Q1 2020 Earnings Call
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Please standby conference call began shortly we thank you for your patience is around why you called the cancer.
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Greetings and welcome to your first quarter 2020 result.
The presentation, all participants will be not less than the only mode.
After school conductor question answer session.
I got time, if you have a question. Please press star one by the four on your telephone.
During a time because actually to reach an operator to press the star but is there.
Somebody to today's cars being recorded Thursday may seven 2020.
Now I'd like to turn the conference over to Louis Tonelli, Vice President Investor Relations. Please go ahead.
Thanks, Tommy Hello, everyone and welcome to our first quarter 2020 conference call.
We will have a formal comments today from Don Walker, <unk> Swami quota, Gary and Vince Galifi, joining us today, our Eric Goldstein and Jim Florals from magnets IR team.
Yesterday, our board of directors met and improved our financial results for the first quarter ended March 30, Onest 2020.
We issued a press release this morning for the quarter.
To find the press release today's conference call webcast slide presentation to go along with the call and our updated quarterly financial review all on 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 or future results and performance to be materially different from those expressed or implied in these statements.
Please refer to today's press release for complete description of our Safe Harbor disclaimer.
As we review financial information today. Please note that all figures discussed our newest dollars unless otherwise noted.
We've 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.
And now I would call a 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 that cobot 19 pandemic can touch on Magnus position.
The mid to long term Swami will discuss the restart production for the industry and Magna and Vince will take you through the quarter, our liquidity balance sheet strategy and capital allocation.
Before I start I want to acknowledge the extraordinary efforts and commitment of all magnum employees around the world, particularly over the past four months, if we have faced unprecedented times and challenges.
Magnet is in good hands, not only because of our strong financial and market positions, but because we have a culture that 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.
Settlement tools in guidance documents to assist all of our plants and offices.
We have also disseminated health screening tools and isolation guides for our employees instituted contact tracing for any known cases within our employee population and instituted deep contamination procedures.
In addition, we installed personal protective equipment and supplies personal protective gear for employees.
Throughout this crisis, our medical and health and safety staff have 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 great turned to work.
So let me will discuss later, but we consult we've consolidated our return 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 throat.
Emotive 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 layoff periods.
Maintaining the number of days at full compensation during the lay off period during the.
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 have an 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 and to prepare for various potential outcomes. While the causes of the down turn this time are different.
We have dusted off the playbook from the great recession. Our response as a company has been highly coordinated with multiple work streams across different disciplines and geographies with many stakeholders to consider.
We've 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 magnet.
That magnum much of the action is at the operating level.
Our business model is resilient, our entrepreneurial culture drives an ownership mentality and 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 and restart.
Once the work streams were established and 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 are involved with.
To support the fight against a cobot 19 pandemic.
We have a number of facilities that are producing much needed mast space yields gallons and ventilator components.
We've been able to support mass or just source mass from China and donate them to various hospitals in North America in Europe.
And divisions and employees around the world there donating clubs to hospitals meals to healthcare workers and hygiene kits to shelters.
To all those divisions and employees, we cannot thank you enough.
I'd like to comment on something I am 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 has 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 capabilities.
We continue to invest for the future both in terms of new program launches in R&D activities.
This has been enabled by our strong balance sheet.
The industry trends are largely unchanged, even if the timelines may shift a little bit.
And our positioning visa be these trends, which we highlighted our investor day in late February which now seems like a long time ago is strong.
Just last week Magna, one and automotive news pace award for our compensated.
Space brain liftgate reinforcement, a lightweight solution that debuted on the 2020 Toyota supra.
The space the space frame is the first comps at application of its kind for an automotive liftgate and achieved at 10% mass savings over steel version we highlighted.
This at our Investor day.
Plastic lift Jake let's gauges, 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 Sony.
Thanks, Tom and good morning, everyone, let Don said hope everybody is healthy and also staying optimistic.
I would like to Echo dons sentiments in thanking order employees around the globe for their commitment responsiveness and hard work or the challenging past few weeks. It is truly an honor and privilege to work with such a great team.
I will co ROE, what we're seeing in terms of production in our key market as well as how magna is preparing for the restart our corporation.
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 grow off pre core with 19 levels. However, refund sequential sales data out of China has been encouraging.
In terms of our production capacity in China. We are also now fully operational.
Our China restart has been exemplary meeting customer requirements, while appropriately protecting your employees and producing through our high quality standards.
We are taking lessons learned from on China experience across to our restarts elsewhere in the world.
In Europe, some production has restarted, but many OEM and supplier plants are planning to startup over the next few weeks.
North America is in much the same position in terms of restart.
Although generally a couple of weeks behind Europe.
The regions to major constraints have be in Mexico and Michigan.
They remain concerns about when Mexico can begin producing auto parts and rate.
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 a fairly slow ramp in production as all participants get accustomed to a new normal in their operation.
And as the industry rates through et cetera, what vehicle demand will look like.
In terms of OEM program launches to this point, we're not aware of any significant program delays.
However, there are few programs that are being pushed off a few months.
Thanks.
I would like to review or activities around the restart our core operation.
We are in very close corporation with our customers suppliers local governments and our employees in order to ensure they can have a smooth ramp curve.
We have also reviewed customers startup protocols to ensure we are aligned.
Obviously, we're worried about the restarts that we would typically experience after summer and Christmas shutdowns that over a number of additional 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 as smart start playbook, which provides a framework for restarting our facilities and office locations with a consistent response and strategy throughout the company, while protecting employees and making sure everyone stay safe.
Healthy and confident about 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're keeping a 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, we're making them aware of government financial assistance that may be available to them.
I would like to highlight the successful restart our for complete vehicle Assembly line for the Mercedes Benz.
G class in our facility in grants, Austria. This operation with standard up again mid April was among the first in Europe to restart.
It has been a success story in terms of freestanding post core with 19 and producing the electronic Waco to the high standards demanded by Daimler.
I will now pass the call over to win can be fees.
Thank you Swami and good morning, everyone.
I hope everyone is 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 latest customer shutdowns at 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 consequence challenges we face.
We were pleased with our first quarter results.
Prior to the covert 19 related shutdown each of our reporting segments is performing in line or ahead of our general expectations.
We estimate that cobot 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 have included in our appendix the breakdown of estimated coal that 19 related sales and EBIT margin impacts by segment.
Our first quarter consolidated sales were 8.7 billion the decline of 1.9 billion or 18% from the first quarter of 2019.
This reflects the 67% decline in global light vehicle production.
Partially as a result, cobot 19 related shutdowns.
Our sales in the first quarter of 2020 for also negatively impacted by the divestiture of our SPP business in the first quarter of 29 gains and currency translation.
Excluding net divestitures.
Which reduced sales by $325 million and currency translation.
Which was 152 million headwind, our 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 a.
210 basis points decline.
We estimate that substantially all of the year over year decline was attributable to the impact of that cobot 19 related shutdown.
In the quarter.
Adjusted EBIT decreased $317 million to 403 million.
Largely reflecting a decline in global vehicle production, including due to the Covance 19 related shutdown.
Also contributing to the Cline EBIT for the divestiture of our STFC business at the end of the first quarter of 19.
Lower tuning contribution in the quarter compared to the first quarter of 19.
And underperformance at a at a body exchanges and structures to quality.
These were partially offset by lower incentive compensation and profit sharing a favorable engineering program resolution incomplete 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% Q1 of 2020.
950 basis points of the increase is the result of tax on foreign exchange gains reported for Mexican tax purposes, but not for us GAAP.
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 foreign earnings.
Partially offset by the impact of income mix.
Net income attributable Magnum with 261 million compared to 531 million in Q1 of 19, reflecting the 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.
Decline reflects the lower net income partially offset by the impact of 7% fewer shares outstanding adding back the impact of the tax items.
Really.
Would have been 98 cents.
I'm now going to review our cash both investment activity.
During the first quarter of 2020, we generated 639 million cash from operations compared to 594 million in the first quarter of 2019th.
Typically we would experience and investment in working capital in the first quarter of the year given the seasonality of production.
The covert 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 403 million, including 203 million fixed assets.
A 100 million investment Waymo 93 million assessment, other assets and intangible assets and 7 million.
Purchase a small surgery.
Free cash flow with 356 million in the first quarter.
We returned 330 million to shareholders quarter through the repurchase of 192 million of our stock representing 4.8 million shares as well as the payment of 121 million and 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 racing liquidity by a further 700 million.
This brings our pro forma available affinity to approximately 4.9 billion.
We also filed a new shelf prospectus, replacing one that had expired last year, which provides us flexibility to pursue up to an additional 2 billion public debt financing down the road for our business.
Many of you will 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 time, 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 declines in EBITDA, we are 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 dividend 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 an outlook for our business.
Nevertheless, we like to get some color on what we expect for the remainder of the year certain areas.
We've been doing some modeling on the expected impact sales supplies on our earnings.
As I said earlier, we estimate that sales loss due to covert 19 for approximately 1.1 billion in EBIT loss was about 250 million.
This implies decremental margin of approximately 23%.
The EBIT impact includes approximately 30 million that represents top of payments to employees.
Excluding the top up.
Decremental would be about 20% in the quarter.
I believe a detrimental margin in the low 20% range is a reasonable proxy to use for the balance of the year.
Keep in mind that there are always a lot of puts and takes in earnings that can impact that incremental including top ups that will impact the second quarter.
Of course, all of this is subject to the various risk factors, we have disclosed in our filings.
In terms of movements in working capital as I noted earlier in the first quarter, we generated cash from working capital and unusual event due to the production shutdowns as sales are increasing sequentially from quarter to quarter. We are typically investing in working capital.
As we continued to restart production here over the next few months, we expect working capital to swing negative.
A 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 is reasonable to assume that we can reduce capital for 2020 by 10% to 15%.
Is the extent that our customers delay or cancel program launches or may be rooms to further reduce and are for 2020 capital.
Thanks for your attention. This morning, we'd all be pleased to answer your question.
Okay.
Thank you very much.
And once again, if you'd like to register any questions. Please press the one by the floor on your telephone you Herthree tone prompt technology request.
It's a question has been assets to dry restoration is the one or both.
One moment. Please her first question.
And we'll look at 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.
The strokes you gave us zero on the outlook Mint.
The first quarter had good decrementals all things considered but it also had very good sales performance given the 27% drop in global volumes or production volumes.
The 13% outgrow that big number four for you or for any any any company I'm just curious and as you look forward. How you generally think about that may be sort of ranges or any kind of direction, because that's a that's a big delta and pretty impressive.
Hey, John.
That's a good question, we've done a whole bunch of modeling.
Talked about in my formal comments.
We believe we present number of different assumptions and overall volumes.
Just have terms that.
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 the chart normal ties falling assumptions of business line that was built up from the bottoms out, but we were effectively manage that growth in content per vehicle.
Our growing fast yield Wal Mart relevant market.
I expect that.
Thats going to continue in the balance of the year.
When you look at Q1.
For one thing kind of we think of that is whether there was maybe a pull forward of of.
Some of our sales to the to the OEM.
Building up inventory in anticipation of a shutdown that may have had a little bit of an impact.
But even if it that exists for really good performance in Q1 around the globe.
Hi, I just that keep in mind John that.
China was down very significantly in 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 Vincent working capital I mean, assuming five percentage sales on on the rewind of production is that okay way to think about it.
Yeah, I think what we get to be able to year.
John what we should be back that kind of normal levels going forward of 5%.
Probably a good way to think about it.
As we've been thinking there.
The other ramp up of working capital.
I think we're going to turn negative.
In the past with these ramp ups half in Q2 Q3 or at least on them.
The investments 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 falling perspective.
Okay.
Okay, and then just look on the balance sheet real quick you have almost $5 billion of liquidity right now the $2 billion shelves you see this it is liquidity liquidity cogent, it's really just sufficient to get through the storm of the 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 the might be really tracking either horizontal or vertical acquisitions.
As.
Just before we increased our revolver.
And with 700 million, we will we were 4.2 billion we went up.
5.9 billion, Yeah, I think about the additional seven holiday.
Additional liquidity.
I'm not that concern about the cash flow and whether we need us to run the business.
I'd like to have added additional liquidity to the accenture some opportunities on some takeover business, whether this amendment any opportunities that come up I'd, just rather have it did not have it.
Yeah, the shelf for us, it's sort of normal post business, we had a shelf previously.
We issued from that under that shelf.
That have expired last year, we had been working on not following the shelf prospectus prior to two coal that 19.
Doug It just gives us.
And our strategy just gives us flexibility if we want to racing debt for whatever reason, we have the ability to do that pretty short notice.
Okay, and then just lumpy given for John just given the balance sheet.
We do have a lot of strength into a whole lot of things but.
As Don talked about on this call is we've certainly internally been focusing a lot on coal that 19, our employees, which is priority to us kind of the startup.
We've also set back to the team is okay, well now that's all working got a whole bunch of worth trying to get the executive team now where do we want to take this business and what do we see in the future and how can we position ourselves and does it kind of give us an opportunity to potentially advance our positioning in the industry. So that at the things we've been talking about if executive level.
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And John It's one of the I think Vince just supposed my last question you think about strategically what your customers are doing and what the end customer being the though that need 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 managing your.
All right in your in your release, but I mean mobility to service might be dead in the individual ownership model may really right here, which is probably ultimately a good thing for volumes and the industry. I mean, just any thoughts is sort of your pine and really think beyond the crisis as the the opportunities than maybe the shift in that.
I will sort through the digesting that might really help you out and provide opportunities.
No John I'll start selling 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 do 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 discussions I'd like to see what happens over the next couple of months I think delevers as far as yen consumer is going to be we can 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.
I have lots of different opinions or 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 beyond that.
Discussion you know, we might see a little bit they'll say push back into themselves emission they'd relations in certain areas or the next three to five years, but <unk>.
Well, we're all like to believe you don't want the numbers, we have talked about or the next 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 crates of.
As the audience try to manage their fleet emissions.
The most important thing wouldn't beat to see how the consumer behaviour will be effective if it is affected at all.
With all your 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 I think that's when look a little bit different based on how things are going right now.
<unk> talking about shade mobility, I think eight 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 so 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 the locks <unk> I think come to light as we see consumers come out in the next week to six months and look at that usage in China. It was interesting that I telling drop 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 rate goes 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.K. by 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 the Waymo investment in the quarter kind of how do you see that.
Progressing in the relationship how do you compare that relationship to your prior relationship with lift.
Yeah, we <unk>, we made 100 million dollar investment in Waymo.
We're not going to comment too much will let them comment on 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 it either.
Possible cooperation in our complete vehicles loop. The magnet stier has the ability to do modifications and 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 in.
As far as we have the capability integration.
We're not doing the level of Flybe work with them level four level five work with them, but I think most standpoint software, but I think gossiping add 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 could beat will be in and not individual ownership I think it could be in areas like Wayne always worked on other companies are working on the people around but if you look at the trend it's changed as far as people ordering things online.
And having delivery service I think that's <unk> a back on in that area. So.
That will be the area where level four level five vehicles like take off as far as the lift that was but different.
Working relationship we have there we were actually working on the software we change your mind, because we want to work more on level two level two plus that's why we change what we're doing so I mean anything.
Oh I've been recorded on the focus or man somebody else to laugh internally and as we have said Oh.
Really need a main focused on the <unk>. In addition to investments whether it's in criminal or criminal stupidly smells. So like don't sit there for five would be a feasible case in the future.
We just looking at it from the perspective of time domain.
So we believe some partnerships in technology or meet it it'd be a team or they years. This I think we'll provide us say front row seat in you know in the Devil <unk> kind of keep us holistic Oh wait on him to know focus needs to be and how are we still keep the finger on the pulse.
That's us for help <unk> secondly, maybe for Dawn <unk> Oh, we didn't know nine magnet was able to gain.
Quite a bit of market share with the content per vehicle, particularly North America I was hoping you could kinda compare as you look out what the opportunity side in this downturn, how that compares to Oh wait or die in terms of supply chain and other be able to control opportunities are similar as the the more is it less she'll be part of it on that.
I think the industry overall is healthier going into.
This situation, we'd had a big run up I think a lot of people had.
Assumed that the volume was going to stay up had a huge dropping I think a lot of the suppliers in in <unk> <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.
The impact that needed to supply basically we're tracking all bars suppliers oleo entered tracking their suppliers as well I think people aren't 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 cutting to 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 there will be opportunities I I'm not sure. How much takeover worked there will be again, it's can be really difficult to tell I think until we get to the Rhys.
And just 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.
Right that that's all very helpful. Thank you.
Thank you very much we'll get our next question on the line from Dan Levy with credit to me go ahead.
Hi, good morning, Thank you.
First question, but want to focus on power.
And you know you just stop power train.
Broad how the down for effective programs.
Sound like you're you're then developed and spend his own pocket bowling.
<unk> at lower levels than what's initially planned so.
Can we expect you to new programs to launch at at lower margin for.
For power train. It also for eight asking them to spend is intact, but you're you're probably in the long shot lower level and you just remind us when the large B.M.W. programs expected to launch.
Swimming do you want it.
Yeah I think good morning, then I think though so BMW program is supposed to launch and made mixed 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 call.
I mean, you continue to try different programs with various Williams.
There has been some.
You know delays and programs, but very minimal to this point and no program cancellation and.
Regarding the question, though from.
Hitting the volume <unk> to be you have to be seen going forward.
You reach we'll have a better answer going forward looking at numbers today and the data doesn't seem to be a significant difference proportionally right. Obviously, the volume started with a different.
Not enough Granny medic to stay rather that change much.
You know the launches better going this right now might be impacted but no visibility going forward you know the launches that are coming later.
The question, though this pending I think we are looking at anything that's near term that's purely operational if it's necessary and has to protect the longevity continue.
But it read huh or every project if you're looking at anything.
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 if they're taking right now doesn't you know effected long term success. So started.
The company.
Okay. So it sounds like you're huh opportunistically approaching send maybe cutting here and there are just for the very near term. That's a long term everything is still intact.
That's right that one thing they spend a lot of work by the car companies as well as 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 there launches 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 gonna prioritize getting their new launches up and out the door as quickly as possible and also focus 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.
They get started because they've got.
They they think they can sell some of these new products should high margin products, and that's where I presume you going to start seeing the biggest incentives for the into the in consumer.
Okay and then my thank you My my second question well class manufacturing has really been.
One of your your key focuses a along the <unk> talked about maybe how the initiative manufacturing play out in the production really Ram.
How does it help reduce the risk if we have lower effective capacity in a social distancing world how does it yeah, maybe help to mitigate some of the supply chain issues. 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 when solid level.
Yeah, that's a a complicated answer I think what class manufacturing <unk> in our in our how what we'd define and have a working on it is everything from once you get an award through the launch program a lot of it is done up front in how you designer product for manufacturing Halloween pick our capital or manufacturing processes, we have flexibility.
So the extent that we have flexibility volumes go up or down we can flex the labor.
Also as we look at a low Raymond Tories things like that.
If if somebody's going to say 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 had gone through where I think we done a good job over that in Alaska. The number of years, because we're de centralized every one of our plants.
Makes it a stations that's why we move pretty quickly.
Ah.
I I you know they 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 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 where we can start strong.
Yeah.
Great great. Thank you.
Thank you for much work I turn next question on the lie from James.
Hello from Keybank.
Go right ahead of what the question.
Hey, you want and gosh.
Just just back on on free cash flow.
Can 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.
You know, 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, 5.5% plus Oh, so of revenue. So certainly elevated curious on your thoughts there and then she just confirm <unk>, we'll we'll working capital D.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 on Capitol, James recall by our outlook now hold it or or capital spending for 2020, we've we've talked about a better $1.7 billion.
Yeah, I just look at.
You know.
Sort of.
<unk>.
You look at I.H.S. as an example, yeah, we're thinking based on a map one scenario.
It could be 10% to 15% reduction over the 1.7 billion.
Yeah, I think is probably some opportunistic that down lower.
Into the accent that some programs get pushed out or delayed by our customers that to have an impact yeah big big chunk of our capital spending is for programs are gonna be wrapping up you know I'm 21, 22 timeframe. So it's kinda hard to just say, we're going to stop spending we've got to condemn that's out there.
I I do think or something like sell to deal with that.
Yep.
So oh, well working capital sort of ends up for the year.
I I'm not I don't remember.
At this point in time, but you know we're.
Typically include or so <unk>, we'll continue that we should build building looking castle she shoes subject to production start ups Q3, with some recovery if she for you know, depending on where sales and up into four relative to queue for.
2019 that that could result in sort of an impact working Kappa, let's say generally in sales would be lower you for this year for us last year, the probably got a little bit of a recovery.
Yeah, it depends as well timing of payments you recall last year, you know, we've got a big chunk of.
Cash in at the end it here every day 2020, so that things around.
I don't normalize basis.
Think of sales or higher.
Fourth quarter, the 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 to to pop up payments actually you know Intel.
First and then you know within body experience and structures. You know there's you know there were some operational under underperformance noted wondering if there's you know if you quantify that.
And then lastly within seeding it sounds as though that business incurred another sleigh to launch costs in the corridor I think the hope was that you know watch related impacts might be behind the business. If for the for this year. So just wondering if you quantify what that impact laws and how things to try and the rest of the year. Thanks.
Yeah, sorry, you're <unk>, you're very professional sort that grammatical oh, sorry, <unk> excuse to correct.
Yeah.
I don't have that number <unk>, yeah. So obviously working process I suspect that the top up some key to probably a little bit less than that 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 an exact number but yeah, it probably be less but not literally lacks is my my view on that.
You're talking about a couple of our segments you know everybody. It's yours instructors segment about looking at your your basis. Yeah. We did have 100 performance in in one of our facility.
Compared to worry were last year.
What's a negative.
We also have.
Another pretty significant negative, which is just a reduced to link contribution.
In our B.S. grip on you know that was probably about $30 million a year over your base [noise].
And we also had a higher commodity caught.
Primarily Laura scrap revenues and you know resin was up at all and all.
That that hurt us so those are the negative and so when you take those into account either you get back up to enter performance still not not a bad result, you have some of the positive things that impacted this segment.
What events things such as Laura launch costs.
<unk>.
Notation unemployed proper training to.
The profit participate in general managers say G.S. president.
We have some some F.X. transactional positive, but all in all A.A., if you take tooling into account and commodity costs for some good things happening in that group.
The other group you talked about three with exceeding.
Yeah. It was a lot.
Shooting launchers.
Yeah <unk>. So so when I look at overall margin or Seatings Ah you know we're down from from a 6.6 at 3.2 pretty sick significant decline remember <unk>, 19th 200 to 250 basis points.
What we have as well is lower equity incumbents results to <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 year hired watch costs compared to last year and on a quarter to quarter basis. We're looking at one of the parts of starting up we've got more sales, but more underperformance are relative basis, so that kinda sums up the change in margin, but again the biggest impact or is is.
Because like 19 impact.
Thanks.
Mm.
Thank you for much Oh.
Okay to our next crossing the line from brought last what's more research right ahead.
Oh, good morning, everybody.
A couple follow up to first of all you could just clarify events, yeah, I see the 23% detrimental market and then I I heard what you said about the underperformance at what facility and some of the residence scrap issues, but if 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.
The traditional auto parts business.
<unk> 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 in any 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 changed so.
<unk>.
But you know.
[noise], we were at 23% that mantel.
In two one on cold at 19, right, if you're back up the top of Squirt, 20%.
About that the top of continuing to some degree in cute too.
And the other thing it's got going is what happens to Magnus our Mega stars operations on on the G. five fines or in April.
So yeah.
Hi, <unk>, probably is a little high because of the top up 61 20 per cent, probably little low because you're going to have some topics and kid too. So that's like how to think about the low twenties rod there is a lot of moving pieces sure a lot of things going on so that to try to.
Had a more precise number is is a difficult I think when you look at to go posting 20 to 23, a kind of the low twenties. That's that's pretty good you for us where we think we're going to end up.
I 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 than what we would normally do you know Q1.
Those numbers are for nearly a quarter, we've done or word is so those are hard numbers and we typically what as we go up our forecasts is we build that up.
Tunnel 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 our trying to.
<unk>.
And based on a whole bunch of assumptions. So we kinda ended up with the low twenties and.
I sat back and says is that make a lot of sense, given what's happening in coupon and kind of 20, 23% and coupon and low twenties for the balance for the full year that to me sort of substantiated at the work that we had done at the mango 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 can you pass along 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 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 in 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 starting up on one shift in many to plant 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 it's been bitten by the inability to starred in Michigan because his stay in place orders why did 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 a lot of discussions going on there hopefully we can get started so I think the the pace of the started.
Up is gonna 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 or they'll find out if if there is.
<unk> with his supply base, so the quick or 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 or not.
And I I don't really have.
Visibility on not at this point in time.
Mmm, great. Thank you and and just lastly, the bigger picture it sounds like you're preparing the company to be.
Opportunistic it's with respect to M.N.A.
My question is <unk>.
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>.
<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 got 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 moon shouldn't make would be to enhance.
The technology or are what friend or the the capability in the products for we're in now there. When you look we have and having a lot of discussions about what's going to change on mobility in the future. So there's there's some other areas, which we're looking at Ah, but most of the things I would think would be within our product curious.
And I think the instead, we stopped restock, thereby back so when we think the time is right we're going to have to make a decision to the extent we want to.
Employee capitalism is better to go by somebody else or by our stock, we'll see with the stock prices, but I do think we're going to be in position due to take advantage of some of the opportunities. We we see coming out of this.
Great. Thank you.
Thank you very much.
The next question on the line from Kansas color from being more capital markets.
It had the thanks, just one question <unk> like as you know other industries for example, a meat processing facilities are having a lot of trouble with the cobot 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 don't Wanna meat processing plant. The employees are literally standing shoulder to shoulder, but you still have issues like a shift changes and wash rooms and change rooms and.
Just wondering how you're going to manage all those.
<unk> yeah right.
It's funny.
I I think the comment from our side being optimistic wasn't so the preparation that we have gone through although his shot central point. The fact that be a pad. The lessons learned from I was trying to approximate send a 54 divisions that came up I know running in China some of the division.
Odd running in Europe, and when you know we've talked about a gradual ramp up from the <unk> perspective, but once you have to shoot and going on.
The protocol starting place to be able to effectively support that process Oh, they're going to be lessons learned going forward absolutely touching back and then based on the one fence manufacturing. There's just nothing by the road map, Okay, p. shouldn't be in continuous improvement.
Kinda use that philosophy to say, how effectively can be you know 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 to their first much through that and I think it'd be feel confident from that perspective done 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 but you're putting 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 in uncontrolled situations in there talking in there you know.
I think there's a.
Risk that you're gonna start senior spiky game, 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.
Last risks.
If we're doing everything properly and that's way everybody's been sharing their their protocols here I'll be last rest and people going out to the shopping mall and we were 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 a plan to make 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 work into this we're sharing our our best practices there as well so think that's probably going to mean, no. There's probably a bigger challenge, but so far we've seen in China and what 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 a life from Brian Johnson or Barclays card ahead.
Thank you I just want to follow up on the last question.
With getting your perspectives on how Ontario, it really mean to.
<unk>.
Where are you in particular, but overall overall important but frankly I south of the 49th an overlap part about.
As far as <unk>, how Ontario has been handling it.
You ask yeah, I'm, what sort of sad towards reopening factory, what kind of restriction can you have an assuming michigan in Ohio can get going we'll ontario beyond saying timetable.
Yeah, we but I I have actually been quite impressed with the way the Premier Ford has handled this strum I've probably been I had been in the fall with him.
10 times, you have been calling me Saturday nights 11 o'clock, you I think everybody's working really hard I've 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 the <unk> partnership Council the material government.
Federal government in Quebec on that and the dealers really good discussions I think there they want to be cautious, but they're going to allow us to restart they do 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 so with Michigan gets up and starting I think that the the the the biggest hurdle right now to restart Canada in the U.S. Mexico's at one we're tracking having lots of discussions I think amexco's prepared to allow the automotive industry to restart, but we just.
I 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. that no. Other areas. So I don't think Ontario stick concern.
Yeah, and just kind of loop back I'm the project acquisition take away, helping out suppliers, maybe even taking compared to last time, the forging casting metal forming businesses where are the most the stress. When you know I is there any particular pocket.
Challenges and why base that you could be looking both to help out getting production going but maybe opportunity for either take over acquisition.
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 a supplier.
Or I don't know of one particular area, but the we typically will have discussions with the <unk> with other major tier one suppliers 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 we get started here and they have the working capital draw.
Okay. Thank you.
Thank you very much we're going to turn next question on the line from Michael Glen with Raymond James Go right ahead.
Oh, Thanks for taking the question <unk> just went on Europe as we think of the supply chain. Starting there is there any sort of cross border dynamic we should think about over there and any any concerns that might come into play to hinder sort of the ramp up in that market.
Are you talking about getting people and goods from country to country across those borders.
Yeah exactly.
You know we'd have a swimming may know he's he's been taking the lead 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 out by 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.
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 around these Swami <unk>.
No. That's a that's correct on I think nothing material to talk about it though both phases, we had some.
You know getting parts and things from Italy, but we walked around it and you know the usual bombs, but nothing significant as of yet.
Okay, and and then just on the tax rate. He just clarify what we should think of up for reasonable tax rate for the year.
Yes so.
The.
It depends what happens at the pay somebody we have gained or lost which creates some noise, which we typically hot but it was really significant in order.
You know we're running at.
Yeah, you think about the guy made earlier on here.
Four and a half that.
If you exclude the impact the Mexico, Yeah, I think we're going to be writing.
Probably a little higher than that.
24.5% <unk>.
Primarily to losses that that we're probably not going to either the benefits.
The.
Production, but I don't think it's gonna be materially higher than the Guy that you were getting back in January.
God <unk>.
Thank you very much I must 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 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 and 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 industry has worked in I think part of that whereas it was because everybody had.
Gotten used to talking and working on the whole renegotiation of NAFTA. So Magda was quite active in getting people threw away said I know the card 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 we can continue to restarted like we have in China in Europe, and North America I'm sure, there's going to be some issues to deal with.
The main thing will be to try and keep everybody as safe as possible and not.
Have to.
Track because of re infection, so we're going to be having our Ah A.G.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 come in 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 and others conclude the conference call for today, we thank you for participation for disconnect your mind.
<unk>.
Oh.
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Or.
So.
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So.
Yeah.
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