had been restated to reflect the transfer of certain assets out of corporate and other to the company's operating segments to better reflect the utilization of these assets.
And now I'll pass the call over to Don.
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 end Q4, and Europe down 3% each compared to.
2018.
A stronger us 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 than planned engineering and other costs in our Ada Es business substantially associated with three programs that will be utilizing new technologies.
Despite some of these factors there were a number of important positives from Magna that came out of 2019.
Once again, we grew our organic sales faster than global vehicle production was complete vehicles power envision and seeding all far outpacing production and body and exteriors segment with the highest exposure to GM coming in line with global 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 far 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 in acquisitions.
We returned 1.7 billion to shareholders through share repurchases and 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 the business and 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 variance 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 our 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 coded 19, however, I'm confident that we are positioned for further growth in sales and margins earnings and cash flow in the years ahead. We planned demonstrate this view at our Investor day in on February 27th in Toronto, I Hope you will be able to joined or.
Or listen to the webcast with that I'll pass the call over of events.
Thanks, Don and good morning, everyone.
Overall, we were fairly pleased with our Q4 results as our consolidated sales and adjusted EBIT were ahead of our internal expectations.
However, as Don mentioned, the GM 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 vehicle production declined 5%.
This was due to production North America, and Europe, our two most significant markets declining, 7% and 3% respectively.
The largest upon in North America was in part due to the GM strike.
We returned 365 million to shareholders in the quarter through dividends and share buybacks.
We generated 1.1 billion in free cash flow well ahead of our expectations coming into the quarter and our board approved that 10% increase in our quarterly dividends.
I'm going to cover each of these and some more detail.
Our consolidated sales were 9.4 billion a decline of 7% from the fourth quarter of 2018.
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 team 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.
Our organic sales declined 3% year over year.
As expected our adjusted EBIT margin was lower compared to last year.
Reported 6.3% in the fourth quarter of 2019 down 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 and 30 basis points was due to lower seating margins.
These were offset by 40 basis points of improvement driven by complete vehicles, and 30 basis points of improvement due to higher profit incorporate.
And of course, the GM strikes and efficacy and contributed to the lower margins for CES power envision and seating.
I will get into the specific that these margin changes in the segment review.
Adjusted EBIT decreased to $590 million from 730 million largely reflecting the GM strike higher engineering costs in our eight us business.
Higher warranty costs net foreign exchange losses, lower scrap metal recoveries and higher commodity costs.
These were partially offset by higher net global commercial items, lower incentive compensation and increased earnings incomplete vehicles.
Equity income was largely in line with last year and up 21 million from the prior quarter, mainly due to lower depreciation and amortization related to fair value increments. As a result of that 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 2018.
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 exposures and structure sales were 3.9 billion fourth quarter down 6% from 4.2 billion a year ago.
This reflects declines in vehicle production in North America, including from the GM strike and in Europe.
The enter production of certain programs, including the Chevy Cruze.
A 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 was slow global vehicle production, but in line on a weighted basis.
Body accessories and structures EBIT decreased by 67 million in Q4 of 19 compared to the fourth quarter of 2018.
Margins fell by 110 basis points to 7.4% in the fourth quarter.
This was primarily due to the impacted the GM strike.
Lower scrap metal recoveries higher net warranty and launch costs and lower foreign exchange gains.
These were partially offset by.
Inefficiencies during 2018 at a plant we closed in 2019 and productivity and efficiency improvements, including a 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 net 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.
Power envision EBIT was lower by 91 million and EBIT margin decreased to 6% compared to 8.5% in fourth quarter of 2018.
Lower EBIT percentage, primarily reflects higher engineering costs in our eight us business substantially associated with three programs that we that will be utilizing new technologies.
The GM strike and higher net warranty costs.
These were partly offset by the divestiture.
Tennessee, which ran at margins below segment average at higher net favorable commercial items.
Excluding equity income EBIT margin fell to 4% from 6.6% and 2018.
Ceding sales were 1.4 billion down 1% from the fourth quarter of last year as a result of supplies and production in North America.
Moving the GM strike and in Europe.
End of production of certain programs, including the Chevy Cruze, a 15 million negative swing and 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.
Ceding 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 in operational efficiencies at new facility higher commodity launch and net warranty costs and the GM strike.
These were partially offset by increased equity income.
Lastly.
Complete 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 launches Toyota Supra and BMW set for 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 costs 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 in the fourth quarter of 2018.
Investment activities amounted to 635 million, including $513 million in fixed assets and 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 asset spending and working capital being better than anticipated by about $200 million.
Keep in mind that we were expecting to 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 the repurchase of 254 million of our stock representing 4.7 million shares as well as a 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 now state that our board approved a 10% increase in our quarterly dividend 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've only make one change to what we've 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 January.
Sorry.
We continue to believe we will generate approximately 5.5 billion in free cash flow into 2020 to 2022 timeframe.
We indicated in our press release that we have not included any adjustment to our outlook related to covert 19.
As it is difficult to assess its impact.
However, our outlook reflects average quarterly consolidated sales in China in the $400 million to $500 million range and approximately 20% of our equity income outlook range is 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.
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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 eight first question on bought eight years and structures.
Given your your content on GM trucks in the downside around just right. There I just kind of would've expected there might be a slightly larger hit.
And what you saw so im just curious if there's something else going on.
Or the the positive move just much greater than what it seems to be.
So what you alluded to on 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're outperforming big ways or something else going on here, where there was no production still going on you are getting paid for.
Framed in other parts or something like that.
Yeah, Good morning, John its fence and when I look at our 40 stores and structures group.
Sales were impacted by about.
225 million.
And I too.
On the margins about 120 basis points.
So that was.
Significant impact.
When I kind of look at what's happening in the quarter year over year or some of the negatives have been.
As we talked about throughout the year.
Is lower revenue on a scrap metals, which was a negative year over year, a little bit higher warranty.
Yes, some additional launch costs.
Some transactional FX.
Some of the sort of.
Positives.
The them come out is one is.
Okay got it position.
Last year Q4, less now gone so we've seen some positive impact profitability as a result of that.
We do have some incremental sales in front of get backup.
The impact of general motors, and and incremental sales pull through it.
At this level, so kind of when you add pluses and minuses, we end up with that.
Q4 of of at 7.4% or even margin.
But there isn't anything in there John that's kind of.
Unusual when it just normal operating results for our be estimate for the quarter.
Got it was impressive on just the second question on the eight as 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.
Pardon stepped up investment.
<unk>.
You know I think when you look at that the spending that we're doing and in our latest business I'd kind of in my mind break it down to sort of three categories.
One we've we've been talking invest in overspending on three programs or that are going there.
Launches in Europe, utilizing new technologies.
And as we continue to work on those were certainly developing so some capabilities and technology capabilities, we're learning from that.
Back to leverage that going forward.
On new programs.
The second Chango or when I think about our engineering Stan.
His application engineering programs that are going to ramp up so we've got the business and just like any other business you've got the startup costs in this business engineering costs. So.
As that business ramps up costs will go down on as we continue to win business will have other engineering spend but but that's a good thing.
The third chopped out of.
Our engineering relates to yeah, I think about is developing our our core capabilities across the board and autonomy.
And eight Thats driving features and like we've been doing in the past, we leveraged that core capability for program Awards.
So as you know we go forward and sales increase we look out over the next couple of years Ada Es overspending as as programs up that is going to go away corresponding and we're seeing a little bit of growth and corresponding over the next couple of years.
I have expected as that business is growing in application engineering is going to be assumption that the business Awards.
Okay, and vintages lastly on seeding similar to be pretty good performance in the quarter all things considered.
You know as you look describing upper sand versus I think we were high 7% last year on your margins just curious where do you think immediate 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 from 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 seeding sites. It does seem like there's real opportunity for organic growth there.
John I answer the very first part of your question I'll have either at dawn sort of deal with the second part.
With respect to kind of overall margins.
Well, yes in the fourth quarter.
We did benefit from higher equity income and we expect that to continue to grow it.
Fans and our joint venture operations, and we don't consolidate I look at a 21 and 22 and beyond as we get.
By the.
The watched somebody inefficiencies.
On the BMW programming inside of our the United States.
We'll see.
It's an overall margins.
We should margins continue to grow.
But if you go back to kind of where we weren't 18, John It and look at margin, where we were in 18, and where we think we're going to be into why do.
I don't like we're going to get to the same level over that three year period and.
Part of that is somebody BMW programs, and we talked about nationally and recent sales.
But we don't have a lot of value added we're purchasing a lot of the components. So it's on lower margin business pretty decent return on capital, but well that.
No 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 to where we were kind of at the 17 18 level.
Yeah, I'll add to that is done here Vince's said due to the extent we do more.
Value added that that will impact the margins for sure from the return on invested capital, which is what we typically look at the more we do in them 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 just continuing to launch business with BMW, we didn't make sure we were getting a reasonable returns.
I wouldn't comment specifically on on other customers, BMW or Daimler or sorry, VW or Daimler, but I do think there's opportunities for our seeding group to continue to grow were smaller player relative to the to some others are out there and then we gotta good reputation. So I would expect the scene busy.
That does have opportunities going in to continue to grow.
But definitely there if they decide to markets, where we're we're relatively small isn't seeding.
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, Jimmy it's kind of seems like it might be cabos that is that a fair statement.
Well I think these opportunities in both of those is.
Hard to tell to the extent that add to 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.
I'd like to vacations powertrain as well as the money money, they're spending on autonomous driving and have been hit some of the regulatory requirements for fuel economy. I think everybody is taken 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 gonna be but I think your comment to that there's there's opportunities in both those areas.
Great. Thank you very much.
Our next question comes from the line that 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 cost level is you know pre production engineering part so I.
I would 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 up.
The launch schedule for these three programs and when do you expect these costs to peak and you know kind of how the cost change as we move forward.
Yeah, Hi, Peter Good morning, Peter as Vince or you know these programs are.
Start to go into production and late 21.
So we'll continue to stance and pre production costs that up until that point in time.
But even you know when you think about where we were 19 and where we are in 20.
We're expecting a margin improvement.
20 versus like chain, we talked about it on our garden or January call Oh, just to go back to what we talked about is just see lower spending on.
Three programs in 2020 should add about 70 basis points.
The power efficient segment in 2020 versus 29 team you know that translates to about 20 basis point improvement in Magnus overall margins.
So as we get into 21 of those costs start to ramp down.
You know the other opportunity or Peter is Ah.
Continue to work internally and with their customers I'm trying to do things more efficiently.
For some additional revenue from our customer as well to take into account somebody it additional spending we've incurred.
If we can bring the merger move up that margin improvement year over year.
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Yeah, just to add to that so I'm 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 what's happened outsourced trying to find people.
So I won't repeat all vinces comments by I think year over year, which 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 the don't think it's on its surprising because it a lot of people seem to go through these these are very challenging programs.
But overall, we talk but maybe a bit more about discern investor day, we've been able do attract in building our team up specifically developing software people and most of the work on this is up front loaded because we've got to get through the testing the validation of the of the components well before production. So I think we're over the.
Hum, but theres still challenging programs and as you can see in Q4, we still over where spend what we expected due.
Okay and.
Moving to the the lift joint venture out when does the when does that.
Venture start to wind down and when do the associated costs.
Come down along with that.
I think a.
Peter.
Got it winds out at the end of course actually already well down the.
Last year.
So we're going to see.
Reduction.
And Matt.
Q1 of a 2020.
Yeah again, when you look at.
The impact on on overall margin 20 versus 19 her vision.
That should help margins 2020 by about 50 basis points in that segment.
Yeah, the magna level, that's going to translate to about a 50 basis points improvement year over here.
Okay.
So it's safe to say then.
Like the with with the wind down of the.
Of the joint venture in the three.
Ada Es programs.
Those are gonna be accumulate there'll be 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 you know.
When I.
When I look at some of the.
We talked about the something on the junior call, but if you look at a bar or engineering spend on.
Okay. So pardon me.
Hey, these three programs than that.
<unk> spending is expected to increase a little bit between 20, and 19 2020 2019.
It's just reflects our business activity.
Yeah, Peter just just for clarification, what we had was a partnership would lift than we anticipated. So it wasn't a formal joint venture and when we were when we started off we had talked about what we want to accomplish in and we don't 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 would lift because actually pretty successful we learned a lot that we still have a good working relationship with them, but what we've said earlier was ER were two and half years smarter now.
Where the market is going to go and it became pretty clear to us at the the sensors required for a level for level five I guess are driving and what companies like lift need are substantially different media specification from one or other customers needed in l. to L. Three so we're reading.
Hurting 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 a <unk> is going to come I think it's further out than people had anticipated well. We've been we knew was further I would think a that's we were projecting.
But I'm not sure what 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 or but I do think the the exposure in understanding what's going on in that market and where things are going with the mobility as a service.
There is still gonna 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 L. to all three.
Okay, Peter just too just to refresh your memory on on power vision that we ended the year it.
6.6% margin our expectation for 2020 is between seven nine an athree now no the that spending coming down in the spending as 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 in power of it.
Okay, and then just lastly, as I recall.
When you provided your initial outlook or for 2020, when you're looking at anticipated European production volumes, you didnt take into account or the new emission regulations and the potential impact that that could have on volumes.
Now there 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 it impacting volumes volumes and mix and have you changed your outlook at all or for the impact that that's going to flow through down into magna.
Yes, Peter you know, we that you guys. Good luck that ER.
Our our outlook, which which remains unchanged, we looked at north American and European volumes and based on.
Early indications there was no reason to change our assumptions in Europe, but let me remind you Peter.
You know, what's built into our outlook for Europe.
Purse hot.
2020 versus.
First happens when 19.
Got it about a 6% reductions.
So again the second half.
A little bit of improvement over the second half 2019.
Well.
I think part of that it is or some of the new requirements coming into Europe, but.
Our expectation get out of that doesn't.
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 It's it's a it's too early to tell at this point.
Okay. Then thanks, so much for your comments.
Our next question comes from the line of Roger clashed with Wolfe Research. Please proceed with your question.
Hi, Good morning, everybody I 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 you know 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 you know a lot of companies talking about pressure, but I'm just fees would be the relationship with Magna what are you hearing along those lines.
Yeah, all a couple of comments.
Again public this could be a longer discussion I think given the pressures generally need concerning season in Europe.
With the hitting 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 are there putting more money into electrification powertrain and then selling those vehicles that potentially lower margins and nobody really knows what the demand is so from our perspective, we are very carefully look at where we think the actual.
Production or the actual was selling will be of those vehicles. When you put on programs, but from a customer standpoint, everybody is looking to.
Save money, including need the supply base wherever we can you. Obviously is to look at that is can they spend less on a upfront programs do 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 neutral.
To do their own their own testing and get lower volumes, then to the extent they can commonize engineering and production.
Get lower prices from the supply base and they're going up the redevelop everything so we're definitely seeing not.
I'm sure they're all looking at their internal cost reduced overheads and they are going to be looking to the supply base to reduce cost but.
Yes. It did did go through cycles I've been in the business for a long time ended the one of the basically been focused so heavily and world class manufacturing as we call. It internally is to make sure we are as competitive as possible.
So if somebody wants a lower price than we were trying to approach. It is well, let's figure out how to other design a the the product or the manufacturing process more efficiently because we don't want to take it out in a barn margin.
As long as we are competitive and we understand their costs well unexplained the customer work through it and that's the best way for us to not have our margin.
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 gonna have to get <unk> are expected return on invested capital and keep our margins up so I I would suspect that if volumes go down and the pressures continue that we're going to continue to see.
Pressure from our customers to give more competitive prices, but its not.
When stage drastically different where I think it will continue.
But it's sort of always been not way, even when they're making great margins are still pushing as hard as they possibly can they're good negotiators and we just have to understand their costs and and make sure. We protect margins. We've never tried to go for growth for the sake of growth target, we want to hit our targets and it will take on business that way I do think given all this it just means there's.
Yeah, there's probably some pressure, but there's 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.
Great. Thanks, Thank you and just my second question. It's you talked about your balance sheet isn't advantage. It provides obviously a lot of flexibility for you could you just give us what your current thinking is on acquisitions, obviously, the equity markets or our <unk> Super focus.
Some growth assets like you know things that are focused on electrification or automation, but potentially some of that that's values are gonna be traditional powertrain and driveline assets do you you know from from magnets perspective.
You those as compelling options based on the value were synergies or or less technical risk or are you primarily focusing on and on some of the other technologies that that might position you better <unk> into the long term future.
You're right, we do have the ability or based on our balance sheeting or cash flow generation to make acquisitions or thank you know that's well enough that we're not to make an acquisition does for the sake of growth. It's gonna have to make sense. The first thing we look at as it is aligned with their product strategy, but I think we're open to either one of them quite frankly are in when.
You look at it buying something that it would be relatively inexpensive for the for the EBITDA, you're buying especially if we could take out overheads Lincoln running more efficiency efficiently Ross said capital or utilize assets a better if we had a bigger base then we will.
Look at that and we continue to look at opportunities in the you're right. Some of the you've got the values seems to be pretty good the I didn't <unk>. The the offset to that is if we're buying a business that theres not.
If there if it's flat sales, it's one thing, but if we think it's gonna be declining over a reasonably short period of time, but next five to six years, we are very conscious of restructuring cost in heavy lift in that area. So it would be cautious what we buy but I do think there's 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 in the past 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 started up technologies and and a integrating them in.
As a tier one we're open to all our options to the extent, we find something goodwill bite at the <unk> can't will this returns you're a money 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 the questions.
First of all Oh.
I want us to start off on on the Corona buyers T. said 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 of Corona virus.
A magnet specifically I know you had some impairments and.
Some of the reduced equity income guide.
It's come from China, but is there any way to maybe think of what decremental margins might look like or just what.
Some banded sensitivity might be.
Obviously excess supply chain piece of course, which is tougher, but any way to potentially sense applied. So we can have a band what the potential outcomes might be.
A little bit most of those events one in jumping afterwards, I I don't know how to answer it but oh, you might be able to I think if you look at the 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.
<unk>.
The impact it will ultimately have on vehicle sales in China I'm sure. It's going as some short term, but is you know people voted by 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 <unk> and I don't know the priorities would.
The let's get the health system backup is good the food supply back up and running.
But they have their decision, making some pretty good headway in allowing in encouraging plans to get back up and running well, let's see other transportation system works over there we are relatively small in China.
Yeah, so the biggest [noise].
The 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 the critical parts.
What are the critical programs you want to keep running they can airfreight things that they have to if there's a whole coming through from the from the shipping. So it's too early to tell and it's anybody's guess everybody's tracking what's happening with the progress I would hopefully they get this contained.
But it's a very sophisticated industry and our customers are pretty sophisticated <unk>, they've all been asking us what what impact might happen in a reducing their their their best guess is doing plants come up and running so too early to tell but with the long term I'm relatively encouraged that we see a lot of the plants coming back up and hopefully we.
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 the into another question on their looser Vince I don't know how we are we can doesn't want to buy.
Let me just add some some some additional comments you Dan with respect to decremental margins.
It's really tough to kind of think about what the impact.
First got understand what the impact on sales Ah.
He decremental margins and are there going to be additional costs incurred for running plans and especially because we don't have all our people. There. It is too early to tell our plants, having resuming operations, albeit at a lower utilization levels.
Well get a better feel as we get that.
Q1.
Yeah. That's part of your question there is.
It does have an impact on.
Impairments.
I don't think so Dan.
This is a temporary in nature.
Industrial get back as you know this as far as it goes away I expected.
China production is going to go back to where it would have been so should have actually no impact on how we look at long term value of the assets that we have China today.
Great. Thanks, and then the second I.
I wanted to follow up on Rod a line of question on the M&A and specifically.
Obviously, we've seen some we're seeing some consolidation the powertrain Marino if I recall correctly, so youre right you drive units.
The make versus buy for you on the sub components on the motor and the power electronics It is mixed.
The technology standpoint is it your view that fully insourcing 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.
The this is why me I've been good question in terms of looking at.
He drives generally is a.
Keep building blocks that come together and as you rightly mentioned power electronics, and you machine or two of those keep building blocks.
In the programs that we've talked about previously.
We have done that on the platform perspective, and the design Oh, the that you machine and some of the key components have been Inferno to Magna.
But.
We kind of look at it from that perspective or the possible by capability.
In the machine or looking at calling for looking at Rudolph and where there's an advantage.
Sorry to make so looking at that works is the design technology capabilities. So they design piece will create a and Hollywood interfaces with the rest of the system is integral inside magna.
Looking a bit component by is a 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 of ER 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 and how things that pitch quarters.
Yeah sure Dan.
Andy We did report $15 million a positive EBIT in our corporate segment.
Got it there's a couple of <unk> significant I'd be I'm, taking a guy if that make up that $15 million not a big number but first of all its a reduced incentive compensation profits are down a Q4 versus Q4 I've been down for the year. So that has a direct impact on overall incentive compensation.
Across the board the second is really noise and in the corporate segment, sometimes is positive sometimes negative and it relates to accounting for deferred taxes, and Mexico, where our functional currency is U.S. dollar as but.
Our local currencies as pesos and you start to re read 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 yet the prime or piece, just some pluses and minuses elsewhere, but those are the two most significant pieces that.
Contribute 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 whats wrong. He said, a we're gonna given an investor we haven't Investor day, a under 27, if we're going to be giving more more clarity and probably be able to get it today. It in more detail as our strategy, what we want to make what we want to buy we want to design in the electrification of the powertrain I think one high level comments.
It's a I think it's been recognized by the industry the industry being more than tier ones that it's very expensive for everybody to do everything on their own. So you see more because it's probably see more acquisitions and.
More importantly, going to see more cooperation agreements I think because there's just a lot of people all going after the the same business and I think it can be more efficient running everybody redesigns to do cooperation agreements acquisitions joint venture so.
We'll talk more about what our strategy is a but I think you can expect to see more would take consolidation of some form in the players in this industry or just to get the efficiencies up in the 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 James Picariello with Keybanc. Please proceed with your question.
Hey, good morning, guys. So you're you clearly lowering the you know the eight US engineering component to your spending 2020, I mean after you account for the 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 the electrified propulsion front, but you just would be curious if you had some key promos programs in mind that maybe you have a similar launch curve to your adolf's visibility.
It doesn't let me start with kinda, just clarifying sort of expenditures, maybe or do you are sort of can deal with the second part of that.
You know when I look at overall spending on eight 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 the first part is just left is is this going away. So that reduces art our expenses and we talked about the our talked earlier about the three.
Programs with a 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 in electrification then autonomy is actually moving up slightly between 2020 and 29 team. So.
Bucket it altogether, it's coming down excluding that the left in the other too the other component actually spending is increasing and 20 versus 19.
Yeah, and they think rins back to your comments when we talk about the three program. The three programs are being discussed here because of their words brand and the scope of the programs. So we have been giving updates on that.
At the normal course of business continues you know in terms of getting new programs, both in North America in Europe and elsewhere.
I think referring back to Vinces comments in the in the beginning the focus on the core or platform engineering continues or which helps.
On the leverage and optimize our application spending as we continue to even programs in electrification.
We look at the building blocks.
You know perspective, which is again platforms are we talked about the programs that are launching.
No end Oh, we W. O program that we've talked about on the you drive.
Dr brought the transformation program, although we face to transmission part of it is hybrid and very very a 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 in variable to efficiently 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're getting in Investor day, but we've been pretty careful on <unk>, because I don't really know what the penetration rates are going to be for the electric vehicles I'd, 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 Rami says more to develop the.
Actually ability or the building blocks and as we as we move further along to see what the actual volumes going to be than when you know better how to quote the the pieces of it. So every reason to sharpening your pencil to get the business. So both in the Adas space as well as the last patient power Uprate Wanna be.
Fairly selective because at the end of the day no. There was a balancing how fast when a growing and keeping the margins up so a weaker than the Adas here and were very strong and cameras. We are trying to bring their new radar technology and also a we've invested into one light our program, which has been very expensive, but we also think.
One of the better long term solution. So we're pretty selective in how what would take notes we don't grow it so fast that were just burning cash.
Got it yet MX that 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 and amortization. So was that one time related or would you consider though the benefit sustainable you know kind of lapping the first three quarters to the positive in Twoq.
20, or again more more onetime related.
No James it's gonna be ongoing or you know the reason for that is we took the impairment in Q3, So we wrote off.
Assets that were being amortized.
That amortization is going away so was about $11 million benefit in Q4 HM.
We're expecting that benefit to continue throughout each quarter 2020, and beyond <unk> and keep in mind, it's already in our outlook.
Got it thank you.
And our final question comes from the line of Brian Johnson with Barclays. Please proceed with your question.
Yes, good morning, and look forward to see you next week I know you comment 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 production.
In the production schedules, so far this quarter and on the schedules years looking through the first half what does it imply for [laughter] overall European production volumes and then are 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 are there around the world.
It really isn't in pockets between you know whether you've got an internal combustion engine or you've got Oh electric yeah car are or hybrid vehicle. So generally it's not a yep per say something that's a big focus for us and in terms of production schedules, having said that you know what we're saying.
With the move to a better fuel efficiency and in Europe is an increased demand for our efficient or DCT transmissions and a hybrid <unk> D. C case, so that'll be a growth opportunity for us.
Announced earlier.
Last year that that one our largest transmission order ever and Magnus history, a tie to our technology and capabilities and D.C. Tees and how we evolved those into hybrid type transitions as well.
[noise] and anything in particular on the mix Oh plug in hybrids in hybrids versus Fabs in terms of the European Oems.
Production makes me just to get to compliance.
<unk>.
Yeah, I think in terms of what we're seeing this year as you know right you have to.
You have the opportunity to exclude the no divorced 5%, though the fleet, Oh man, which goes away and you take the entire fleet next year.
But in terms of just the powertrain product as you where do I know.
The impact of whats in production. This year, you know is it because the design cycles and hobby 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 won't be a significant change.
You know in Tom So the production volumes because what you have is what you're balancing so I think it's more a transition as we go forward density and material change in the mix at least for my part I'd like to explain you want on the Big program. We've talked in transformation, we have both radian. So it's not.
Submission will be a hybrid as well as the normal de city. So we believe we won't see something significant you know as we go through 2020.
Okay. Thank you.
[noise] Mr. Walker there are no further questions at this time I'll turn the call back to you. Please continue with your closing remarks.
Well I appreciate everybody listening this morning the.
Overall the.
Given what what what went on in 2019 as the sport weakness always moving parts or we're going to be because they 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 was not behind this which was a significant.
Issue, we worked on in a 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 in 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. The biggest supplier in North America. So that should be positive, we'll see how the details rollout of getting rid of the the and certainly there and the duties will one last thing to worry about the two.
Grade.
Which between the U.S. in China, hopefully will settle down and based on what we've seen so far so that's one last thing to worry about but the opportunities in the new mobility. The new entrance is the mobility as a service.
I think there's there's been a lot going on in 2019, so shouldn't be challenges in 2020, but we can have more discussions next week.
The getting the strike behind this is a good thing as well. So I think we have a solid outlook a with continued growth and margin expansion and we've talked about our free cash flow generation. So.
I will watch what happens in the Cobot 19 would you be hopefully a short term issue.
But overall I'm pretty encouraged about the future and look forward to seen whoever is going to be there next week. So thanks for dialing didn't have a great everybody.
That does conclude the conference call for today, we thank you for your participation and I. Thank you. Please disconnect your lines.
Yes.
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