Q2 2020 Magna International Inc Earnings Call

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Greetings, I walk up to the second quarter two 2020 results presentation. All participants have been a listen-only mode afterwards will conduct a question-and-answer session at that time. You have a question. Just press the one for by the floor on your telephone. If any time the conference in to reach an operator to press the star key for better zero hour or two days car is being recorded Friday, August 7th 2020. Now I would like to turn the call over to a Lewiston L. Vice president investor relations, please go ahead.

Thanks, Tommy. Hello, everyone and Welcome to our second quarter of 2020 conference call. We will have formal comments today from Dom Walker Suamico to Gary and Vince galifi yesterday that the directors met and improved our financial results for the second quarter ended June 30th, 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 are updated quarterly financial review all in the investor relations section of our website at mac.com.

Before we get started just as a reminder the discussion today may contain forward-looking information or forward-looking statements within the meaning of applicable Securities legislation substance involves certain risks assumptions and uncertainties, which may cause the company's actual or future results and performance to be materially different from those expressed or implied in these statements. Please refer back to today's press release for a complete description of our Safe Harbor disclaimer.

as you review

Cancel information today, please note at all figures discussed or US Dollars unless otherwise noted.

We've included in the appendix reconciliations of certain key financial statement lines for 220 and Q2 2019 between reported results and results excluding unusual items.

Our quarterly earnings discussion today will exclude the impact of unusual items in these periods. Don will comment on the restructuring actions. We recorded in the second quarter the fact 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'll pass the call over to Don. Thanks Luis. Good morning. I hope everyone is staying safe and healthy wherever you are before I start I want to reiterate that the health and safety of our employees remains our top priority at Magna. We have been re-reading employees back into our plants and offices using our protocols assessment tools and guidance documents. It was a Monumental exercise to plan coordinate and implement the restart as a company and as an industry, I believe we have responded extremely well to the challenge caused by the pandemic including being a leader for other Industries to follow in terms of safe mode.

successful operational restarts

during the second quarter of 2020 are most significant markets of North America and Europe experienced year-over-year declines both in percentage and absolute volume terms wage exceed the worst quarters that we saw during the great financial crisis more than ten years ago and the worst decline that I've experienced in in my forty years in the Auto industry.

Industry environment has been improving off these loads vehicle sales and production levels in our key regions were better sequentially in May and June as governments around the world started to ease lockdowns and his Auto Sales began to recover vehicle sales Trend continued upward in July and we expect a significant improvement in our sales and the first serve. To the second half of the Year. Nevertheless General view of the industry is at the production trendline over the next few years would be lower than previously anticipated. This prompted us to initiate and in some cases accelerate the timing of restructuring plans to right-size the business to align with our updated expectations for the mid-term across the country have been taking difficult. But necessary action is to strengthen our business for the future. We recorded a 168 million charge in the second quarter substantially related to this week.

structuring

as expected for the second quarter our sales reflected the severe production declined falling 58% compared to Q2 2019 as it constructs. We posted our first operating loss on a normalized basis since 2009. However underline the discouraging results for a few encouraging elements are detrimental margin associated with covid-19 was about 22% reflecting our efforts to reduce and defer discretionary costs.

We can.

Served additional cash by reducing Capital spending and we expect the actions. We undertook in the quarter to lead to an improved cost structure and detrimental is going forward.

At the same time we continue to invest to secure a future and to ensure that we can successfully execute an all upcoming launches while we remain in relatively uncertain time to are confident that we have the full balance sheet the leadership and the right operating structure to allow us to remain Nimble and responsive to whatever the future holds in the short and long-term.

Lastly I want to comment an important recognition from our largest customer and late June General Motors. Recognized Magna was six 2019 is the Player of the Year Awards the most jobs ever for supplier in a single year the supplier of the Year Awards recognize GM's best suppliers that consistently exceed expectations creating outstanding value or introduce Innovations just for the company and I know one supplier of the Year Awards across our system segments for our mirrors Driveline systems truck Flames faces and systems as well as an innovation award for our freeform seat trim technology. I'm very proud of these accolades as they recognize our ability to provide solutions to the many challenges faced by our customers.

With that a pass the call over to Swami.

Thanks, Don. Good morning. Everyone. I am happy to report that you were able to achieve safe and orderly restarts in all of our operations around the world class soldiers varied in length with most plants shut down for several weeks overall the mood and morale at our plants upon return to work has been positive with respect to our restart capacity utilization in both China and North America are getting close to where we thought we would be at the beginning of the year in this timeframe. Europe is a little behind these two regions largely reflecting a software vehicle demand environment compared to China and North America.

Why we have seen a number of delays and a few program cancellations from our customers at this point. We don't expect these to have a significant impact on our business growth of to the market or the next couple of years. One of the concerns. We had a few months ago was the status of our supply base we noted on our q1 call that we were working closely with our suppliers to ensure a safe And Timely restart while we continue to track a number of suppliers. We have mitigation plans in place and to this point would have experienced no major Supply base issues impacting our operations.

Our operations have been able to manage the transition to a new normal our Smart Start play book has been an excellent foundation and it's become standard operating procedure with the protocols put in place have been well-received and adapted by our plant employees. They have been able to manage the production ramp-up without significant disruption to our production efficiency.

however

We are not stopping there a team of varying backgrounds from across Magna looked ahead to develop recommendations on how operations could be adjusted to stay prepared. Especially if a second wave hits or this becomes a seasonal illness the team closely examined what may need to be done in our Global operations over and above our current Kleberg an incorporated these into a regular operating mode and policies. We are staying prepared to keep our employee safe and protect our business.

While our leadership team was addressing the short-term needs of the business. We were also looking and planning much further ahead at what our company industry and society and need in the future. We continue to monitor ongoing Trends and potential new trends and I believe Magna has the structure people Technology Building Blocks and investment strategy to remain a leader in Mobility lastly. I want to announce that sheriff Marathi has joined Magna as Executive Vice President of research and development Chase manage all aspects of Magnus Innovation and new product development strategy and related activities.

Sheriff has been in automotive technology industry for 30 years and comes to Magna from Ford Motor Company where he held a variety of product development and Engineering leadership positions. He has extensive experience in electrification having led the 14 in developing a battery electric vehicle and hybrid electric vehicles off Sheriff also served as president and CEO autonomous vehicles LLC and was on the board of directors for Argo AI for self-driving technology partner. Additionally, he spent time with Uber as vice president of global vehicle programs leading the integration of their autonomous software into production OEM Vehicles off. We are very happy to consider it as part of our management team. I will now pass the call over to Vince.

Thank you, Swami and good morning. Everyone. I will provide a fairly high level summary of our quarterly results today rather than go through a lot of detail including on a Thursday results, which you can find in our MDMA and are not particularly meaningful given the severe sales declines L spend some time addressing what our Outlook implies about the second half of this month.

It's Don mentioned. We experienced the worst year-over-year decline in vehicle production that we can recall during the second quarter of 2020 Global vehicle production declined 48% year-over-year, but more significantly declined 70% and 59% in North America and Europe respectively are most important production markets month. We estimate that covid-19 related shutdowns negatively impacted our second-quarter results and sales in particular by approximately 5.5 billion and are justified by approximately 1.2 billion.

A decremental margin of approximately 22% reflecting strong cost control across Magnus operations. We have included in our appendix of breakdown of estimated covid-19 related sales and decremental margins by segment.

In addition Equity income was negatively impacted by the covid-19 related shutdowns.

Our second quarter total sales were 4.3 billion a decline of 5.8 billion or 58% from the second quarter of 2019.

In addition to the compact our sales in the second quarter of 2020 were negatively impacted by the end of production of certain programs currency translation, which was about six million dollar head would and net customer price concessions.

Organic basis in Q2 our regional sales in North America Europe and Asia each of performed vehicle production in their respective markets. However, as a result of the regional production mix organic sales underperformed the change and Global vehicle production in the quarter recall that we far outperformed Global Production in q1 wage in part due to significantly lower production in China or Magna is relatively less represented on a weighted basis organic sales slightly outperformed Global Production month.

this represents

Adjusted ebit decreased 1.3 billion to a loss of $600 billion substantially reflecting the decline in global vehicle production due to the covid-19 related shutdowns.

Also contribute to the decline and Eve. It was lower tooling contribution in the quarter compared to the second quarter of 2019.

Higher engineering cost in our business including electronic the social tax cost net Provisions for customer claims in the quarter and higher net warranty costs. These were partially offset by lower spending for electrification and autonomy as well as favorable assembly program mix and the benefit of cost-cutting initiatives in our complete faith that the segment

Our tax recovery was booked at 16.9% income tax rate compared to 23.5% on our pretax income in the second quarter of 2019. The tax recovery was lower than our typical tax rate primarily as a result of an increase in losses not benefitted in Europe.

Net loss of trivial to Magna was 511 million compared to income of $500 million in Q2 of 2019 reflecting the lower even higher interest expense and the impact of the lower effective tax recovery rate.

Tell who is lost for sure was a dollar seventy $1 for the quarter compared to a PS of a dollar fifty nine last year to decline reflects the lower net income and the negative impact of 7% fewer shares outstanding. We estimate that the lower tax recovery rate cost us about fifteen cents, assuming a tax rate of approximately 24. 5%. We expected when we lost provided and Outlook in February.

Not going to review our cash flows and investment activities during the second quarter of 2020. We use 1.2 billion in cash for operation representing a 2.2 billion swing from the second quarter of nineteen.

1.2 billion of the change is a result of reduced earnings due to the lower sales 934 million is a result of an increase in non-cash working capital.

You may remember from the first quarter that given the covid-19 shut downs and are corresponding sales declined. We generate a cash from working capital in the quarter. When we normally it's just working capital through the first half of the year. We sat on our q1 call that we expected this to reverse as we restarted production at various facilities around the world.

Customer payment delays the payout of our 2019 employee profit-sharing plan recoverable wage subsidies and a shift from a tax payable to a tax receivable balance, which is activated to about $500 million together with the wrap up a production represented most of the change in non-cash working capital in the quarter.

However, we expect to recover much of our working capital investment by the end of this year. The delayed customer amounts were collected shortly after the second quarter.

Is that connectivity is amount? That's a $243 million including $169 million fixed Assets in $72 in Investments other assets and intangible assets free cash flow is -1.5 billion in the second quarter.

in addition, we returned $116 to shareholders in the quarter through the payment of dividends despite the significant use of cash in the quarter our balance sheet remains, very strong at the end of the second quarter our liquidity stood at 4.1 billion including over six hundred million in cash

In June, we completed an offering of 750 million of 10 years senior unsecured notes bearing interest at 2.45% this that raised five additional Financial flexibility at a very low rate at a time and its debt markets were highly receptive.

Or just the debt. So just leave it at the end of the second quarter stands at two point three five times as anticipated. This is above our target range given the severe Decline and even home particularly in the second quarter. We will likely stay above the target range in the short term, but expect to racial to normalize back in the range in the second half of 2021.

yesterday our board approved our second quarter dividend of $0.40 reflecting our Collective confidence in our liquidity and our future

let me turn.

To a roadblock, which we re-established this quarter.

As always our Outlook is based on a set of vehicle production assumptions compared to other years. There is a higher degree of uncertainty surrounding future production given risk associated with consumer demand increasing covid-19 infection rates, supply chain or other production challenges and other factors, if actual production vary significantly from our emotions our results may also very significantly.

Rather than repeat the Outlook already in our press release. I will make a few observations regarding our implied second-half Outlook in comparison to the second half of 2019 vehicle production is expected to be down approximately 5% and 10% in our key markets of North America and Europe respectively off overall. We're also expecting Global vehicle production down approximately 11%

We believe our expect a second half stacks up. Well particularly given these Productions of clients are total sales range implies sales at worst phone 9% and a best up 2% or even percentage range implies an even dollar range of about 1.05 billion to 1.255 billion compared to 1.15 billion in the second half of 2019 and our free cash flow range for 2020 is between 200 and 5 million implying a range of 1.3 to 1.5 billion for the second half of 2020 compared to last year's very strong second half of 1.45 billion.

Lastly comparing this Outlook to our February Outlook. We now expect second-half decremental margins to be under 20%

the solid Outlook reflects the combined actions. We are taking across our business to mitigate the impacts of the current environment. They're facing

thanks for your attention this morning. We would all be pleased to answer your questions at this time.

Thank you. And if you like, once again to register your questions, please press the one on your telephone. Your request is the question has been asked or Draw your reservation as a one for my one moment. Please her first question.

I will get your first question on the line from John Murphy of Bank of America Merrill Lynch right ahead.

Good morning guys, and and thanks for the Outlook. It's you know, it's very helpful. And that's you know, my my first question, you know, Vince is as we look at this performance in the quarterback mentals of of down 22% was you know impressive but you know getting to just down 20% in into a second half a year is obviously even better and just curious as you're looking at this, you know, first, you know there any actions that you think might be sticky as the world normalizes which means maybe orange might be a little bit better than expected in the world normalizes. You know, I'm in second, you know sort of in the same vein. We think about incrementals, um on the upside over time. Are they going to near these new DEC page or could they potentially, you know be higher and how would we think about incrementals is um, you know, sales and production actually start Rising presumably in 2021.

Yes.

Join us as a really good question. It's because it's kind of difficult to answer that. Uh, in isolation. I think you got to consider a whole bunch of things. Yeah. I think when you look at the bank restructuring actions that we took in cute or commence in Q2 and they're going to wrap up by the time we get to the end of the year, you know, most of them. I think what you're seeing in the second half of a year is the benefit of some of those actions already, uh, uh, impacting positively are detrimental margins. Uh, but we don't get to the the the true benefit of those activities until we get into Twenty-One. So we'll continue to see that fixed cost structure reduction helping us, um in 21,000. I think if you look longer-term and you start thinking about what happens to overall volumes and how fast do they grow and what regions and what happens to the incremental margins going forward, you know at some point. Uh, yep,

Going to be approaching average margins as the business grows at a significant rate. That's why I think you can just answer that question in isolation. You've got to look at all the factors sort of what regions are you growing how fast you're growing wage absolute level of growth in sales. But you know, I think when I you know, when you look around the organization and you think about our culture, which we you know, we don't talk a lot of much as we should or decentralised operating system with our general managers focused on what they need to do to run their plant officially what costs are required and what costs can they take out and yet kind of put that all together and makes it pretty significant difference in our overall results.

Okay, that's helpful. And then just a second question is you look at the you know, the environment for new contracts or the environment from your customers. I'm just curious you know what the pace of activity is. Maybe a normalizing is everybody kind of working through the crisis and hopefully, you know getting back up and running and also, you know think you just about launches off in the near-term for stuff that's in in your in your backlog. Just curious if there's anything more disruptive than sort of two to three months, you know delays from you know from Covetous eyes things were down, you know on The Lawns are there any sort of near-term issues or maybe even opportunities?

For the most part people were pretty effectively through the down. There was some delays where you couldn't get people in for physical testing. So we're seeing a few months or Ram delays from the customers. Most of them are relatively short. There's been a couple of cancellations. Most of them are we don't we're not talking about them in the customers can but most of them are none of the big programs. We've got the discussions on going on when a new contracts a little bit of a delay but not not particularly. So I was pleasantly surprised that we're able to keep on top of our launches. We just went through a 1/4 reviews globally don't see, you know, any unusual spike in sort of running up against concerns and on new launch the Sorting pretty good night Swapmeet probably closer to I am inserting your areas. You've got any other comments there. No. I think you're covered it pretty much, you know, a small delays here and there but nothing that I would change.

Material that would affect the business going forward or the launches later on going right now and I think the theory we talked about in general the the move towards electricity.

And is pretty consistent what we saw before I think the economist level to level 2 and 1/2 continues that same bolt in the market spending in on the level three four and five or certainly slowed down a little bit of it is trying to conserve cash, but I think the the the customer still have to be awarding contracts so they can they can hit their launches so not no big huge delays there and keep in mind, you know to the extent that we have content on the old program that gets extended. You know, that's that mitigates the potential loss of business from launch that are delayed.

Got it. And then just just last real quick on on acquisition opportunities. I know the balance sheet might you know, the language might be a little bit harder higher than you know, your target range, but just curious, you know wage, you know out there have there been any new opportunities that have availed themselves because of the stress, you know in sort of what is what is the landscape look for you guys? And and what do you you know looking at most specifically it's nice to go through the funnel of opportunities.

I want to come in and specifically obviously but the generally unless there's a huge second wave that we you know, we don't anticipate we went through a cash position. I think would have been difficult to try and execute anything big unless it was addressed to stress situation during the down down time or the downturn. We we're continue to look at things more in technology is what we want to add some capability. Um, we have the ability to weave continue to pay the dividend. We we stopped by back but we can fax it should be back to to pretty healthy cash flow standpoint going forward. So we have the ability to move on something if we think gets correctly priced so go on, but we We are continuing to look at pretty carefully what technologies we want to grow in. What do we want to be located around the world?

Thank you very much.

Thank you, and we'll get to our next question on the line from the lineup Peter Scolari or BMO Capital markets. Go right ahead. Good morning question on the the decrement wage up 22% in the quarter. As you know, there were various, uh government subsidy programs in regions where they subsidized wages and other programs as well did that did that was that a meaningful amount and would that have had a positive impact on the deck Sacramento margin or or were those subsidies that magnet would have received relatively minor Peter good morning is spent, you know, in terms of the the amount of subsidy that we booked particularly in Canada probably higher than what we were anticipating as you know, there was some programs in Canada where we were encouraged to keep people on our payroll even though they weren't working so, you know birth.

occurring a costly of

Device wouldn and have a had a reimbursement from the government. So that's kind of a net zero to us. So I think if you back all that out and you look at the the benefit of the government programs on our decrement the margin it it's really not significant at all, you know, obviously sheer amount of recovery is larger because of as I said inactive employees that we've brought back on payroll, but didn't really have a significant impact on overall decrement, you know recall that you know, when you start looking at the bucket of you know, I looked at I looked at Sacramento margins from an operational standpoint, then I looked at the cost of in active labor government support and then the other part got in in all of that is the cost of PPE, uh, in the quarter, you know, it kind of hard to get exact number. We're probably about, you know, thirty-five years.

Dollars of additional costs and the quarter some are going to be you know, obviously reoccurring with with math and sanitation, uh fluid, um part of it is dead one time. But, you know going to look at that other bucket of cost it up pretty well next to zero Peter and the the big change when I look at that wage was just reduced sales and reduce costs of producing those sales including that's you need and other related costs.

Okay, and like you touched on this a little bit in a previous question but like your decremental margin was 22% in the quarter but in your guidance off like your guiding for a detrimental margin of under 20% so I'm just wondering why it's not the same on the way up is on the way down or I'm just being too precise that's really the 20% and 20% are really the same thing I think about it Peter as it's an improvement you remember last quarter we talked about kind of for the fact that the last nine months of the year we thought about low 20% you know, I think when you look at even q1 and Q2 on reduced sales and reduce T, but we're running about 5.2% decremental a little higher in q1, but I think until it's about 22% and how we came up with that number is you know, we looked at our Outlook we gave in January. Yep.

Which is where we think we're going to be and we looked at the reduced sales as a result of cool, but in q1 and Q2 and the and the loss operating income and that's the 22% When you go to the second half of the Year again, we're we're looking at the reduced sales compared to where our Outlook lies in January. So sales. Our Gap is volumes are down, and the decremental on that is going to be less than 20% So if there was no change in our cost structure that Sacramento, you know would be around the 22% off because we've taken some actions to right-size the business. We're seeing the benefit of that by way of a reduced decremental margin.

Okay, and then lastly then can you just you know based on your guidance Magnus going to be back to profitability in the second half generating free cash flow. Can you comment on the ncib and what you're thinking is in terms of resuming the share buyback?

Yeah, yes Peter. It's it's a topic of discussion at every board meeting in terms of capital structure and leverage and kind of what we need to do is a balance sheet and opportunities we have and so on, you know from my perspective and the boards and and and the rest of the team support of I I still think you're took a certainty with respect to we're going to end up for the balance of the year. We are generating expect to generate some pretty significant amount of cash flow. Yeah. I I prefer just point in time to kind of step back from from the buyback. Let's get through this year. Let's look at our business line where volumes sort of shake out next year and then we can think about starting to resume the buy back in in Twenty-One. Now again, you know, we might get to recorder and things look a lot different we might have a more positive birth.

The only things and and our our actions could change but that's our thinking at this point in time.

Okay. Thanks for all your comments.

Thank you very much. We'll get you on the next question on the line from James. Piccirillo from KeyBank. Go ahead.

Hey, good morning guys, just to clarify on the second half guide which which is of course appreciated. So you're the implied back at you know, you're looking at $650 million lower sales rep. I think the comment was just made that that drops through at eight twenty 22% decremental, right? So that's $150 million loss for the back half and then we get back to Flat year-over-year driven by the structural savings. Is that a fair assessment?

Yeah, so I think if you look at the slide deck that we have posted, you know, you are looking at a you know, eBay wage, you know, the mid range of our apply. Is is the same as same as 2019, you know, cuz our range is 1.05 to 1.25 on overall, you know sales depending on where you could be about flat. So you have if you look into twenty Twenty-One and we still need to do our business plan what we're going to get in Chrome and twenty one is the benefit of the Restriction we're doing in 2020. So that should be a creative. You know, there's going to be a whole bunch of other things taking place in in 21, you know, remember the things we talked about the beginning of the year, you know, we're focusing on underperforming operations were expecting some contributions from that. We're expecting some contribution from uh-uh reduced wage.

on the three advanced

A test programs that were working on and so on. So there's a a lot of moving pieces into Twenty-One, but certainly the restructuring activities we were taking in 2020 will continue to benefit with us in a bigger way than 21.

Got it. That's that's helpful question on.

On fleet vehicles the you know, the margins are if the teen-aged improve on on down sales as as there's a recovery in the back half should we expect margins, you know similar to maybe you know the second half of of nineteen or do they continue to, you know at the at the first-half run right here?

Yeah, we haven't given specific guidance on segments just given, you know, the level of you know, more uncertainty on overall production volumes given other other years. I can talk about on the the complete vehicle business. If I think about the the very first half of the year, there's a couple of things that have benefited us one is dead. You know, we've had some favorable mix within just even assembly programs depending on what vehicles are are being sold and trim levels, you know, if that continues that that should be you know, positive year-over-year or magnastar group undertook a huge review of their overall processes and cost structure. And as a result we're seeing the benefits of of those cost saving initiatives impacting us positively in q1, but more so long

2 and that's going to continue in Q3 and Q4. So that's different from where we were last year the other unusual thing with our business in Magna Steyr and you bought a lot of our programs there. We get a fixed cost recovery regardless of the level of production. So when you start thinking about incrementals and detrimental we don't have the same level of operating leverage that we do in our production division, so that could impact ultimately where margins end up but magnifier. So again, a lot of different sort of ingredients in they're impacting margins, I guess the final point on Magna Steyr, you know, if I think about the business this year and last year on the engineering side job, you know, we've been getting a lot more work and we've been generating some decent margins on that and given that engineering is a bigger proportion of birth.

The starter cuz if we reduced volumes that's having a positive impact on average margins in this segment.

Got it, just to clarify on the on the restructuring effort 168 million charge when the quarter is that something that you know, possibly continues through the whole second half or is that a charge that reflects the entire effort possibly potentially?

I think it's it's substantially all there. There's going to be some costs are going to trickle into you know, Q3 and Q4 depending on you know, when we're going to be able to recognize them from an accounting perspective, you know, the the the bulk of it substantially all of its already been reflected in our accounts in Q2. Remember some of the spending is not going to take place until later, but we've been able to recognize that that cost in our financials for the second quarter.

Is there a typical return you get on your restructuring efforts in terms of you know savings versus cost. Is there a typical?

It depends what region, you know, if you're letting some people go and certain regions the the cost of severance could be pretty significant, you know, in other regions. It's a little uh, so there really isn't a there's a typical probably by reason but not typical across the organization and you can when we look at the the restructuring there is a $850 million of it was restructuring the balance of it was acid impairments across a number of our operations that hundred and fifty million, you know, as we move into 2021 to translate into about a $200 annualized Savings in in costs on a run-rate basis. So, you know, we'll we'll pay back with restructuring costs less than 12 months.

That's very helpful. Thank you. Thank you very much. I'll get your next question on the line with Credit Suisse. Go ahead. Am I good morning everyone. Thank you. First we know that the GM large truck program T100 largest platform. And if you can look at the schedule is obviously easy, from the fourth quarter from the strike and they're producing everything. They can I think they're volume is going to be up in excess of 30% So to the extent that that volume materializes could you give us a sense of what type of incremental margin you see on that? Is it fair to say that that's contributing nicely to the the comments that you've given on second-half decremental sub-20.

Well. We're not going to comment. I think the mental margins or margins in General on any programs so I can't help you there. But you're right in terms of sales. It's definitely strong and certainly not going to you know, what we see is the opportunity for good organic growth in in the back half of the year. So it's a big program. As you said, we got about $21 of content on the new k2xx versus wage or the the new GM platform versus the old one.

And as they're going all out, is it fair to say that your I guess the directional your contribution margin on that now is comparable to what should have done in the past were there any inefficiency that they're trying to squeeze as much out of that?

Yeah, we never talked about you know, where we are. But we've done this program a lot of content we've had in that program for for several Generations. So, you know, the typical going forward wouldn't comment on a particular program. Okay, great. And then just a second question. Thank you a question on you know, the broader TV landscape that we're seeing in the role of complete vehicles and we took seeing some you know, obviously a lot of headlines with the TV startups and there's a lot of questions of those who want to go past that light. Are you having incremental discussion across the automotive landscape being with you know, established automakers or with startups about complete vehicles? And you know, how does vary regionally what's the role of of complete Vehicles as as this landscape is clearly shifting.

Don if you want me to answer this, good morning, I think as a part of our normal process we go through discussions with our various home from a product landscape perspective and the part of that, you know, obviously the EV discussions are there from the customers that are traditional as you said and because of magnifier, we do have a lot of touch points with the so-called newcomers that you talked about which gives us also a pretty good visibility on you know, what the other newcomers or you know, the

Future is think being taught about in terms of from our product strategy perspective. We talked about the different building blocks and the platform strategies that we have from a radius subsystems of the powertrain and we are able to address that and as you know, the design Cycles are long enough that we have a good visibility may be able to Pivot as we need going forward.

Just a couple of additional comments if you think about it a new entrant or a new Mobility player. Typically, it's electric but pending on what what they're doing they they would be looking to style for engineering and program management, which is a huge undertaking for anybody new in the business and then on top of that and that can be anywhere off early and on top of that if it's going to be leading to contract vehicle manufacturers that have big facility in Europe. We've also had a good start up in in our joint venture we have for electric vehicles in China and that is working. Well, so geographically we'd be more likely to be able to do something from manufacturing standpoint in China or Europe and Engineering we can do it anymore.

Okay, and we're thinking about going forward, you know, would you expect the discussions to accelerate war with Legacy OEM that you know don't want to put in place with the added capacity or is more of the incremental discussion on your end going to be uh with with startups that just want to go asset-light.

I think it's both and it's hard to predict, you know, it's going to happen part of it will be depending on what happens in in vehicle volumes and what the specific car companies want to do from restructuring there the past few months and I think going forward to the extent that people know what the Market's going to do. They want to try and have it so they're running their facilities pretty closely to 100% And then utilized as people like magnets tire for excess capacity. So it's it's difficult to answer that unless we had a crystal ball. It says with the volumes are and we're also pretty awful careful who we take business on there's a lot of different startups talking about, you know, what they're going to do and how much money they raise and a lot of people fail. So we're pretty particular and we take a business on 4th.

So I do think Mobility is something to Swami and his team are looking at pretty pretty carefully and I think there's going to be different opportunities coming up with with the new entrance off.

Great. Thank you.

Thank you very much. We'll get your next question on the line from Citigroup. Go right ahead a great. Thanks a good morning. Everyone just took a longer-term. Margin question. I mean looks like the the second half guidance implies that you kind of get back to 2019 margins on a still a fairly lower revenues and and and prevent something like you mentioned additional restructuring benefits and other potential Tailwinds next year. So as we think about the big picture, did you think the earnings power the company has increased through this downturn that when and if we do get back to your prior 20-22, you know Revenue objectives or whenever that might be that the margins can end up being higher than what you originally thought.

Yeah, I don't know if I if Vince wants to come in one of the things we've been working on. We're looking at World Class Manufacturing is I don't think we're going to be getting a lot higher margins on or traditional business. They're pretty well where they are as we're being new technologies to Market that we can usually get higher margins and we've been spending a lot of money off the electronics area and the powertrain area as well as a lot of other new products. That's when particularly pleased to see the number of awards. We we one from General Motors because it's very representative of what we're offering do a lot of customers it just the you know, they're they're recognizing Innovation and execution. So margins can be affected by cost of non quality and getting a lot of non-value-added cost out of the out of our company and we were working really hard on that. So there's a lot of moving pieces, but I think we are making good Headway on our wage.

manufacturing initiatives expense I think as you

Let me get back to seeing volumes and same sort of Revenue now that he has a couple of years have given what IHS is thinking about overall Global Production volumes wage, you know our mix of business. I've got to believe is if we different than what we thought just in January, but yeah, I sit back and you know, think about your your question and what I saw happen in the organization is, you know, certainly right sizing the company for what we see in the next, you know in the short-term mid-term from a cost perspective, but the the Relentless focus on World Class Manufacturing and the the time that the plants were down. I think it was an opportunity to reflect on things a little harder a little differently, there's processes and and costs that we took out that probably would have come out at some point down the road but those are them all sort of accelerated and taken out. I think that's a dead.

Or mental, but how that kind of maps up to when Revenue sort of come back, you know again, I you what our mix of businesses what programs are going toward of what new programs were working on a Migos all come into play and it just don't have the visibility of right now to to venture at a couple of years out now that that's all very helpful and just a quick follow-up. Then you mentioned that you expect to recover most of the working capital this year any any high-level view of what you may be able to recover in twenty Twenty-One kind of unrecoverable working capital other timing differences affecting cash.

assuming you get back up when we get in that assume.

Sorry was that twenty one or Twenty? You know, let me answer with respect to twenty twenty when I looked at the the investment and working on the second quarter about 930 million dollars. Uh, it was you know more than I expected. You know, you start peeling back the you know life in on the on the irony look at the delete customer payment. We got that back in July, you know, when you think about these government grants, you know, and that based off a prospective was was pretty neutral but it's a pretty significant receivable that we've got that we should be getting that and two three Q for income taxes flip from being a payable to a receivable that'll flip remember that. We also generated cash into one from working capital. It's really dead.

Usual, so that's all comes back into as as a use of cash in in the second quarter. And we remember you say we also had it was about a two hundred million dollar collection of receivable in Q4 of last year that we should have got in q1. So kind of think about where we end up with the end of the year. I think if if we weren't thinking about that $200,000 of cash that we collected in key for versus key one of those that we we probably recover all of it. So, you know, are we sure two hundred or two hundred million dollars of that because of the lack of cash and 54 could be but you know, we can also get some other payments that we get in early and key for a 2020 so that we're going to get off I think all of that back by the time we get to key for 2020.

So, that's all very helpful. Thank you.

Thank you very much. We'll get your next question on the line from the line of research read ahead.

Good morning, everybody. I wanted to follow up on just the this significant amount of capital being raised by startups. It's something that clearly the investment Community believes that that has implications for the competitive landscape and auto and I'm wondering if if that is actually dead ones thing you in terms of the risk that you're willing to take with regard to some of these startups. Does that should we as we look at that you should we be thinking that faith has greater potential for expansion in in complete Vehicle Assembly in in North America and at least relative to what what you've done so far.

Well, we really haven't done much in North America so far. We have an investment which we talked about in waymo and we're doing some work with them. We we've had a good relationship with them, but that's very relatively low-volume. It's a bit like the Chicken and the Egg as far as the Vehicle Assembly work in North America. We continue to have requests or questions from potential existing customers who want Outsource and low-volume programs as well as some new startups, but you need a certain volume to justify the capital even if it's a game.

I think if we had a sheet of paper with all the potential new entrants into the market, how many will succeed what would the volumes be? I do think it would be some people who will be 16th. Will they be then joint venture or blocked by somebody else hard to say? I don't see a huge volume in the new entrance relative to the size of the market, but I you know, I mean, do you have any other thoughts?

No, I think that the kind of addressed it done. I think brought the TV Market is kind of still evolving just not only from the start up but also the architecture perspective or volumes. So we kind of look at the landscape and be able to evaluate and I'm sure there are opportunities like downset as we engage wage is higher then also help the product roadmap from the component subsystem perspective.

Okay, and thanks for that and was hoping just Vince if you can clarify you put out longer-term, I think for 20 22, let's forget about the the time frame but the margin was 7.68% just based on the two hundred million dollars of additional savings bank is divided that by the twenty percent decrement the margin. Is it reasonable to conclude that you could achieve that same level of profitability with a billion dollars of lower-wage new or were you you basically implying that a lot of what we're seeing right now is is essentially pulled forward from from from your future plans.

Broad when you look at some of the things that we talked about in Q2 part of that is pull forward. So, you know would have been factored into our life that we gave for 22 back in January this year a part of it is actual incremental activities that under took over my comments events gave us the time to kind of reflect on what we're doing and we're doing things a little differently that wasn't in her class that is incremental to whatever we would have talked about in the past.

Okay, so just to to kind of summarize on that point when you provide them a margin Target like that. It sounds like that's kind of a floating Target. I bet it's really contingent on the mix and the size of the the business. It's not like you're not doing the reverse exercise and saying look based on the capital committed. We have to we have that this kind of profit and find some other way to get there. Is that fair?

So you talking about 22? Sorry just yeah, so how how do we read that that kind of a of a Target? Well, sorry, but let's go back to you know, when we talked about January and we pulled our guidance obviously, but we talked about January wasn't a Target Rod. It's based on our our our Bottoms Up business plan based on business has been awarded to essentially been a word to us or or a high potential that we're going to get awarded. It's based on walk-in volume assumptions is because based on mix it's based on exchange rates. So, you know, if if even if you get the 2022 and exchange rates on a run or Productions higher or lower in a particular region or mix is a little different that could impact our ultimate numbers, but you know, it isn't a Target and we talked about in January.

You know by segment what was going to happen a margin and why it was going to happen to merge them and there was a whole bunch of reasons broad depending on the business unit. Why margins were going to move, you know, part of it was off on a performing operations part of it is start up a new business. You know, when you think about some of the Investments we're making electrification autonomy is that business starts to come on we're going to have revd which we you know, some cases we don't have today, but we have cost. So that's all going to have to to margin Improvement.

Okay. Thank you. Thanks for clearing it out.

Thank you will get your next question online from Chris McNally have a car go right ahead.

Great. Thanks so much and great results guys. Maybe the the the first question some of the questions already been answered. If we think about some of the quote unquote Problem Child of 2019. Some of the issues you had around feeding the individual contract, you know could jog in China could could you talk about maybe just a little update about how many of those we actually cycled through the wage through the the benefit from it looks like probably on on on t v that you've gotten some of the issues back from the you know, the individual contract, but just maybe an update from home is more savings or improvements to competently may be in control of in China where that's a a multi-year sort of recovery.

I think if you look at let's break that up you look at some of the

The underperforming operations that we talked about last year. Um, and we were on track to see some improvements obviously reduce volume from covid-19 life is a challenge for all of our plants. But you know, what we've seen from an operational standpoint is that in both of the operations in North America, we have continued to see improvements with you know, I I think in one in particular or even even with lower sales or a little bit better than more we thought on an absolute basis, so that that's a good story. I think when you look at home are you talked about I think it was a test and electrification our our electrification spend. It's an investment because we've got programs coming in in in the future and platform technology and continue discussions of customers. I mean that that just continuing uh to to be invested and and curved for for the right reasons birth.

And our business and you know, we talked about some some overspending in 2019 and kind of look at where we are for for 20 28. I think we're probably a little bit behind where we thought we were going to be a little bit additional cost overall. But again as we get into twenty one and start to ramp up that should should go away from China and a good track standpoint, you know, obviously we've been impacted by covid-19 off there has been some restructuring in in some of the joint ventures to take some cost of I'd say one particular joint venture just probably a little bit less volume than what we were anticipating even with the restart of overall production volumes in North America. That's probably going to be a negative, you know shorter-term going forward them.

We had had anticipated in the past but overall, you know, we're pretty long track everywhere across the organization if you take covid-19 into account.

Great, and then just a quick one on on on on steyer, you know, you talked about obviously the benefit and YouTube as a result of the cost actions and that should maybe continue in maybe second month, you know, should we start to think about this is moving pieces, but as a 3% plus sort of margin business, you've been moving in that direction for for several years. I guess that's the first part and then the second part on the birth of the question. I think was asked earlier, you know, if they were programs that you know had forty fifty thousand of potential volume is that sort of the right hurdle for the kind of visibility that you may need, you know, many of your programs are in that sort of um, uh area in in in in year one. Just thinking about the potential to grow this business, you know, well beyond the six or seven billion have been historically off.

Well, we have an existing plant we could look.

Programs that are five thousand ten thousand units that will fit in there. If you were going to be looking at a justification of a new facility, you know, you want to get up to eighty thousand a hundred thousand and you know, ideally that's probably the the programs that 20,000 but it never comes back cleanly. So I think there's some opportunities uh with some some new startups, but it really comes down to what's the vehicle you need a paint shop is to Greenfield. Is it a Brownfield so, you know from a marketing perspective.

We have complete vehicle manufacturing and the margins are pretty low because of all the bottom components. We also have engineering and I do think there's opportunities for good engineering contracts, especially with Summer the new friends because of the capability we got there. So the comment on whether we get 3% or not, but you know, I've been I've been very pleasantly surprised.

And I've been see surprised but it's been nice to see the efforts and the results. We've been getting out of our Engineering in the manufacturing initiatives entire that and that's directly in the existing facility over in Europe.

Christina I think when you look sorry just just we're not going to give guidance and where you know any one of our segments including complete vehicle or this year for the next couple years will do that again as we update our our business planning in January, but you know in my commentary about margins just things are going to move it at any one quarter. Um, you know, it's just a mix of program and our complete Vehicle Assembly business. It's going to be gone talk today, you know the level of engineering what in my mind is dead myself and we've seen a team do a really good job is focusing on on some cost-saving initiatives and Hammerstein some some handsome dividends on that and that's going to continue wage that's incremental kind of thinking even a year ago.

Fantastic. Thanks.

Thank you very much. I'll get your next question on the line from Richard Morningstar. Go right ahead.

Thank you. Good morning. Everyone. Thanks for taking my question. I'd like to drive down a little bit more on the complete vehicle to you know, we went from a 2.4 adjusted ebit last year to a 4.7 this year, you know revenue from the segment was down almost 50% but he went from 43 million to 44 million on the adjusted ebit. Can you kind of characterize for me please? You know you talked to a little bit about the favorable mix you talked about the fixed cost recovery page you talked about cost reduction in the group, you know, uh that $44 million on that much of a drop in Revenue wage, you know, can you talk a little bit about you know, where most of that came from? Is this something that was all cost reduction driven and then partially the fixed cost or

Um, you know, is it?

more of the fixed cost recovery that uh in the mix that drove that

Yeah, I see that the the the biggest impact is going to be it looks through. This is you've got mixed. It's probably be the most significant impact on us and that's you know, trim levels and types of vehicles that are being produced and the amount of contribution that we have on that. I say followed by some of the cost-saving initiatives. What what's a little more challenging than you know, I got a summer here to try to figure this all out is the impact of some of the the fixed costs Arrangements that we have with our customers. So you could have sales coming down and you got fixed cost recovery. So the you know, you think margin would come down come down more than it actually has and that's because of the the the support we have under those fixed costs recovery contracts, but Richard keep in mind with

The sales start to go up. You also see the the fact that you have those fixed cost recovery that you don't have that operating leverage. So those those those are the factors that are impacting us and we keep on talking about is like there's been some more engineering work that this group has been doing in particularly over the first half of this year with our Engineers by big part of been working from home and we've seen some efficiencies as a result of that. So that's all contributed to the the growth and profitability and grow thin margin percent in magnifier in Q2 of 20 versus Q2 2019.

Okay, great. Thank you. That's helpful. And then on the other segments on the decremental, you know pretty much good performer there across the board. Everything is under 30% but being dropped from the 30s in the first quarter to 18 in the second quarter bath and body exterior structures stayed fairly constant and the mid twenties, but then power and vision just about doubled wage from $15 to about 28, you know, and I recognize that feeding is more of a less or a Less capital-intensive business office on a high-level basis, you know, just looking at the at the different segments and given the entrepreneurial Spirit of the the company. I mean the cheating performed better in the south.

Order because of the individual plants doing more cost-cutting versus the other segments or can you kind of just go through wage the difference there between the segments that drove the different kinds of performances there?

I think the first thing you got to remember Richard is that the the level of capital intensity by segments different? So you're going to have different detrimental than incrementals as sales rep around, you know in our commentary is as well as if you kind of come through our md&a. There are some items that are impacting segments that are not covet related if I think about our body exteriors and structures group, I'd say there's probably, you know, a couple of things that kind of stand out a couple of things just balance each other out the last year was a heavy launch here for this group and that there was some to you know, walk more coolant contribution last year than there was this year, you know, so that that that's that's a negative if you look at in a year-over-year basis, I'm not looking at potentially, but I'm looking at year-over-year we did talk about birth.

Some Provisions for some customer claims, uh, and we have their plus and minus every quarter there, you know, there's more significant than what they would typically be and they're sitting in our body experience and structures group. So that's a negative which is going to impact overall, you know, decremental margins come in our power off Vision Group, you know, when I think about kind of detrimental other than cold, but

One thing that impacted us and you know warranty is a little higher this quarter versus do you have the the prior-year quarter? Um, I I think it's eating and activity home equity income. Thanks Louis. I think considering what you're what you're seeing is, you know, some some continued progress on some of the underperforming operations and when we met we were struggling last year an action plan was put in place, even with with these volumes. We're seeing some improved performance, which is what we were expecting with. The team is focused on that. I think that covers some of the kind of unusual type items that are impacting sacramentals and that's just the focus. Everyone's having on, you know, your cost structures across the organization wage is having a positive impact on profitability and feeding also was launching the business in BMW business in Europe. So you got normal pull through on on the launch this offset in the full Vin in fact dead.

Okay, great and then given the guidance for the second half I'm assuming that you know, we're we're looking at where the different segments have.

Opportunity to improve it looks like then body exteriors structures and power vision would be the ones that probably improve in the second half off the feeding and complete vehicle.

We're not providing details by terms of improvements in the back half by segment, which sorry

Okay, great. Thanks.

Thank you very much. And we do have one more question and he was from the line of Michael Glenn with Raymond. James. Go right ahead. Oh, okay. Thanks for squeezing being. Can you just give me an update on the track in terms of the what you're seeing from the hybrid transmission product and as we think about a lot more fully electric product coming to Market will bring up some implications for customer Demand on the hybrid side.

So, do you want to give that you ask me I think you know as we're talking about the TV credits and how are China's looking at it in terms of including hybrids in the credit side. I think it will be a positive influence. We believe in addition to the he drives and you know looking at is going to the hybrid dual-clutch transmissions and the product of the DHT in the future. We see that as a a positive trend for the product line with China, you know, when I say that for transmissions whether it's the jv's or you know overall in general for the product line of transmission for us.

And are you able to give some commentary on Europe as well?

Yeah, in terms of the the specifically to this I'm assuming and and I think Vince is mentioned in the past. We've seen pretty good progress and Traction in terms of the correct line in terms of Transmissions. Not just you know dct's but also the HDT part of it which is the hybrid transmissions and there is some good activity with customers even on the Next Generation, which is the tht I talked about so definitely much higher traction and interest in several programs in Europe as we speak.

Never called Michael Michael that an investor day talked about a couple of programs in in Europe on on the east side. So it's going well.

Okay, that's it for me. Thanks. Thank you very much. Miss Walker have no further questions on the line. I'll turn it back to you. Okay, I appreciate everybody dialing in this morning and it's been very interesting year to say the least and and Q2 is a complicated quarter from a working standpoint. But overall, I'm fairly optimistic. We've had some continue to have good activities and the results and our Innovation activities both products and the process for making good Headway in a World Class Manufacturing reduce the number of stations and launch concerns. We have continued with the big priorities within the company sustainability is a it's a big push from the company or diversity inclusion activities the Resurgence extremely. Well, we talked about the launches seem to be going. Well, we have had to make some tough decisions, but you know that that's business and will be getting some payback on Thursday.

So overall I'm happy with the efforts and the cooperation. We saw a throughout the company in a very

Yes will call time trying to keep people safe and comfortable working also in the execution of everything we're doing so I'm I'm really looking forward to seeing what the what the teacher brings in the money with this new customers or new products or new Revenue models. So thanks everybody for for tuning in and hope you have a great day.

Thank you very much. And thank you everyone that does conclude the conference call for today. We thank you for your participation, please disconnect your lines. Have a good day. Everyone. Be safe.

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Thursday

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