Q1 2020 Earnings Call

Ladies and girls. Please standby conference call began shortly we thank you for your patience is around where you called the cancer.

[music].

Greetings and welcome to your first quarter 2020 result.

In the presentation, all participants will be no listen only mode.

Of course will conduct a question answer session.

Time, if you have a question because crestor one by the four on your telephone.

<unk> for actually to reach an operator to press the star for but is there.

Somebody to those cars to be recorded Thursday may seven 2020.

No I want to turn the crossover to Louis Tonelli, Vice President Investor Relations. Please go ahead.

Thanks, Tommy Hello, everyone and welcome to our first quarter 2020 conference call.

We'll have a formal comments today from Dawn Walker.

Swami quota, Gary and Vince Galifi, joining us today, our Eric Goldstein, and Jim Claros from magnets IR team.

Yesterday, our board of directors met and approved our financial results for the first quarter ended March 31st 2020.

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 all in the Investor Relations section of our web site at Magna Dot com.

Before we get started just as a reminder that 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 you review financial information today. Please note that all figures discussed our U.S. dollars unless otherwise noted.

We have included in the appendix reconciliations between of certain key financial statement lines for Q1 2019 between reported results and results excluding unusual items.

Our quarterly earnings discussion today excludes the impact of unusual items in Q1 19.

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

Now I would call will pass the call over to dawn.

Thanks, Louis Good morning, I hope, everyone has seen safe and healthy wherever you are today.

I will address Magnus response, the cobot 19 pandemic can touch on Magnus position in the mid to long term shiny will discuss the restart production for the industry and Magna and Vince will take you through the quarter, our liquidity balance sheet strategy in capital allocation.

Before I start I want to acknowledge the extraordinary efforts and commitment of all magna employees around the world particularity over the past four months, if we have faced unprecedented times and challenges.

It is in good hands, not only because of our strong financial in market positions, but because we have a culture the breeze problem solvers and an ownership mentality.

I wanted to make it clear that the health and safety of our employees remains our top priority.

As cobot 19 spread we took a number of steps to protect employees. We developed protocols assessment tools in guidance documents to assist all of our plants and offices.

We've also disseminated health screening tools and isolation guides for employees instituted contact tracing for any known cases within our employee population and instituted D contamination procedures.

In addition, we installed personal protective equipment and supplies personal protective gear from employees.

Throughout this crisis, our medical in health and safety staff at work in cooperation with public health authorities coordinated with the medical directors of our customers to share best practices.

As well as to promote employee safety and confidence returned to work.

Let me will discuss this later, but we can sell we've consolidated I returned to work protocols and a smart start playbook.

This has been shared with our customers and suppliers in order to promote health and safety of employees throughout the automotive chain.

In light of the suspension of production temporary layoffs employees have been inevitable.

However, we have taken a number of steps to minimize the impact felt by our employees. These include maintaining employee benefits coverage throughout lay out periods.

Maintaining the number of days at full compensation during the lay up period during.

Through the utilization of vacation days.

Engaging emergency wage protection programs in providing top ups to maintain full compensation levels for certain period, and providing regular communication to employees, including with respect to company programs to support their physical and mental health.

We are fortunate magnitude haven't experienced senior management team. Many members of the team managed to the great recession in 2008 and nine.

As well as other downturns.

The experienced gives us confidence in our ability to manage through these challenging times NIM and to prepare for various potential outcomes. While the causes of the down turn at this time are different.

We have dusted off the playbook from the great recession.

Response as a company has been highly coordinated with multiple work streams across different disciplines in geographies, but many stakeholders to consider.

Been able to take quick action and share information and best practices globally. It makes me proud to be involved with such a strong team.

Of course Magna.

Magna much of the action is at the operating level.

Our business model is resilient, our entrepreneurial culture drives an ownership mentality in a motivated proactive and agile response.

Challenging times.

Operating management has been working hard to quickly flex our cost structure and capital needs to address this sudden and sharp decline in production levels.

This is being done while continuing to support our customers and prepare for production of restart.

Once the work streams were established an operating effectively executive management was able to take a step back and focus on the big picture and long term vision for Magna.

I would like to share with you some of the activities we're involved with.

To support the fight against a cobot 19 pandemic.

We have a number of facilities that are producing much needed mass face yields gallons and ventilator components.

We've been able to support mass or just source mass from China and donate them to various hospice in North America in Europe.

Divisions and employees around the world there donating clubs to hospitals meals to healthcare workers and hygiene kids to shelters do all those divisions and employees we cannot thank you enough.

I'd like to comment on something I'm personally very proud of Fortune magazine has named Magna to its world's most admired companies list for 2020. This is the fourth straight year Magna as won this award.

Despite the unprecedented challenges we are currently facing I'm confident that the industry will recover from the crisis I believe we remain well positioned for the long term our value creation framework remains intact, we have a successful entrepreneurial culture, leading market positions in global capable.

Ladies.

We continue to invest for the future both in terms of new program launches in R&D activities. This spend enabled by our strong balance sheet.

The industry trends are largely unchanged, even if the timelines may shift a little bit.

And our positioning vis-a-vis these trends, which we highlighted our investor day in late February which now it seems like a long time ago is strong.

Just last week Magna one in automotive news pace award for compensated space brain Liftgate reinforcement that lightweight solution that debuted on the 2020 Toyota supra.

The space the space frame is the first comps it application of its kind for an automotive liftgate and achieves a 10% mass savings over steel version we highlighted.

This at our Investor day.

Plastic lift Jake let's gauge is a fast growing market globally, we expect significant growth in this market going forward.

With that with that I'll pass the call over to Swami for his remarks, so on me.

Thanks, Don and good morning, everyone like Don said hope everybody is healthy and also staying optimistic.

I would like to Echo dawn sentiments in banking or employees around the world for their commitment responsiveness and hard work well with a challenging past few weeks. It is truly an honor and privilege to work with such a great team.

I will cover off what we're seeing in terms of production in our key markets as well as how magna is preparing for the restart operations.

In China right. We took some time essentially all OEM production has now restarted.

The challenge in China has been largely demand driven as vehicle sales have been well off pre covert 19 levels. However, recent sequential same stayed out of China has been encouraging.

In terms of ore production capacity in China. We are also now fully operational.

Our China restart hasn't been exemplary meeting customer requirements, while appropriately protecting your employees and producing two our high quality standards.

We are taking lessons learned from on China expediency across to our restarts elsewhere in the world.

In Europe, some production has restarted, but many OEM and supplier plants are planning to startup or the next few weeks North America isn't much the same position in terms of restart although generally a couple of weeks behind Europe.

The regions to major constraints happy in Mexico, and Michigan.

They remain concerns about when Mexico can begin producing auto parts and make those.

Michigan is targeted to start ramping up after may 15.

In line with many OEM target dates.

As we have seen in China, we are expecting you're fairly slow ramp in production as all participants get accustomed to a new normal in their operations and as the industry rates to assess what veeco demand will look like.

In terms of OEM program launches to this point, we're not aware of any significant program delays.

I remember there are few programs that are being pushed off a few months.

Next I would like to review our activities around the re Socofar operations.

We are in very close cooperation with our customers suppliers local governments and every employee in order to ensure they can have a smooth ramp curve.

Yeah, well sort of view customers startup protocols to ensure we aligned.

Obviously, well wouldn't about the restarts that we would typically experience after summer and Christmas shutdowns that a number of 80 smoke complicating factors to manage in this case, including new protocols around the safety of employees and potential supply disruptions.

With respect to employee safety protocols, we have developed its mott stock playbook, which provides a framework for restarting our facilities and office locations with a consistent response in strategy throughout the company, while protecting employees and making sure every Wednesday safe.

Healthy and confident at both returning to work.

With respect to our supply base as you can imagine with the size of Magna the number of suppliers. We have is enormous.

We are keeping your close eye on supply to try to avoid disruptions in production.

We're also helping suppliers to explore potential solutions for liquidity and working capital challenges that might occur by making them aware of government financial assistance that may be available to them.

I would like to highlight the successful restart for complete vehicle Assembly line for the Mercedes Benz.

G class you know facility in grants, Austria. This operation with standard up again mid April was among the first in Europe to restart.

As being a success story in terms of restarting post call with 19, and producing died Connie Waco due to high standards demanded by Dangler.

I will now pass the call or the wins coming.

Thank you Swami and good morning, everyone, I hope, everyone staying safe and healthy.

I will provide a fairly high level summary of our quarterly results today.

Rather than go through a lot of detail, including on our segment results, which you can find in our Mdna I will address more permanent topics given the current environment, including our liquidity balance sheet leverage and capital allocation strategy.

We are of course happy to answer any questions you have on a quarter or otherwise.

During the first quarter Twentytwenty global vehicle production fell, 27%, reflecting declines of 44% in China, 90% in Europe, and 13% in North America.

The decline largely reflected the impact on cobot 19 related customer shutdowns that plants around the world, which began in the first quarter and continue into the second quarter.

Considering the magnitude of the volume declines and the consequent challenges we face.

We were pleased with our first quarter results.

Prior to cope with 19 related shutdown each of our reporting segments was performing in line or ahead of our general expectations.

We estimate that covert 19 related shutdown negatively impacted our first quarter sales by approximately $1.1 billion and our adjusted EBIT by approximately $250 million.

The EBIT impact includes approximately $30 million associated with top up payments to employees.

We've included in our appendix the breakdown of estimated cool that 19 were related sales and EBIT margin impacts by segment.

Our first quarter consolidated sales were 8.7 billion a decline of 1.9 billion or 18% from the first quarter of 2019.

This reflects the 27% decline in global light vehicle production largely as a result covert 19 related shutdowns.

Our sales in the first quarter of 2020, we're also negatively impacted by the divestiture of our ethylene seed business in the first quarter of 2019 and currency translation.

Excluding net divestitures, which reduced sales by 325 million and currency translation, which was 152 million headwind organic sales declined 14% year over year.

Our adjusted EBIT margin was 4.7% in Q1 2020 compared to 6.8% in the first quarter 2019.

210 basis point decline.

We estimate that substantially all of the year over year decline was attributable to the impact of the cobot 19 related shutdown.

In the quarter.

Adjusted EBIT decreased 317 million to 403 million.

Largely reflecting the decline in global vehicle production, including due to the cold with 19 related shutdown.

Also contributing to the Cline and EBIT was a divestiture of our Sps he doesn't fit into the first quarter of 19.

Lower tooling contribution in the quarter compared to the first quarter of 19 and underperformance at or at a body Ics your as instructors facility.

These were partially offset by lower incentive compensation and profit sharing.

Favorable engineering program resolution and complete vehicles and earnings on favorable mix within the Mercedes G class complete vehicle Assembly program.

Our effective income tax rate was 34.7% compared to 23.7% in Q1 of 2020.

950 basis points of the increase as a result of tax on foreign exchange gains reported for Mexican tax purposes, but not for us gap.

This items negatively impacted our EPS by approximately 12 cents.

The remainder of the increase related to an increase in losses not benefited in Europe and higher accrued tax on undistributed for earnings partially offset by the impact of income mix.

Net income attributable magnet was 261 million compared to 531 million in Q1 of 19, reflecting a lower EBIT and higher tax rate, partially offset by lower interest expense and higher minority interest income.

Diluted EPS was 86 cents for the quarter compared to $1.63 last year.

Fine reflects the lower net income partially offset by the impact of 7% fewer shares outstanding adding back the impact of the tax item.

It really.

Would have been 98 cents.

I'm now going to review our cash flows investment activities.

Just first quarter of Twentytwenty.

We generated 639 million in cash from operations compared to 594 million in the first quarter of 2019.

Typically we would experience and investment in working capital into first quarter of the year given the seasonality of production.

The cobot 19 related shutdown and our corresponding sales decline.

Resulted in us generating cash from working capital in the quarter.

We expect this to reverse as we restart production at various facilities around the world.

Investment activities amounted to 400, a 3 million, including 203 million fixed assets, a 100 million investment in Waymo 93 million investments other assets and intangible assets and 7 million to purchase a small subsidiary.

Free cash flow was 366 million in the first quarter.

We returned 330 million to shareholders a quarter through the repurchase of 192 million overstock, representing 4.8 million shares as well as the payment of 121 million in dividends.

Let me take a few minutes to discuss our liquidity balance sheet leverage and capital allocation strategy.

At the end of the first quarter, our liquidity stood at 4.2 billion, including over 1 billion in cash.

Last month, we further strengthened our liquidity position by increasing and extending our short term revolver raising liquidity by a further 700 million.

This brings our pro forma available liquidity to approximately 4.9 billion.

We also filed the new shelf prospectus, replacing one that had expired last year, which provides us the flexibility to pursue up to an additional 2 billion in public debt financing down the road for our business.

Many of you recall that for years now we have been communicating our leverage target of one to one or half times adjusted debt to adjusted EBITDA range during more normal times, while maintaining a cash level that is necessary to manage intra quarter swings and working capital.

We designed this leverage target conservatively to give us the flexibility to manage through downturns and allow us to maintain investment grade credit ratings, even during times of economic shock.

As a result of the production shutdowns and the corresponding to climbs and even D.A., we're experiencing now.

We will go over the target range in the short term.

Nevertheless, with our ample liquidity, we're working from a position of strength.

As we look at capital allocation moving forward, we continue to invest in our business, including spending for organic growth R&D for the future and M&A opportunities.

Our strong balance sheet allows us to keep a long term focus and as Don said earlier, we remain well positioned for the long term.

Our board approved our first quarter dividends 40 cents.

Given the ongoing uncertainty late in the first quarter, we stopped or share repurchases in order to protect our liquidity position.

We also withdrew our outlook.

At some point as the visibility improves we intend to resume providing ineligible for our business.

Nevertheless, we'd like to get some color on what we expect for the remainder of the year in certain areas.

We've been doing some modeling on the expected impact of the sales declines on our earnings.

As I said earlier, we estimate that sales loss due to covert 19 for approximately 1.1 billion an EBIT loss was about 250 million.

This implies the decremental margin of approximately 23%.

The EBIT impact includes approximately 30 million that represents the top of payments to employees.

Excluding the top up.

Detrimental would be about 20% in the quarter.

I believe a detrimental margin in the low 20% range is a reasonable proxy T is for the balance of the year.

Keep in mind that there are always a lot of puts and takes and earnings that can impact decrementals, including top ups that will impact the second quarter.

Of course, all of this is subject to the various risk factors. We have this flows in our filings.

In terms of minutes and working capital as I noted earlier in the first quarter, we generated cash from working capital and unusual that due to the production shutdowns sales are increasing sequentially from quarter to quarter. We are typically investing in working capital as we continue to restart production here over the.

Next few months, we expect working capital to swing negative.

The massive investment of working capital is difficult to forecast given the significant production uncertainty right now.

Lastly in terms of capital spending our business units are currently assessing their capital needs, including discretionary productivity and program related capital.

Nevertheless, we believe it's reasonable to assume that we can reduce capital for 2020 by 10% to 15%.

To the extent that our customers delay or cancel program launches there may be room to further reduce entered or for 2020 capital.

Thanks for your attention. This morning, we'd all be pleased to answer your questions.

Okay.

Thank you very much.

I once again, if you like to register your question. Please press the one oh by the floor on your telephone Herthree tone prompt technology requests.

It's a question has been assets dry restoration is a one quarter three.

One moment. Please her first question.

And well get to our first question on the line from John Murphy Bank of America Merrill Lynch Red hat.

Hi, Good morning, everybody, it's great to hear from you.

Just wanted to start with a first question maybe a follow up on on the broad brush.

Strokes, you gave us near or on the outlook Vince.

The first quarter had good decrementals all things considered but it also had very good sales performance given the 27% drop in global volume production volumes.

As a 13% outgrowth, that's big number four for you or for any any any company I'm. Just curious as you look forward. How you generally think about that maybe sort of ranges or any kind of direction, because that's a that's a big delta and pretty impressive.

Uh huh.

On it.

That's a specific questions we've done a whole bunch a modeling as I talked about in my formal comments.

We've we've.

Number of different assumptions on overall volumes.

Just in terms of.

Where thats going to end up for full year.

I don't necessarily have a view on that time.

If you think back to.

The guidance that we gave in 2020.

Which we've now Paul remember that based on sort of normal ties with falling assumptions and a business plan that was built up from the bottoms out we were adapting organic growth in content per vehicle are growing faster than the overall mark relevant markets.

Expected.

Thats going to continue in the balance of the year.

When you look at Q1.

The one thing kind of we think of that is whether there was maybe a pull florida.

Some of our sales to the to the OEM.

Building up inventory in anticipation of a shutdown you know that may have had a little bit of an impact, but even if it did.

Really good performance in Q1 around the globe.

You know I just that keep in mind, John that's China was down very significantly and the terms of the waiting we don't have as much business in China, So thats going to weigh down the global production more than it distorts the numbers a little bit.

Okay got it.

Then just one simple one Vince on working capital I mean, assuming five percentage sales on on the rewind a production is that okay way to think about it.

Yeah, I think what we get to the end of the year.

John what we should be back that kind of normal levels can afford to 5%.

Probably a good way to think about it.

Yeah, as we've been thinking there.

Yeah, the ramp up of working capital.

I think we're going to turn negative or.

Hey applications ramp ups happened Q2, Q3 were as he said its and ER and the vessels in that area, which we should see some payback or return of that working capital in Q4, as we become more of kind of normal from a volume perspective.

Okay. Okay, and then just on the balance sheet real quick you have almost $5 billion and liquidity right now the $2 billion shelves you see this is as liquidity.

Do you Cogen, that's really just sufficient to get through the storm.

Second quarter, maybe into the third quarter or is this sort of a wind up to really take advantage of some opportunities that are going to avail themselves in the market there might be really tracking either horizontal or vertical acquisitions.

It.

John just before we increased our revolver or.

700 million, we would we were 4.2 billion, we went up to 4.9 billion.

I think about the additional 700.

Additional liquidity.

I'm not that concern about sort of the cash for and whether we need to run the business, but something like that have additional liquidity to the accenture some opportunities on some takeover business, whether the some M&A opportunities that come up I'd, just rather have it did not have it on the shelf for us this quarter in normal course business, we had a shelf.

Previously.

We issued some debt under that shelf.

That have expired last year, we had been working on fighting the shelf prospectus prior to two coal that 19.

Doug.

It just gives us and our strategy just gives us the flexibility we want to racing debt for whatever reason, we have the ability to do that pretty short notice.

Okay, and then just lumpy given there just given the balance sheet. We do have a lot of strength to do a whole lot of things but.

As Don talked about in this call is we've certainly internally than focusing a lot on covet 19, our employees, which is a priority to us kind of the startup.

We've also set back in the team is okay. Well now you know that's all working got a whole bunch of Workstreams executive team, where do we want to take this business and what do we see in the future and how can we positioned ourselves and the these kind of give us an opportunity to potentially advance our positioning in the industry. So that type of things like and talking about it executive level.

And Don it's one of the I think Vince just posed my last question you think about strategically what your customers are doing and what the end customer being the though that for purchasing consumer I mean, you. How do you think about how the industry may change over time I know you had a quote about man.

In your.

In your in your release, but I mean mobility to service might be dead in the individual ownership model may really rise year, which is probably ultimately a good thing for volumes and the industry I mean, just any.

Bosses are if youre pine and really think beyond.

The crisis as does the opportunities than maybe the shift in the business model sort of through the digesting that might really help you out and provide opportunities.

Yes, John I'll start so I may want to add something.

It's pretty difficult to tell what's going to happen we've been trying to run different models on how fast to consumers come back and buy cars did people.

Feel more comfortable in their own car you can read lots of different opinions on it.

We had a deep breed long discussion with the board as well and had a lot of internal discussion I'd like to see what happens over the next couple of months I think that libors as far as yen consumer is going to be we can see what happens in China and then we'll see what happens in Europe and North America.

The theres been a very good coordinated.

Discussion in effort and discussions between the industry and the government about trying to get some dealerships open safely again.

What's different opinions of what happened, but I'd like to see what happens there. The I personally think the amount of money that was being spend as an industry on level three.

The five on a das was surprising to me I think we're going to see that spending lower because I don't know that that's where people can just want to spend their money. So you may see a little bit of a shake out into the leaders are in that space I don't think theres going to be a change the level two level, two plus because I'd say the pull from the consumers so that.

X. five to 10 Euro horizon will not change significantly.

In the short term we have to maybe look at the possible makes changes in take crepes of.

As the or <unk> try to manage their fleet the emissions.

The most important thing would you be to see how the consumer behaviour will be effective if it is affected at all.

With all the prices, where they are what does it mean in terms of affordability and will the consumer be wanting to take a.

Longer buyback on on D.V. vehicles, as an example, I haven't gone mentioned about the Avi being pushed don't we've been talking about maybe for the or the 10 year horizon and.

I think that really look a little bit different based on how things are going right now.

<unk> talking about shade mobility, I think a relative a little bit whether he wants to go in a public transportation already you know different type of shapes service to be seen a lot of interest in terms of disinfecting and new materials. According to and so on that will help improve the hygiene in such cases.

I I still believe in the long term the the big long secular trends will not change significantly they will pay with a little and and a lot will I think come to light as we see consumers come out in the next three to six months and look at that usage in China. It was interesting that I telling dropped significantly.

But from what we understand it next totally it's coming back at it or has come back.

And the administration days continuing to support the policies. Some any V. then you energy <unk>. So I I think like Don said the next three to six months will be telling.

Okay. Thank you very much it's very helpful.

Thank you.

I know what gets hard next question on the life of U.K. I tape My Kelly from Citigroup correct ahead with a question.

<unk> great. Thank you just a couple of questions first I'm, hoping your kids elaborate more on the.

Investment in the quarter kind of how do you see that.

Progressing in the relationship.

Here that relationship to your prior relationship with lift.

Yeah, we make we made 100 million dollar investment in Waymo, we're not going to comment too much for let them comment and what their their strategies publicly we we see it as we were already doing work with Waymo that we'd already announced that we're doing some vehicle modifications.

We've had discussions about either.

Possible cooperation are complete vehicle group to make this dire has the ability to do modifications in a lot of other work quite frankly in in relation to this type of vehicle. So this is a I would say a strategic investment we are still we won't get injured indeed details, but I think it's an area. We can continue to grow.

As far as we also capability integration.

We're not doing the level five work with Dan level four level five work with them, but I think most standpoint software, but I think we've got something had to work with them for a couple of years I think just can continue to grow and I think the.

The the opportunity for driverless cars.

I think it could be will be in and not an individual ownership I think it could be in areas like way most working on other companies are working on taking people around but if you look up the the trend it's changed as far as people ordering things online and having delivery service I think that's will be some good pay back on in that area.

So that's that will be the area where level four level five vehicles might take off as far as the lift that was a a.

Different.

Working relationship we had there we were actually working on the software we change your mind, because we want to work more on level to level two plus that's why we we change what we were doing left so I'm you want to anything.

Oh I've been recorded <unk> class internally and as we have said Oh.

Really need to men focused on the intelligent and efficient investments, whether it's internal or external to position ourselves like don't sit there for five would be a feasible case in the future.

Just looking at it from the perspective of time domain.

So we believe some partnerships in technology or <unk> as you have seen over the years. This I think we'll provide us say front row seat in you know in the Devil look mental <unk> kind of keep us holistic Ah radar internal focus needs to be and how are we still keep pay finger on the pops.

That's us for help <unk> secondly, maybe for Dawn you go back and Oh wait in O. nine magnet was able to gain you're quite a bit of market share. It in content per vehicle, particularly North America I was hoping you could kinda compare as you look out what the opportunity set in this downturn, how that compares to oh wait or dying in terms of.

Supply chain and other potential opportunities as it's similar or is it more as a less she'll be if you could find a bit on that.

I think the industry overall is healthier going into.

This situation, we'd had a big run up I think a lotta people had.

Assumed that the volume was going to stay up had a huge dropping I think a lot of the suppliers in in in supply <unk>, a lotta people were unable to withstand it it'll be interesting to see as we go through the restart here and then working capital demands.

What the impact that need to the supply basically we're tracking all of our suppliers oleo inter tracking their suppliers as well think people are in it and are healthier position, depending how fast we get back to work.

But I think this will give us some opportunities with people have we balance sheets.

If they're really got into the core.

To get through this.

<unk>.

But we know the air the product areas, we want to grow in.

I think right now being pretty difficult to do any acquisition because nobody knows what's gonna happen number one I I just don't think can see appropriate time to be in making aggressive news, but I think it will be opportunities I I'm not sure how much takeover work there will be again, it's can be really difficult to tell I think until we get to the Rhys.

Starting to see how People's financial positions are typically.

The customers will look to companies that have strong balance sheets and have a proven track record of being able to move fast and had the technical and the operational capability when they run into problems. So I suspect is going to be some opportunities pretty difficult to estimate it right now.

[noise] quit that that's all very helpful. Thank you.

Thank you very much we'll get our next question on the line from done Levy with credit Suisse grid ahead.

Hi, good morning, Thank you.

Hmm first question want to focus on power Division and you know if we just talk how're train.

Broad strokes, how the downturn effective programs and it sounds like you're you're spend developed and spend his own tack that bowling potentially going to launch at lower levels than what's initially planned so.

Can we expect these new programs to launch at at lower margins for power train. It also for eight asking them to spend is intact, but you're you're probably in a long shot but rather than you would just remind us when the large BMW programs expected to launch.

Swimming do you want it.

Yeah, Yeah, I think good morning, then I think the the B.M.W. program is supposed to launch and made next to your July 2021, we continue to hit the milestones you know as we go forward in that I think from the poetry in perspective as I mentioned in the initial.

Comments, you continue to try to different programs with various Williams.

There has been some.

You know delays in programs, but very minimal to this point and no program cancellations and.

Regarding the question of.

Hitting the volume so pay creates is to be you have to be seen going forward.

You reach we will have a better answer going forward looking at numbers today in the data doesn't seem to be a significant difference proportionally right. Obviously the volume so good at different.

Not enough Granny medic to say, whether that'll change much.

Launches that are going this right now might be impacted but no visibility going forward you know the launches that are coming later.

<unk> the spending I think we are looking at anything that's near term that's purely operational if it's necessary in has to protect the lunch. Then we continue but every time a or every project if you're looking at in terms of spam.

Obviously, if that is a way to magnitude better or stop certain activities. We we will take action or have been taking action.

The big question being if we are making sure that any action that we are taking right. Now doesn't you know if practically long term success sort of started view of the company.

Okay. So it sounds like you're opportunistically approaching.

Then maybe cutting here and there are just for the very near term, but long term everything is still intact.

One thing they spend a lot of work by the car companies roles is by based during the shut down to keep the engineering, the testing, where where we could do that there's been a lot of work on the launches because the customers don't wanna reduced or or slow down their lunches I think in some cases and we'll have some impact.

Swami just said I can't think for the car companies, but I'm, assuming if there's any sort of supply.

Tightened as they are going to prioritize getting their new launches up and out the door as quickly as possible and also focused very heavily on where they have the high margin products it'd be pretty obvious and we'll see how how fast the sales come back, but I think Dick the card companies are really anxious.

Just to get started because they've got.

They think they can sell some of these new products should high margin products, and that's where I presume you're going to start seeing the biggest incentives for the into the in consumer.

Okay and then my Thank you My my second question <unk> World Class manufacturing has really been one of your your key focuses a along the years can you just talked about maybe how the initiated of manufacturing play out in the production really round how does it help reduce the risk if we have lower effect.

Capacity in a social distancing world how does it yeah, maybe help to mitigate some of the supply chain issue. Then is is this world class manufacturing really at the core of this low 20 per cent Sacramento margin, which is really quite quite a low and solid level.

Yeah, that's a a complicated answer I think world class manufacturing <unk> in our in our <unk>, we'd define how we're working on it is everything from once you get an award through the launch program a lot of it is done brand in how you design a product for manufacturing how do we pick our capital or manufacturing processes, we have flexibility.

So the extent that we have flexibility volumes go up or down we can select the labor.

Also that we look at a lower inventories things like that.

If if somebody's going to saying what do we mean by World class manufacturing I would the the big picture is reduced any non value added activity and we have very specific things we've gone through where I think we've done a good job over that in Alaska. The number of years, because we're de centralized every one of our plants.

Makes the decisions that's why we move pretty quickly.

I I you know the detrimental margin. It is what it is I don't know what other people are doing I think the the fact that we don't have a lot of wasting the system.

Hopefully will help we track everything from costing on quality in her mouth box scores. So.

I think the that proves into putting we've been having better launches, reducing our costs at nine quality and I would expect as we come back up the plants will do what they normally do but one of the differences. We did consciously this time and we went to the wait on nine and everybody was cutting.

We probably as well as a lot of other people I think caught in some of the wrong areas. We we we reduced and and let go some of our best operating people. When it comes to six segment things like that we we consciously made the decision we want to.

Not only protect those people, but take advantage of maybe other people being the marketing and hire them. So we're we can start strong.

Mm.

Right great. Thank you.

Thank you for much we're gonna turn next question on the lie from James.

Hello from Keybank.

Go right ahead with a question.

Hey, good morning Gosh.

Just just back on on free cash flow.

And you you know more or less from the the cap X. intentions, you know if we're talking about 10% to 15% cut you know we're still looking at.

No, it's close to one and a half billion for the year, which you know depending on where sales fall out you know could be.

You know five and a half per cent plus of of revenue. So certainly elevated security Thunder thoughts there and that you just confirm we'll we'll working capital B.A.A. use of cash for the full year I understand the sequential pick up just wondering the the full your expectation.

So I just the overall on on Capitol, James recall by our outlook, which we now call that or or capital spending for 2020, we've we've talked about about $1.7 billion.

Yeah, you look at.

You know her sort of.

Volume.

You look at I.H.S. as an example, you know we're thinking based on on that born scenario.

You know it could be 10% to 15% reduction over the 1.7 billion I think there's probably some opportunistic that down lower 'cause accent that some programs get pushed out or delay by our customers that could have an impact how big a big chunk of our capital spending is for programs are gonna be wrapping up a young 21 22.

I am frames. So it's kinda hard to just say, we're going to stop spending we've got to condemn that's out there, but I I do think or something like sell to deal with that.

You know in terms of kind of will working capital sort of ends up for the year.

I I'm not I don't remember when each a while at this point in time, but you know where.

Typically include four so <unk>, we'll continue to we should build throw things working capital g. to subject to production start ups Q3, with some recovery before.

Yeah, depending on where shell and up into G. four relative to queue for up 2019 that that could result in sort of an impact I'm working Kappa, let's say generally sales would be lower you for this year for us last year, probably got a little bit of a recovery.

Yeah, it depends on as well timing a famous you recall last year, you know, we've got a big chunk of.

Cash in at the end it was here every day to 2020, so that things around.

I don't normalize basis.

Think of sales are hired this this fourth quarter from last year, probably have a net investment are working capital plus or minus some of the other items I talked about.

Got it no that that's really helpful and then.

In terms of you know thinking about the low 20 per cent decrementals for the year, which was certainly a positive.

Can you provide any color on on what the the two q.

Payments actually you know entail.

First and then you know within body experience and structures. You know there's you know there was some operational under underperformance noted wondering if there's you know if you could qualify that <unk> and then lastly within seating it sounds as though that business incurred another sleigh to launch cost in the quarter I think the hope was that you know watch.

It it impacts might be behind the business if for the for this year. So just wondering if you quantify what that impact was and how things to try and the rest of the year. Thanks.

Yeah, sure, you're you're very professional sort of detrimental Oh, sorry, <unk> excuse to correct. Yeah, you don't like I don't have that number <unk> you know so obviously working process I suspect that the top 10 kids to college and all that less than what they were in Q1.

Ah, yes, I'm kind of when the plan shut down, but we need to kind of figured out across the globe. So I don't have the exact number but yeah, it probably be less but not mature early last is my my view on that.

You're talking about a couple of our segments you know your body aches yours instructors segment, if I look at a year over year basis. Yeah. We did have underperformance in in one of our facility.

Compared to worry were last year.

It's a negative.

We also have.

Another pretty significant negative which is just.

<unk> tooling contribution in our B.S. grip on you know that was probably about $30 million a year over your base [noise].

We also had a higher commodity costs.

Primarily lower scrap revenues and you know resin was alphabet, but all in all that that hurt us.

So those are the negative so when you take those into account easy it back up to enter performance still not not a bad result, yeah. Some of the positive things that impacted this segment.

What events things such as lower launch costs.

<unk>.

<unk> unemployed profit sharing into.

The profit participated as a general managers say G.M. presidents, we have some some F.X. transactional positive, but all in all in a.

Take tooling into account and commodity costs for some good things happening in in that group.

Sorry, the other group you talked about three with exceeding.

Yeah. It was a lot.

Shooting launches.

Yeah.

So so when I look at overall margin Seatings Ah you know we're down from from other 6.6 at 3.2 pretty significant decline remember covert 19th 200 to 250 basis points.

What we have as well is lower equity incumbents resolve that <unk>.

<unk> related production slowed down primarily in China.

Last year, we had a gain on a scale of an asset, which we talked about and I. We have this you're hired watch costs compared to last year and on a quarter to quarter basis. We're looking at one of the plan to starting up.

We've got more sales, but more underperformance on a relative basis, so that kinda sums up the change in margin, but again the biggest impact or is is a covert 19 impact.

Thanks.

Mm.

Thank you very much.

Okay to our next crossing the line from brought last with Wolf Research grid ahead.

Oh, good morning, everybody.

<unk> <unk> <unk> first of all if you could just clarify events, yeah, I see the 23% detrimental margin and I I heard what you said about the underperformance at what facility and.

Some of the resonance scrap issues.

We sort of just excluded they come or the you complete vehicle Assembly business. It looked like that detrimental was 30% to 35%. So if we were to just stay sick that into the C.V.A. versus the.

Traditional auto parts business.

When when you talk about low twenties prospectively in terms of Sacramento margin are you sort of suggesting that that that's what we should be thinking about and it's kind of incorporates it's an improvement from where we are now because it incorporates an adjustment to head count that you weren't able to achieve because the business change so quickly.

<unk>.

But.

We were at 23% Sacramento's.

Q1 on cold at 19 right.

If you're back up a toss up squirt, 20% think about that the top of continuing to some degree in q. too.

And the other thing you've got going is what happens to Magnus our Mega stars operations on on the G. five fines or up in April.

So yeah, you're you're 23, probably is a little high because of the top up 61 20 per cent, probably with a low because you're going to have some <unk>. So that's like how to think about the low twenties, but rod there is a lot of moving pieces share a lot of things going on so that.

<unk>.

Get a more precise number is is a difficult I think and you're like Uh huh.

To go plus being 20 to 23 and kind of the whole twenties. That's that's pretty good you for us and where we think we're going to end up.

I I.

I want you to just I'll think about how we've come up with some of these numbers because it is a little different from what we would normally do you know Q1.

Those numbers are from you know we've got the quarter, we've done or ridges Ah. So those are hard numbers and we typically what as we both up our forecasts as we build that up.

No level right up to corporate and if the bottoms up plan.

Given the the significant changes in production schedules that were occurring.

We weren't able to build up the forecast bottoms up so we were doing some molly at the magnet level, that's sort of trying to.

Kept in our mind, if we're going to end up based on a whole bunch of assumptions. So we kind of ended up with the low twenties and I sat back and says is that make a lot of sense, given what's happening in Q1, and kind of 20, 23% and coupon and low twenties for the balance for the full year that can be sort of substantiated.

You have to work that we had done it the magnet level makes sense.

Mhm, Okay, great. Thank you and then Don or or Swami it's from a macro perspective, when when we look at.

The market's it looks like dealer inventories about they get very low, especially in North America.

Could you pass long any thoughts you may have based on the release is that you see on on the trajectory of the restart, especially in North America, just post may it sounded like you're somewhat cautionary on Mexico, but we've been hearing that there's a pretty steep restart being planned in in some cases.

Yeah, I I can't comment on the dealer inventory and you know you like a day supply depends on you know what are they do the math on it I think the I think the start up.

Was delayed across North America people are going to try and started up on one shift in many plants may 4th which is this week people are hoping is going to be next week. It looks like I think most who's going to be the week after and most of that is being driven by the inability to start in Michigan because his stay in place orders a lot of discussions going on.

<unk> between the industry and Michigan once we're allowed to start safely and I think we can start safety with all the work that has been done I think the unknown here is Mexico when can we get up and running allowed to discussions going on there hopefully we can get started so I think the the pace of the started.

It's going to be dependent on the supply chain.

As far as a demand from the end consumer I I, you know I think it'll be a couple of weeks before the the plans go from one shifted to shift in many cases three shifts they'll find out if if there is <unk>.

Problems with with this supply base. So the quicker they can get up to regular production. They will and I think that will continue depending on what you. Just asked are the end consumers bind vehicles are not and I I don't really have.

Visibility on not at this point in time.

Mhm, great. Thank you and and just lastly, the bigger picture it sounds like you're preparing the company to be.

Opportunistic just with respect to M.A.

My question is.

You don't really make move the needle on magnet obviously, they the the sizes of acquisitions would have to be somewhat larger and if you were to pursue something.

<unk> is <unk> are you primarily focused on extensions of businesses that you're already in or are you sort of thinking about extensions into new products.

We would be looking at technologies and things that are bolt on two to the products were in but if you look at their products were in let's take power trained as an example, there's a you know we've we've done a lot of capability, but there's a lot more products that sort of feel that would fit in.

To that area. So I would I I would it yeah I would assume that most of the news who would make would be to enhance.

The technology or our foot print or the the capability in the products for we're in now there. When you look we have been having a lot discussions about what's going to change on mobility in the future. So there's there's some other areas, which were looking at but most of the things I would think would be within our product curious.

And I think the instead, we <unk>, we stopped our buyback. So when we think the time is right we're going to have to make a decision to the extent we want to.

Just employee capitalism is it better to go by somebody else or by our stock, we'll see what the stock prices, but I do think we're going to be in position due to take advantage of some of the opportunities we see coming out of this.

Great. Thank you.

Thank you very much.

<unk> capital markets current had.

Thanks, just one question <unk> like as you know other industries for example meet protesting facilities are having a lot of trouble with the corporate 19.

So I'm just wondering like why are you so optimistic that.

You're going to be running your parts plans now I understand that you'd want to meet processing plant. The employees are literally standing shoulder to shoulder, but you still have issues like <unk> changes and wash rooms and change rooms and.

Just wondering how you're going to manage all this.

Yeah.

Go ahead funny.

Oh, I I think they're coming from outside being optimistic was in terms of the corporation that we have gone through although his shot central data points. The fact that we have had the lessons learned from.

I was trying to approximate them to 54 divisions that came up and running in China.

Some of the divisions odd running in Europe.

And when you know we talked about a gradual ramp up from the <unk> perspective, the one chip to shipped in going on the protocol starting place to be able to effectively support that process, Oh, they're going to be missing from going forward, absolutely touching back <unk>.

Drink, it's just nothing but a road map, okay efficiency in continuous improvement we.

To use that promotes greed to say how effectively can be.

No put things in place and it's been encouraging to see it being able to do that in China and in Europe. So the comment that of course, much do that and I think it'd be feel confident from that perspective dumb if you want to write something.

Yeah, I'm, Peter I think my personal opinion is I'm glad I'm not a politician no matter. What you say you you're going to put your put your mouse I think the I I personally think that society has to get started again.

The governments can't afford to keep on going on I think we're going to the the the.

We're gonna have more damage longterm do people's mental and financial Health I. If we don't get started again and then we're seen from from the virus. So the I think if you have people going out and noncontrolled situations in there talking in there you know I I think there's a.

Risk that you were gonna start scene is spiky gain where we can control where people walk and there's been a lot of work here, where people are standing, but they're wearing ah there's probably.

<unk> risks.

If we're doing everything properly and that's way everybody's been sharing their their protocols here, probably less rest and people going out to the shopping mall and we were just completely uncontrolled. So we're gonna happen to track. It we've got tracing involved in no I I'm relatively comfortable that we can do to safely as long as people are follow.

But they should be doing and I think people are worried so they're gonna be very cautious of what they're doing so I'm.

You know I think that the the more difficult areas someplace like Mexico, where you do have you know plants with a lot of people close together and those are things were working on and I know other companies I clear and put a lot of working with this we're sharing our our best practices there as well so that's probably going to <unk>, probably a bigger challenge, but so far we've seen in China and love we've seen so far.

In Europe and people are being pretty disciplined.

Okay. Thanks for those comments.

Thank you very much we're going for next course on the line from Brian Johnson Barclays card ahead.

Thank you I just want to follow up on the last question.

With getting your perspectives on how Ontario is fitting into.

<unk>.

For you in particular, but overall and <unk> important, but frankly south of the 49th an overworked part about another supply chain.

As far as <unk>, how Ontario has been handling it <unk> you ask yeah I'm, what's their standards towards reopening factories, what kind of restrictions can you have an assuming michigan in Ohio can get going we'll Ontario beyond the same time table.

Yeah, we've been <unk> I've actually been quite impressed with the way the Premier Ford is handled this strum I've probably been I had been in the fall with him.

10 times, you been calling me Saturday nights 11 o'clock, you I think everybody's working really hard I been quite impressed with what they're doing the they didn't really tell us we had to shut down if we had lots of dialog. We've had several meetings now, but we called caps you. The painting on a motor partnership Council the material government.

Federal government in Quebec sign that and the dealers really good discussions I think there they want to be cautious, but they are going to allow us to restart. They do you understand the importance of restarting. So I think we're ready to start if we were ready to start a may 4th.

With all the protocols the Ah so with Michigan gets up and starting I think that's the the the the biggest hurdle right now to restart Canada in the U.S. Mexico's of one we're tracking and have been lots of discussions I think Mexico's prepared to allow the automotive industry to restart, but we just.

He didn't do it really carefully down there and and and safely we'll see when the assembly plants get started up down there, but they understand that we need to get the suppliers going where else North America doesn't start so I think overall I'm really.

Pleasantly surprised with what the Ontario government has been doing with industry in in cooperation on P.B.B.P.P.E.N. at in other areas. So I don't think ontarios to concern.

Yep, and just kind of loop back on the subject acquisitions take away, helping out suppliers, maybe even taking some <unk> last time, the forging casting metal forming businesses where are the most distress. When you know I is there any particular <unk>.

Okay challenges in the supply base that you could be looking both to help out getting production going but maybe for opportunities for either take over acquisition.

Mhm.

I'm not close enough to to know we've tracked about 200 and suppliers that we have red for various reasons other financial or whatever we're but we got we have thousands of suppliers I'm not aware of any particular area and again I think if if there's a if there's a supplier or I don't.

One particular area, but the we typically you have discussions with the <unk> I'll take the lead with other major tier one suppliers of of how we get that restarted right now maybe maybe we just don't know enough, but we were not.

Aware of any Showstoppers and I haven't heard of any show stoppers at the car companies either so we'll probably find out more as as we get started here and they have the working capital draw.

Okay. Thank you.

Thank you very much we got her next question on the Lion from my cum Grano with Raymond James Go right ahead.

Oh, Thanks for taking the question just just one Europe as we think of the supply chain. Starting there is there any sort of crossborder dynamic we should think about over there and any any concerns that might come into play to hinder sort of the wrap up in that market.

Are you talking about getting people in goods from country to country across those borders.

Yeah exactly.

You know we've haven't Swami may know he's he's been taking the lead in over the last month and a half on all the activities as far as restarting covered 19, we we do track it closely we've been able to start up our G. class I've seen for about four weeks now and that's been that was the first vehicle line that started up.

Think of all the vehicle lines and we've been able to get people as we needed to Ah croston in where we were having difficulties we can figure that out as well as suppliers I'm not aware of anything off the top of my head I think people are sort of jumping through hoops as you would expect but I think so far they've been able to to work.

<unk> no.

No. That's a that's correct on I think nothing material to talk about in the post phases. We had some hurdles you know getting parks and things from Italy, but we walked around it and you know the usual bumps, but nothing significant as of yet.

Okay, and then just on the tax rate you just clarify what we should think about for a reasonable tax rate for the year.

Yes so.

The.

Yeah, it depends what happens with a pay some whatever guess gains or losses, which creates some noise, which we typically hot but it was really significant in order.

<unk>, we're running at.

Yeah, you think about the guidance would be earlier on the here and stuff like 24.5%.

If you exclude the impacts the Mexico, Yeah, I think we're going to be ready.

Probably a little higher than a 24.5% and that's due primarily to losses that that we're probably not going to give it a benefit as a result of a reduced production, but I don't think it's gonna be materially higher than the guy that you were getting back in January.

Got it <unk>.

Thank you very much Mr walk around or for the question of the time I'll turn it back to your friend of closing remarks.

Okay. Thanks for everybody for dialing in so we took a little bit extra but it's it's it's a sturdy an unusual times unusual quarter, we won't repeat what I said earlier I think the it's can be really interesting to see what happens over the next couple of months on the restarted I'm sure there's going to be things that we have the industry has and anticipated I've been really impressed with how the in.

History has worked in I think part of that whereas it was because everybody had.

Gotten used to talking in working on the whole renegotiation of NAFTA. So Magda was quite active in getting people through a waste to and all the car companies talking I think that's worked out very well so.

We'll see what happens I think we're in a good position I, we'll we'll we'll see what happens if it we can continue to restarted like we have in China in Europe, and then North America I'm sure. There's gonna be some issues to deal with the main thing will be to try and keep everybody as safe as possible.

Not have to backtrack because of re infection. So we're going to be having our H.M. actually in in 45 minutes here relatively straightforward, we're just going to be doing it over over a telephone.

We'll see what questions coming from the media there, but overall, where I think we're we're prepared and were quite excited to get everybody back to work and getting a society back in a in a safe way to restart so thanks for joining today and we'll be talking to people tune. Thanks.

Thank you very much another's conclude the conference call for today, we thank you for participation.

Right.

Cigarettes, a day one.

Oh.

Oh.

[music].

Oh.

[music].

Yeah.