Q2 2020 Magna International Inc Earnings Call
Ladies and gentlemen for somebody to conference call began shortly we thank you for your patience <unk> conference call, becoming just on that.
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Ladies and girls somebody a conference call begun shortly we think if it passes railway carpets called <unk>.
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Greetings and welcome to the second quarter, two 2020 results.
The presentation, all participants will be no listen only mode. Afterwards, we'll conduct a question there not professionals.
Pardon me they have a question expressed a one probably before I wondered how fun.
If any time the conference you to reach locker compressor start probably easier.
As a reminder, today's call is being recorded a Friday August seven 2020.
No I want to turn the call for were to Louis Tonelli, Vice President Investor Relations. Please go ahead.
Thanks, Tommy Hello, everyone and welcome to our second quarter 2020 conference call.
We will have formal comments today from dog Walker Swami quota, Gary and Vince Galifi.
Yesterday, our board of directors met an approved our financial results for the second quarter ended June Thirtyth 2025.
We issued a press release this morning for the quarter.
You'll find a press release today's conference call webcast. The slide presentation to go along with the call and our updated quarterly financial review all in the Investor Relations section of our website at <unk> Dot com.
Before we get started just as a reminder that discussion today may contain forward looking information or forward looking statements during the meeting of applicable securities legislation.
Such statements involve certain risks assumptions and uncertainties, which may cause the company's actual future results and performance to be materially different from those expressed or implied in these statements.
Please refer to today's press release for complete description of our Safe Harbor disclaimer.
As you review financial information today. Please note that all figures discussed our U.S. doors unless otherwise noted.
We have included in the appendix.
Reconciliations of certain key financial statement lines for Q2, 20, 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.
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'll pass the call over to Dawn.
Thanks, Louis 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 integrating employees Bakken or plants novices, using our protocols assessment tools and guidance documents.
It was a monumental exercised plain coordinated and implement the restarts does a company.
And as an industry I believe we have responded extremely well into the challenge caused by the 10 damage, including being a leader for other industries to follow in terms of safe and successful operational restarts.
During the second quarter 2020, our most significant markets of North America, and Europe experienced year over year declines both in percentage in absolute volume terms that far exceeded the worst quarters that we side during the great financial crisis more than 10 years ago, and the worst decline that I've experienced.
And that in my 40 years in the auto industry.
[noise] industry environment has been improving off these lows 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 as auto sales began to recover.
Vehicle sales trend continued upward in July and we expect a significant improvement in our sales and the first half to the second half of the year.
Nevertheless, general view of the industry instead, the production trend line over the next few years would be lower than previously anticipated.
Prompted us to initiate and.
In some cases accelerate the timing of restructuring plans to rightsize the business to align with our updated expectations for the mid term across the company had been taking.
Difficult, but necessary actions to strengthen our business for the future. We recorded a 168 million charge in the second quarter substantially related to this restructuring.
As expected for the second quarter.
Our sales reflected this severe production decline falling 58 per cent compared to Q2 2019.
As a consequence, we posted our first operating loss on a normalized basis since 2009.
However, underlying the discouraging results for a few encouraging elements are decremental margin associated with Cobot 19 was about 22%, reflecting our efforts to reduce into for discretionary costs.
We conserved additional cash by reducing capital spending.
And we expect the actions we entered tuck in the quarter to lead to an improved cost structure and decrementals going forward.
At the same time, we continue to invest to secure a future and to ensure that we can successfully execute and all upcoming launches. While we remain in relatively uncertain times. We're confident that we had the balance sheet the leadership and the right operating structure to allow us to remain nimble unresponsive to whatever the future holes in the short and.
Long term.
Lastly, I want to comment on an important recognition from our largest customer in late June General Motors recognized Magna was six 2019 supplier the year awards, the most ever for supplier in a single year.
The suppliers a year awards recognize <unk> jams, and best suppliers that consistently exceed expectations, creating outstanding value or introducing innovations to the company.
No one supplier the year awards across our system segments for our mirrors driveline systems truck flames faces and seating systems as well as an innovation award for our freeform seat trim technology I.
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 I'll pass the call over to Swami.
Thanks, Don Good morning, everyone.
Hi, I'm happy to report that we were able to achieve safe and orderly restarts in all of her operations around the world.
<unk> closures really didn't land with most plant shutdown for several weeks.
Overall, the mood and morale at our plants up on return to work has been part with it.
With respect to our restarts capacity utilization in both China, and North America, or 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 softer veeco demand environment.
Hey to China, and North America.
Why do we have seen a number of delays and a few program cancellations from our customers at this point, we don't expect Easter habits significant impact on our business growth relative to the market or the next couple of years.
One of the concerns we had a few months ago was the status of course supply base.
We noted on our Q1 call that'd be we're working closely with our suppliers to ensure is safe and time to restart.
Why do we continue to track and number of suppliers, we have mitigation plans in place and to this point have experienced no major supply base issues impacting our operations.
Our operations have been able to manage the transition through a new normal.
Our Smartstop playbook has been an excellent foundation and it's become standard operating procedure.
The protocol is put in place have been received and adapted by our plant employees.
We have been able to manage the production ramp up without significant disruption to our production efficiency.
However, we are not stopping there it team of rating backgrounds from a cross Magna looked ahead to double up recommendations on how operations could be adjusted to stay prepared.
Actually if its second wave hits or this becomes a seasonal illness.
The team closely examine what may need to be done you know global operations are worried about our current playbook and incorporate good these into a regular operating mode and policies.
We are staying prepaid to keep our employee safe and protect our business.
While our leadership team what the dressing that short term meets a business. We were also looking and planning much further ahead at water company industry in society may 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 shape, Morocco, B has joined Magna as executive Vice President of research and development.
Great food manage all aspects of magnets innovation, and new product development strategy and related activities.
Sure. It has been in automotive and technology industry for 30 years and comes to Magnum from Ford Motor Company, where he held every right to your product development and engineering leadership positions.
He has extensive experience in electrification, having led the full team in developing get battery electric vehicle and hybrid electric vehicles.
<unk> also so as president and CEO for autonomous vehicles, LLC and wasn't the board of directors for Argo AI.
Food self driving technology partner.
Additionally, he spent time with Hoobler as vice president of global be could programs, leading the integration of their tone in the software into production OEM vehicles.
We're very happy to have should it as part of for management team.
I'll now pass the call owed to Vince.
Thank you saw me and a 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 our segment results, which you can find in our mdna.
And our up particularly meaningful given the severe sales declines I will spend some time addressing what our outlook implies about the second half of this year.
As 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 42% year over year, but more significantly declined 70% and 59% in North America.
In Europe, respectively, our most important production markets.
We estimate that cobot 19 related shut downs negatively impacted our second quarter results.
And sales in particular by approximately 5.5 billion and our adjusted EBIT by approximately 1.2 billion.
This represents a decremental margin of approximately 22%, reflecting strong cost control across magna's operations.
We have included in our appendix a breakdown of estimated covert 19 related sales and decremental margins by segment.
In addition equity income was negatively impacted by the cobot 19 related shutdowns.
Our second quarter total sales were 4.3 build again, a decline of 5.8 billion or 58% from the second quarter of 2019.
In addition to the coal would impact our sales in the second quarter of 2020 were negatively impacted.
By the end of production a certain programs currency translation, which was a 76 million dollar headwind and net customer price concessions.
On organic basis in Q2, our regional sales in North America, Europe, and Asia, each outperform vehicle production in their respective markets. However, as a result of regional production mix organic sales underperform the change in global vehicle production in the quarter.
Call that we'd far outperformed global production in Q1 impart due to significantly lower production in China, where magna is relatively less represented.
On a weighted basis organic sales slightly outperformed global production.
Adjusted EBIT decreased 1.3 billion to a loss of 600 million substantially reflecting the decline in global vehicle production due to the covert 19 related shutdowns.
Also contributing to the decline in EBIT was lower tooling contribution in the quarter compared to the second quarter of 2019.
A lot higher engineering costs in our eight eight us business, including retroactive social tax costs net provisions for customer claims in the quarter and higher net warranty costs.
These were partially offset by lower spending for electrification and autonomy Hezbollah's favorable Assembly program mix and the benefit of cost cutting initiatives, you're not complete vehicles segment.
Our tax recovery was booked at 16.9% income tax rate compared to 23.5% on our pre tax 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 benefited in Europe.
Net loss attributable to magnet was 511 million compared to income of 509 million in Q2 of 2019.
Reflecting the lower EBIT higher interest expense and the impact of the lower effective.
Tax recovery rate.
Diluted loss per share was $1.71 for the quarter compared to EPS of $1.59 last year 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 15 cents, assuming a tax rate of approximately 24.5% that we expected when we last provided an outlook in February.
I'm not going to review, our cash flows and investment activities.
During the second quarter of 2020, we used 1.2 billion in cash for operations, representing a 2.2 billion swing from the second quarter of 19.
1.2 billion of the change is a result of reduced earnings due to the lower sales 934 million as a result of an increase in noncash working capital.
You may remember from the first quarter that given the covert related shutdowns and our corresponding sales decline.
We generated cash from working capital in the quarter, when we normally invest working capital through the first half of the year.
We set in our Q1 calls that we expected this to reverse as we restarted production at various facilities around the world.
Customer payment delays the pay out of our 2019 employee profit sharing plan recoverable waste subsidies and a shift from a tax payable to a tax receivable balance, which all aggregated to about 500 million.
Together with a wrap up.
Production represented most of the change and noncash 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.
Investment activities amounted to 243 million, including 169 million fixed assets and 72 million investments other assets and intangible assets.
Free cash flow was negative 1.5 billion in the second quarter.
In addition, we returned $116 million 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 600 million in cash.
In June we completed an offering of 750 million of tenure senior unsecured notes bearing interest at 2.4 or 5%.
This that raised provides additional financial flexibility at a very low rate at a time and then that markets were highly receptive.
Our adjusted debt to adjusted EBITDA up at the end of the second quarter stands at 2.35 times as anticipated. This is above our target range given the severe decline and EBIT da 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 approves, our second quarter dividend of 40 cents, reflecting our collective confidence in our liquidity and our future.
So let me turn to our outlook, which we reestablished 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 covert 19 infection rates supply chain or other production challenges and other factors if actual production very signal.
Secondly from our assumptions our results.
I 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 over.
Overall, we're also expecting global vehicle production down approximately 11%.
We believe our expected second half stacks up well, particularly given these production declines.
Our total sales range implies sales at worse down, 9% and a best up 2%.
Our either percentage range implies an EBIT dollar range of about 1.05 billion to 1.25 billion compared to 1.15 billion in the second half of 2019.
And our free cash flow range for 2020 is between 200, and 400 million, implying a range of 1.3 to 1.5 billion for the second half of 2020 compared to last year is very strong second half of 1.4 or 5 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're taking across our business to mitigate the impacts of the current environment we are facing.
Thanks for attention this morning.
You would all be placed to answer your questions at this time.
Thank you.
And if you're right.
That's a registry question just press the one hole, but a four on your telephone.
<unk> technology requests.
That's a question has been I sort of like to draw your restoration of the one.
One moment. Please her first question.
And we'll get to our first question on a life from John Murphy of Bank of America Merrill Lynch Red hat.
Good morning, guys and thanks for the outlook, it's its very helpful and that's my first question.
Vince is as we look at ditch performance in the quarter Decrementals of down 22% was.
You are impressive, but getting just down 20% in second half the year is obviously, even better Im just curious as you're looking at this first.
Your any actions that you think might be sticky as the world normalizes, which means they earnings might be a little bit better than expected in the world normalizes.
And in second sort of in the same vein, we think about incrementals.
On the upside overtime are they going to mirror these new decrementals or could they potentially be higher and how should we think about incrementals as.
Sales and production actually start rising presumably in 2021.
Yeah, John it's a really good questions, it's kind of difficult to answer that.
In isolation, I think you've got to consider a whole bunch of things.
Yeah, I think when you look at.
The restructuring actions, we took in Q2 or commenced in Q2, and they're going to wrap up by the time to get to the ended the year most of them.
I think what you're seeing in the second half of the year.
As a benefit of some of those actions already.
Impacting positively our decremental margin.
But we don't get to the the true benefit of all those activities until we get into 21. So we'll continue to see that.
Fixed cost structure reduction helping us.
In 21, Yeah, I think if you look longer term you and you start thinking about what happens to overall volumes and how fast as they grow and in what region and what happens to incremental margins going forward you know at some point.
You are going to be approaching average margins as a 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 a growing how faster growing what's your absolute level of growth in sales.
But I.
I think what I when you look around the organization.
When you think about our culture, which we don't talk a lot as much as we should.
Our decentralized operating system with or general managers focused on what they need to do to run their plant efficiently what costs are required and what cost can they take out and you kind of put that altogether and makes a pretty significant difference in our overall results.
Okay. That's helpful. And then just a second question.
Don as you look at the.
Joining me for new contracts or the bidding environment from your customers I'm just curious what that the pace of activity is as maybe normalizing is.
Everybody kind of working through the crisis, and hopefully getting back up and running and also you just about launches.
Near term for stuff that's in your in your backlog just curious if there's anything more disruptive than sort of two to three months.
Delays from from Cobot as things were down shown on the launch side are there any sort of near term issues or maybe even opportunities.
For the most part people work pretty effectively through the.
Down period, there was some delays we couldn't get people and for fiscal testing. So we're seeing a few program delays from the customers. Most of my relatively short there has been a couple of cancellations most them or are we don't we're not talking about the customers can but most of my none the big programs, we've got a the.
Discussions ongoing on winning new contracts I had a little bit of a delay, but not not particularly so I was pleasantly surprised that we're able to keep on top or launches. We just went through a quarterly reviews globally don't see.
Any unusual spike in sort of running up against concerns and on new launches so in pretty good shape Swami.
You probably closer to the I am sort in your area. So you got any other comments there.
Oh, No dawn I think you covered it pretty much.
Small do lithium there, but nothing that I would say material that would affect the business going forward or the launches that are ongoing right now.
No they think the area.
We talked about in general the move towards electrification.
It is pretty consistent what we saw before.
I think the economist.
Level to level, two and half continues that's a big pull from the market spending and on the.
Levels, three four and five or certainly slowed down a little bit is trying to convince conserve cash, but I think the.
The the customers still have to be awarding contracts. So they can they get their launches so not no big huge laser and keep in mind.
The extent that we have content on the old program that gets extended yes, thats that really mitigates the potential loss business from launches that are delayed.
Got it and then just just last real quick on on acquisition opportunities I know the balance sheet.
Leverage might be a little bit heart higher than your target range, but just curious what's.
Out there have there been any new opportunities that have avail themselves because a distress.
You know in sort of what is what is the landscape look for you guys and what do you.
Looking at most specifically as to kind of go through the funnel of opportunities.
Well I want to comment anything specifically, obviously, but the generally.
And I'm not sure is a huge second wave that we we don't anticipate we went to our cash position I think I would've been difficult to try and execute anything big amounts was it just distressed situation during the down downtime.
What are the downturn, we're continuing to look at things more in technology areas, where we want to add some capability each.
[noise], we have the ability to we continue to pay the dividend we leased got for buybacks.
You should be back to two pretty healthy cash flow standpoint going forward. So we have the ability to move when something if we think.
Yes, that's right price of one comment just looking but we are continuing to look at pretty carefully what technologies, we want to grow and where we wanted to be located around the world.
Got it thank you very much.
Thank you and we'll go to our next question on the line.
Hello, Peter Sklar, a BMO capital markets go right ahead.
Good morning, a question on the decremental margin.
22% in the quarter.
As you know there were various.
Government subsidy programs in regions, where they subsidize wages and and other programs as well did that did that was that a meaningful amount and would that have had a positive impact on the debt.
For a mental margin or or were those subsidies that magnet would have received relatively minor.
Peter Good morning as fast.
Yeah in terms of the amount of subsidy that we bought 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 we're incurring a cost so we otherwise wedding and have 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 decremental margin.
It's really not significant at all.
Obviously sheer amount of recoveries as larger because of.
As I said in active employees that we.
Bought back on payroll.
But didn't really have a significant impact on.
Overall decremental recall that.
When you start looking at the bucket of.
Hi, but I look at decremental margins from an operation standpoint, though that the costs of inactive labor government.
Apart and then the other we've got and all of that is the cost to me.
In the quarter.
Yeah, it kind of hard to get an exact number we're probably above.
$35 million of additional PE cost in the quarter, some are going to be obviously, it re occurring with the math and sanitation.
Fluid.
Part of it as one time, but.
And I look at that other bucket of cost at a pretty well nets to zero Peter.
And the big change.
When I look at decremental, Martin as just reduced sales and reduce costs of producing ourselves and putting us in a and other costs.
Okay, and then like you've touched on this a little bit in a previous question but.
Like your decremental margin was 22% in the quarter, but in your guidance I'm.
Like you're guiding for decremental margin of under 20%. So I'm just wondering why it's not to same on the way up because on the way down nurse or.
Just being too precise that's really the 22% in 20% or really the same thing.
No I I think about it Peter as.
That's an improvement you remember last quarter, we talked about kind of for the the last nine months of the year, we thought about low 20%.
I think when you look at even Q1 in Q2 on reduced sales and reduced the but we're running about 22% Decrementals, there's little higher in Q1, but I think until it's about 22% and how we came up with that number as we looked at our outlook. We gave in January.
Our which is where we think we're going to be and we looked at the reduced sales as a result, the coal that in Q1 in Q2, and the relaunch and the loss operating income and that's a 22%.
When you go to the second half of the year again, we're looking that the reduced sales compared to where our outlook was in January. So sales are down because volumes are down and EBITDA down and the decremental on that is going to be less than 20%. So.
So if there was no change in our cost structure that decrement, though would be around the 22%.
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, Vince.
Can you just.
Based on your guidance Magnum is going to be back to.
Profitability in the second half generating good free cash flow can you comment on VNC I'd be and what you're thinking is in terms of resuming the share buyback.
Yeah.
Yes, Peter.
Yes, it's a topic of discussion.
That every.
Our meeting in terms of capital structure, and leverage and kind of what we want to do the balance sheet and opportunities we haven't sell wants.
Yeah from my perspective, and the bars and the rest of team supportive.
I still think theres, some certainty with respect to where volumes and up for the balance of the year. We are generating ex expected generates some pretty significant amount of cash flow.
Yeah, I prefer just point of time to kind of step back from from the buyback let's get through.
This year plus look at our business plan, where volumes server shake out next year.
And then we can think about are starting to resume the buyback and 21.
Again.
Well I get through quarter and things like a lot different I mean, I have a more positive the on things and our actions could change, but that's our thinking at this point in time.
Okay. Thanks for all your comments.
Thank you very much.
Well go next question on the line from James Picariello from Keybanc correct.
Hey, good morning, guys.
Just to clarify on the second half guide, which which is of course appreciate it. So the implied that cat you're looking at 650 million lower sales I think the comment was just made that that drops through at a 20, 22% decremental right. So that's 150 million in loss to EBIT EBIT.
For the back half and then we get back to flat year over year.
Driven by the structural savings.
Instead of a fair assessment.
Yes, So I think if you look at a slide deck that we posted yes you are.
Looking at it.
EBIT.
You know the mid range of our implied outlook is the same of same as 2019, because our range as 1.05 to 1.25.
On overall.
Sales.
Depending on where you could be about flat.
So.
If you look in to 2021, and we still need to do our business plan, what we're going to get incrementally and 21 is to benefit other restructuring we're doing in 20 funny. So that should be accretive you know there's going to be a whole bunch of other things taking place in 21.
Yes, remember some of the things we talked about the beginning of the are you know we're focusing on underperforming operations were expecting some contribution from that we're expecting some contribution.
From a reduced engineering cost than on the three advanced eight as programs that were working on and so on so there's a lot of moving pieces into 21, but certainly the restructuring activities, where we're taking in 2020.
We will continue to benefit us in a bigger way in 21.
Got it.
That's a that's helpful.
Question on.
On fleet vehicles.
The the margins are a continued to improve on on down sales as as Theres a recovery in the back half.
Should we expect margins similar to maybe.
Second half of 19 or do they continue to.
At the at the first test run rate here.
Yeah, we haven't given a specific guidance on segments just given.
The level of more uncertainty on overall production volumes given other other years.
But what I can talk about on the a complete vehicle business. If I think about the very first half of the air.
Just a couple of things that have benefit us.
One.
As you know we've had some favorable mix within just even assembly programs, depending on what vehicles or are being sold and trim levels.
Yeah, if that continues that should be positive year over year.
Our Magnus Star Group undertook a a huge review of their overall processes and cost structure.
And as a result, we're seeing the benefits of those cost saving initiatives impacting us positively.
But in Q1, but more so on Q2 and that's going to continue in Q3 in Q4.
So that's different from where we were last year.
The other unusual thing with our business and Mega Star in NIM.
A lot of our programs there.
We could affect fixed cost recovery, regardless of the level of production. So when you start thinking about incrementals and Decrementals. We don't have the same level of operating leverage that we do in our production division, so that could impact ultimately where margins and up at Magna star. So.
A lot of different sort of ingredients and there are impacting margin I guess, a finer point on Magna star If I'd think about the business this year and last year.
On the engineering side.
We've been getting a lot more work than we've been generating some decent margins on not.
And given that engineering is a bigger proportion will all magna side because of reduced volumes, that's having a positive impact on average margins in this segment.
Got it just to clarify on on the restructuring efforts hundred 68 million charge in the quarter is that something that possibly continues.
Through the second half or is that a charge that reflects the entire effort, possibly potentially.
I think it's it's substantially all they're just going to be some costs are going to trickle into Q3 in Q4, depending on what we're going to be able to recognize them from an accounting perspective, but.
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 cost in our financials for the second quarter.
Is there a typical return you get on your restructuring efforts in terms of savings versus cost.
Is there a typical.
It depends what region.
Yeah.
If you're letting some people go in certain regions the cost of severance could be pretty significant.
Other regions, it's a little less.
So there really isn't it does a typical probably by region, but not typical across the organization as when we look at the the restructuring there was about 150 million how that was restructuring the balance of it was asset impairments across a number of our operations.
That hundred 50 million, yeah, as we get into 2021 should translate into but a 200 million dollar annualized savings and costs on a run rate basis. So our will pull payback of restructuring costs in less than 12 months.
That's very helpful. Thank you.
Thank you very much.
Our next question on the line from the line of them Levy with credit Suisse Curet ahead.
Hi, Good morning, everyone. Thank you how first we know that the GM large truck program T. One FX is your that's your largest platform.
If you look at schedules, obviously easy comp in the fourth quarter.
From the strike and they're producing everything they can I think the volume this can be up an access and 30%. So you can be extended that volume materializing could you give us a sense of what type of incremental margin you'd see on that is it fair to say, but that's contributing nicely to the comments that you'd given on second half detrimental some 20.
Well that we're not going to comment on incremental margins are margins in general on any programs.
The there, but you're right in terms of sales.
It's definitely strong and certainly contributing to what we see as an opportunity for good organic growth in the back half of the so it's a big program. As you said, we've got about 21 of those are content on a new.
Okay, two X X versus or the new GM platform versus the old them.
And as they're going all out.
Is it fair to say that Youre I guess, it's Directionally your contribution margin on that now is comparable to what you would have done in the past are there any inefficiency that they're trying to squeeze as much out of that.
Yeah, we never talk about where we are but we've done this program a lot of content. We've had in that program for for several generations. So to speak typical going forward I wouldn't I want to comment on a particular program.
Okay, Great and then just the.
Second question. Thank you.
A question on a broader e. the landscape that we're seeing in the role of complete vehicles and we don't we're seeing.
Some the you know obviously a lot of headlines with easy startups and Theres a lot of questions of those who want to go asset light are you having incremental discussions.
Across the automotive landscape being with.
You know establish automakers are with startups about a complete vehicle and you know how does that very regionally, what's the role of complete vehicle.
Landscape is clearly shifting.
Don If you want me to answer this Oh, good morning, I think as a part of for normal process. We go through discussions with the various Oems.
From a product landscape perspective, and that's part of that you know, obviously that you'd be discussions out there from the customers that are traditionally have you said.
And because of for magnets tire, we do have a lot of touch points with the so called New Kumar said, you talked about which gives us all to a pretty good visibility you know what the other newcomers are you know the.
Future is think of being talked about in terms of UBI from our product strategy perspective, Yeah, we've talked about the different building blocks in the platform strategy that we have from radius subsystems are the powertrain and be able to address that and as you know the designs.
Cycles are long enough that we have a good visibility and be able to.
<unk> as we need a going forward.
Yes.
Additional comments, if you think about and a new entrant or.
The new mobility player typically its electric.
But depending on what what they're doing they would be looking to stier for engineering and program management, which is a huge undertaking for anybody new in the business.
And then on top that and that can be anywhere globally.
And on top that if it's going to be leading to contract vehicle manufacturers that have big facility in Europe. We've also had a good started up and our joint venture we have for electric vehicles in China and not is working well so geographically we'd be more likely to be able to do something from manufacturing standpoint in China.
<unk> or Europe, but engineering, we can do it anywhere.
Okay, and as we're thinking about going going forward.
Would you expect the discussion to accelerate more with a legacy Oems that.
Don't want to put in place the added capacity or is it more of the incremental discussion on your I'm going to be.
Let's start ups I just want to go asset light.
I think it's both and it's hard to predict what's going happen part part of it will be dependent on what happens in vehicle volumes and what specific car companies want to do from restructuring their capacity utilization.
I think going forward it to the extent that people know what the market is going to do they want to try and habit. So they're running their facilities pretty close would do a 100% and then utilized few Blake Magnus tire for excess capacity. So it's difficult to answer that unless we had a real crystal ball as with the volumes are.
And where else are pretty careful who we take business on there's a lot of different startups talking about what they're going to do and how much money. They raised and a lot of people fail. So we're pretty particular and we take business on for.
So I do think mobility is some this swami and his team are looking at pretty high.
Pretty carefully and I think there's going to be different opportunities coming up with some new entrance.
Great. Thank you.
Okay.
Thank you very much. Okay. Next question on the line as from you tied in the Kelly from Citigroup go ahead.
Great. Thanks, good morning, everyone.
Just talk I want to go back to the longer term margin question. It looks like the second half guidance implies that you kind of get back to 29 teen margins on still fairly lower revenue base and visiting like you mentioned additional restructuring benefits and other.
Potential tailwind next few years as we think about the Big picture did you think the earnings power, where the company has increased through this downturn that when and if we do get back to you want your prior 2022 revenue objectives whenever that might be but the margins could end up being higher than what you originally thought.
Yeah, I don't know if I, if Vince wants to comment on it I get the 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 our traditional business. They are pretty well, where they are as we are being new technologies.
The market that we can usually get higher margins than we've been spending a lot of money in the electronics area in the powertrain area as well as a lot of other new products. That's why I'm, particularly pleased to see the number of awards, we won from general Motors because its.
30 representative of what we're offering do a lot of customers. It's just that they're they're recognizing innovation and execution. So margins can be affected by a cost of non quality and getting a lot of non value added costs out of the out of our company and we were working really hard and not so.
It is a lot of moving pieces I think we're making good headway on our.
Got it manufacturing initiatives you tell you its Vince.
I think as he.
Assuming you get back up when we get had assumed the woman get back to same volumes and same sort of revenue.
Now if you have.
A couple of years have given what I HSS thinking about overall global production volumes.
Yeah, our mix of business I got to believe that will be different than what we thought just in January but.
But yeah I sit back and think about your question and what I saw happened in the organization as a.
Certainly rightsizing the company for what we see the next on the short mid term from a cost perspective.
But the relentless focus on world class manufacturing <unk> and the time that the plants were down I think give us an opportunity to reflect on things a little harder animal differently I think there's processes and cost that we took out that probably would have come out at some point down the road, but those have been all sort of.
Accelerated and taken outside I think thats an incremental.
But how that kind of mopped up till when revenue sort of come back.
Again, I you what our mix of business says what programs. It got award of what new part of working on I mean, those all come into play and I just don't have the visibility right now to venture out a couple of years out.
[noise], that's all that very helpful. Just a quick follow up that Vince you mentioned that you expect to a cover most of the working capital. This year any any high level view on what and what you may be able to recover.
In 2021 kind of and comfortable working capital other timing differences affecting cash flow.
Yeah. So it was at 21 or 20.
I'll, let me answer with respect to 2020.
No when I looked at the the investment in working capital in the second quarter, but $930 million.
It was more than I expected.
You start peeling back.
The skin on the on on the on a look into that some some delayed customer payment we got that back in July.
When you think about these government grants.
Net basis on a piano perspective, as it was pretty neutral.
But at the pretty significant receivable that we've got that we should be getting that.
Q3, Q4 income taxes flipped from being a payable to a receivable that'll flip.
Remember that we also generated cash in Q1 from working capital is really unusual so that's all come back into it as a use of cash in the second quarter and we remember.
We also had about it was about a 200 million dollar.
Collection of receivables in Q4 of last year that we should have got in Q1, so kind of think about where we end up at the end of the year I think if we weren't thinking about that $200 million.
Cash that we collected in Q4 versus Q1 I was that we probably will recover all of it so.
Are we showed 100 $200 million of that because that the pull forward of cash into Q4 could be but.
Good day also got some other payments that we get an early in Q4 2020, so now.
Get substantially I think all of that backed by the time, we get to Q4 of 2020.
With that so that's all very helpful. Thank you.
Thanks very much.
Next question on the line some of the line of Rod Lache with Wolfe Research Red hat.
Good morning, everybody I wanted to follow up on.
That's a significant amount of capital being raised by E V startups its.
Something like that.
Clearly the investment community believes that that has implications for the competitive landscape in auto and I'm wondering if that is actually influencing you in terms of the risk that you're willing to take with regard to somebody startups that does that should we as we look at that.
Should we be thinking that there's greater potential for expansion in complete vehicle Assembly in North America and at least a relative to what you what you've done so far.
Well, we really haven't done much in North America, So far we haven't investment, which we talked about in Waymo and we're doing some work with than we've had a good relationship with them, but it's very relatively low volume.
It's been like the chicken in the big as far as a vehicle Assembly work in North America, we continue to have requests or questions from.
Potential existing customers, one outsource some low volume programs as well as some new startups, but you need a certain volume to justify the capital even if its a.
Ill.
I think.
If we had a sheet of paper with all the potential new entrance into the market. How many will succeed what would the volumes B. I do think there'll be some people who will.
The successful will they be then.
Joint venture bought by somebody else hard to say I don't see huge volume in the new entrants relative to the sizes and market, but so I mean, given its size.
No I think that they can address to dawn I think rock the you'd be market is kind of still evolving I'm just not only from this kind of but also the architecture perspective for different Oems.
So we cannot.
Look at the landscape and be able to evaluate and I'm sure. There are opportunities like Tom said as we engage with up Magnus tire.
And then also help the.
Product roadmap from the components subsystem perspective.
Okay, and that's it thanks for that and I'm, just hoping just Vince if you can clarify.
You put out longer term margins I think for 2022, let's forget about that the timeframe, but the margin was 7.6% to 8%.
Just based on the $200 million of additional savings. If you just divided that by the 20% decremental margin is it reasonable to conclude that you could achieve that same.
Level of profitability with a billion dollars of lower revenue or.
Well, you basically implying that a lot of what we're seeing right now it's it's essentially pulled forward from from from your future plans.
A broad they then when you look at some of the things that.
We talked about in Q2 part of that is.
Pull forward. So they would have been factored into our outlook that we gave for 22.
Back in January this year.
A part of it is actually incremental activities that we undertook nor my comments about this gave US a time to kind of reflect on what we're doing and we're doing things a little differently that wasn't in our plan for that.
That is incremental to whatever we would have talked about in the past.
Okay. So just to two.
Kind of summarized on that point when you provided a margin target like that it sounds like that's kind of a floating target a bet. It's really contingent on the mix in a size that the business, it's not like you're not doing the reverse exercise and saying look based on the capital we committed we have to we.
I have to reach this kind of profit.
And find some other way to get there is that fair.
So you're talking about 22, sorry, I've, just yeah, I'm sorry, yeah. So yeah, how how do we read that that kinda, but have a target.
So let's go back do you know when we talked to the January and we've pulled our guidance, obviously, but when we talked about January wasn't a target rod.
It's based on our a bottoms up business plan based on.
Business Thats been awarded substantially been awarded to us or high potential that we're going to get awarded.
Based on production volume assumptions based on mix, it's based on exchange rate. So.
You know if even if you get to 2022 and exchange rates or debt for in our production higher or lower in a particular region or mix is a little different that could impact our ultimate numbers, but.
It isn't a target and we talked about in January.
By segment, what was going to happen a margin and why it was going to happen tomorrow and there was a whole bunch of reasons rod depending on the business unit why margins were going to move part of it was.
Underperforming operations part of it is a startup of new business.
When you think about some of the investments, we're making electrification autonomy is that business starts to come on.
Gonna have revenue, which we sometimes we don't have today, but we have cost so thats all going at it to margin.
Improvement.
Okay. Thank you thanks for clearing it up.
Thank you well go next question on life from Chris Mcnally with Evercore go right ahead.
Great.
Thanks, so much in great results guys, maybe the that the first question some of the questions already been answered.
If we think about some of the clinical problem child, the 2019th and the issues you had around seeding the innovates contract Buitrago in China can you talk about maybe just a little update about how many of those we actually cycled through the on through the the benefit.
It looks like probably on on on TV that you've gotten some of the the issues back from the you know the end of his contract, but just maybe an update if there's more savings or improvements to calm, particularly maybe in getrag in China, where that's a multi year sort of recovery.
Well I I think if you look at.
Let's break that up you look at some of the underperforming operations that we talked about last year.
And we were on track to see some improvements.
Obviously reduced volumes from coven 19.
Is a challenge for all of our plan, but.
What we've seen from an operational standpoint is in both of the operations in North America.
We have continued to see improvements.
I think in one in particular, even even with lower sales were a little bit better than where we thought on an absolute basis. So that that's a good story.
I think when you look at.
Our.
You talked a bit I think it was a dozen electrification our electrification spend.
It's an investment because we've got programs coming in the future and platform technology and continue discussions are customers I mean that that's just continuing.
To to be invested and incurred for for the right reasons on.
Our Ada Es business, and we talked about some some overspending in 2019, it kind of look at where we are for 2028, I'd say, we're probably a little bit behind where we thought we are going to be a little bit additional cost overall.
But again as we get into 21 or start to ramp up.
That should should go away.
From China and a good track standpoint has obviously, we've been impacted by covert 19.
There has been some restructuring and some of the joint ventures will take some cost that.
I'd say in one particular joint venture just probably.
Little bit less volumes than what we were anticipating give them with the the restart of overall production volumes in North America, that's probably going to be a negative or you know shorter term going forward than what we had had anticipated in the past.
But overall it you know we're pretty well on track a everywhere across the organization. If you take over 90 into account.
Great and then just a quick one on on on on Stier, you talked about obviously the benefit in Q2 as a result us on the cost actions and that you'd maybe continuing into Q3. It maybe second half should we start to think about it.
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 back of that easy question. I think would that earlier you know if there were a program that you know had 40 50000 potential volumes is that sort of the right hurdle for the kind of visit.
Realty that you need that look you know many of you programs are in that sort of.
Area and in in in year, one just thinking about the potential to grow this business you know well beyond the six or 7 billion that it's been historically.
We have an existing plant we get will take programs that are 5000 10000 units as a fit in there. If you were going to looking at a justification of a new facility you Wanna get up to 80000 100000, ideally that's probably three programs that 20000, but it never comes that cleanly.
So I think there's some opportunities.
Some some.
New startups, but.
It really comes down and what's the vehicle you need to paint shop is a greenfield is that a brownfield.
So from a margin perspective [noise].
We have complete vehicle manufacturing.
And the margins are pretty low because with all the bought in component. We also have engineering and I do think there's opportunities for good engineering contracts, especially with some of the new that's because of the capability there. So.
Comment on the weather and get to 3% or not but.
We had been I've been very pleasantly some [noise].
I've been surprised but it's a nice to see the efforts and the results, we've been getting out or engineering and the manufacturing initiatives in desire.
That's correct Thats typically in the existing facility over in Europe.
Yes, Chris you know I think when you look sorry, just just we're not gonna give guidance on where.
Any one of our segments, including light vehicle or for this year.
The next couple of years, we'll do that again as we update our business plan in January.
But.
In my commentary about margins are things, they're going to move it in any one quarter.
No it's going to be the mix of programs will then.
I think vehicle assembly business, it's going to be as Don talked to that.
The level of engineering.
What in my mind.
So.
And we've seen a team do or a really good job is focusing on some cost saving initiatives and we're seeing some some handsome dividends. On then that's going to continue that's incremental kind of were thinking even a year ago.
Fantastic. Thanks.
Thank you very much.
A question of life from Richard Hilgert with Morningstar go right ahead.
Thank you good morning, everyone. Thanks for taking my question.
I'd like to drill down a little bit more on the complete vehicle too.
You know we went from a 2.4 adjusted EBIT last year.
To a 4.7 this.
Revenue from [noise].
Segment was down almost 50%, but you went from 43 million to 44 million.
The adjusted EBIT.
Can you kind of characterize for me please.
You talked a little bit about the favorable mix you talked about the fixed cost recovery.
Talked about cost reduction.
In the group [noise].
The.
44 million on that much of a drop in revenue.
Can you talk a little bit about where most of that came from.
Something that was all cost reduction driven and then partially the fixed costs.
Or.
More of the fixed cost recovery, but in the mix that drove that.
Yeah, I'd say that the the biggest impact.
Is going to be ILEC through this is you've got mix is probably the most significant impact on us and that's a current levels and types of vehicles that are being produced and the amount of contribution that we have on that.
I'd say fall by or some of the cost saving initiatives, what what's a little more challenging than you know I've got a summer here to try to figure. This all it is.
The impact of some of the the fixed cost arrangements that we have all their customers. So you could have sales coming down.
And he got fixed cost recoveries. So the you think margin would come down or profit was come down more than.
It actually has and that's because of the support we have other those fixed cost recovery contracts, but Richard keep in mind.
Well the cell 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 those those those are the factors that are.
Impacting us and we keep on talking about is that there's been some more engineering work that this group has been doing in particularly over the.
The first half of this year.
Our engineers by Big part have been working from home.
And we've seen some efficiencies as the result of that so that's all contributed to the growth and profitability and growth and margin percent AMAG and start in Q2 of 20 versus Q2 2019.
Okay, great. Thank you.
That's helpful and then on the other segments.
Decrementals.
Pretty much good performance there across the board everything's under 30%, but feeling.
Yep.
The thirtys.
In the first quarter to 18.
Second quarter and body exterior structures.
Barely constant.
<unk>.
But then power envision just about doubled.
15 to about 28.
Recognize that seating is more of the left or a less capital intensive business.
On a high level basis, you know just looking at the it's a different segments.
Given the entrepreneurial spirit of the company I mean, the leading perform better in the second quarter because.
The individual.
Plants doing.
More cost cutting versus the other segments or can you kind of just go through what's the difference there between the segments that drove the different kinds of performance is there.
Well I think the first thing you Gotta remember richer is that the the level of capital intensity by segment set front.
So you're going to have different decrementals in incrementals as sales move around.
You know in our commentary as well as Dave kind of come through our Mdna there are.
Some items that are impacting segments that are not covered related.
If I think about our body exteriors and structures group I'd say, there's probably at either.
Couple of things that kind of stand out a couple of things is balance each other ed.
But last year was that the heavy launch here.
For this group and that there was some tooling.
More tooling contribution last year than there was this year.
That that that's that's a negative if you look at an a year over year base I am I looking at sequentially than looking year over year.
We did talk about some provisions for some customer claims.
And we have there plus and minus.
Every quarter.
There.
More significant than what they would typically be.
And they're sitting in our body accessories and structures groups. So that's a negative which is going to.
Impact overall.
Decremental margins.
In our parent and vision drew.
When I think about.
Kind of decrementals or other than coal that.
We talked about.
Social security taxes.
Difference in our view on consultants and whether their employees are independent contractors, and we booked a provision for social security taxes, which amounts to about $15 million in the quarter.
Which is reflected in our our power envision group, it's our electronics group.
So that's one thing that impacted us and.
Warranty was little higher this quarter versus.
The prior year quarter.
I I think in seating an equity and equity income. Thanks, Louis I think in seating, we hear what you're seeing as.
You know some some continued progress on some of the underperforming operations and when we were struggling last year an action plan was put in place even with reduced volumes were seeing some improved performance.
Which is what we're expecting with the team is focused on that I think that covers some of the kind of unusual type items that are impacting decrementals hi, that's just a focus everyone's having on.
Their cost structures across the organization, which is having a positive impact on profitability and feeding also was launching the business.
Business in Europe. So you got normal pull through one on the launch that's offsetting.
Right.
Okay, Great and then given the guidance for the second half.
I'm assuming that.
Looking at where the different segments have opportunity to improve it looks like then body exteriors structures and our vision would be the ones that probably improve in the second half.
Versus eating and complete vehicle.
What we're not providing details by Ah theres improvements in the back half by segment, which I'm sorry.
Okay, great. Thanks.
Thank you very much.
I would try one more question and acute was from the line or Michael blend with Raymond James go right ahead.
Okay. Thanks for squeezing me in.
Can you just give an update on good 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. The ship will that have some implications for.
Customer demand on the hybrid sites.
So why do you want to.
Yeah that yes means I think it you know as we're talking about the any we critics and how China is looking at income so including hybrids in the credits I.
I think it could be a positive influence we believe.
In addition to the drives and you know looking at DCP is going to the hybrid a dual clutch transmissions and the product both the de HD in the future, we see that as a positive trend for the product line in China.
You know when I say that for transformations whether.
It's the Jvs or you know overall in general for that product lineup transmission for us.
Okay and are you able to get.
Some commentary on Europe as well.
What it sooner.
In terms of the ER. This specifically to this I'm, assuming and I think Vince as mentioned in the past we've seen pretty good progress and traction income so if the product line.
In terms of transformations not just.
You know DCT, but also the HD t. Barnum quickly to the hybrid transmissions and maybe some.
Good back to really with customers even on the next innovation, which is the DST or talk about so definitely much.
Hi attraction and interest in several programs in Europe, a as we speak.
You recall glad that Michael that Michael that a at our Investor day talked about a couple of programs in Europe on on the HTC side, So it's going well.
Okay. That's it for me thanks.
Thank you very much.
Mr Walk around no further questions on the line I'll turn it back here.
Okay. Appreciate everybody dialing in this morning, just a it's been a very interesting year to say the least and Q2 is a complicated.
Quarter from memory booking standpoint, but overall I I'm fairly optimistic we've had some continued to had good activities and we believe results in our innovation activities. Both in the product in the process, we're making good headway in a world class manufacturing.
Reducing number losing divisions and launch concerns.
We have continued with a big priorities when the company sustainability is a big push in the company or diversity inclusion activities.
The restarts gone extremely well as we talk to vote launches deemed to be going well Oh, we have had to make some tough decisions, but that's that's business and we'll be getting some payback on that so overall I'm really happy with the efforts and the cooperation we saw.
<unk> the company in a very difficult time trying to keep people safe and comfortable working also in the execution of everything we're doing so I'm really looking forward to seeing what the.
What the future brings in the area of new mobility with its new customers or new products or new revenue model. So thanks, everybody for June in and hope to every day.
Thank you very much affect everyone that does conclude the converts conference. We thank you for your participation disconnect your lines.
Good day, everyone they'd be safe.
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