Q2 2021 Magna International Inc Earnings Call
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Okay.
Yeah.
Greetings and welcome to the Magna International incorporated second quarter 2021 results.
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You require operating system simply press Star Zero as a reminder, this conference is being recorded today Friday August 6.2021. It is now my pleasure to turn the conference over to Louis Tonelli, Vice President Investor Relations. Please go ahead Sir.
Thanks, Brent Hello, everyone and welcome to our second quarter 2021 results conference call joining.
Joining me today are so let me go to Gary and Vince <unk>.
Yesterday, our board of directors net and approved our financial results for the second quarter of 'twenty 1.
We issued a press release this morning outlining our results.
The press release today's conference call webcast. The slide presentation to go along with the call and our updated quarterly financial review all in the Investor Relations section of our website at Magna Dot com.
Just 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.
Such statements involve 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 to today's press release for a complete description of our safe Harbor disclaimer.
As we review financial information today. Please note that all figures discussed are in U S Force.
We've included in the appendix a reconciliation of certain key financial statement lines for Q2 dollars 21 in Q2 'twenty between reported results and results excluding unusual items.
Quarterly earnings discussion today excludes the impact of unusual items.
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 with that I'll pass it over to Swamy.
Thanks, Louis and good morning, everyone.
Happy to be here to provide you with an update from Magna.
Overall, we were pleased with our Q2 performance considering the day to day production disruptions caused by the semiconductor chip shortage continues to make for a challenging industry environment in the short term.
As a result of much lower production than we had anticipated back in early may, particularly in North America, and Europe sales came in well below our expectations for the quarter.
Naturally this impacted our Q2 earnings.
And as Vince will discuss later it is also impacting our outlook for 2021.
We continue to have a sharp focus on managing our costs through the volatile production period.
This includes ongoing activities to enhance operational excellence as well as realizing savings from restructuring initiatives announced last year.
Our focus from cost helped mitigate the impact of lower sales in the quarter.
Longer term our portfolio positions us to continue driving sales growth over market.
As well as strong free cash flow generation.
2 weeks ago refined the definitive agreement to acquire <unk>.
I'm sure by now many of you have heard about qualcomm's unsolicited offer for <unk> yesterday.
Earned up the news likely at the same time as you did about 24 hours ago.
We are evaluating our options and considering next steps in light of Qualcomm's announcement.
We will be disciplined in our approach and remain committed to earning appropriate returns on our investments.
We are excited about magna future, particularly given our systems and complete vehicle Knowhow and approach.
We recently highlighted magna activities that reflect improved positioning in key megatrend areas.
Next year, we will be launching the industry's first application.
Digital radar technology with our icon radar on the physical ocean the.
The technology developed together with our partner <unk> dramatically improves radar performance with a number of unique attributes compared to current radar systems.
And in the area of electrification, we closed our joint venture agreement with LG.
This JV.
<unk> enhances our E motor and inverter building blocks is an important vertical integration step that strengthens our overall E drive systems capability.
At the same time it allows us to participate in the fast growing E machine and in water market for Oems, who choose to do some system integration work in house.
We recently profiled our new surface element lighting technology, with which we were first to market on the Volkswagen I'd for VEB.
This technology offers many key features with respect to lead <unk>.
Which provides opportunities for future growth for us and lighting.
Lastly, we won <unk> supplier of the year Awards from General Motors.
The annual awards honors suppliers that consistently exceed gm's expectations.
Magna is the only supplier to receive 6 of large in a single year and we just did it for a second consecutive year.
We're really proud of this and we would like to thank our customer for this recognition.
Let me turn to some of the market dynamics that are affecting our business right now.
It is clear that the global semiconductor chip shortage has been and will be more impactful to 2021 than most in the industry anticipated earlier this year.
Significant chip shortages continued to impact OEM production into the second half of 2021.
Commodity costs, while modestly better for 'twenty, 1 than what we expected a quarter ago, we remain higher than what we expected at the beginning of the year.
And wage pressures in certain markets together with new Labour loss in Mexico have led to increases in labor costs.
In terms of tailwind the industry continues to experience robust auto demand following the COVID-19 induced industry.
Challenges of 2020.
Strong auto demand coupled with OEM production disruptions. This year have led to historically low dealer inventory levels, particularly in North America.
These 2 factors together with indications from Oems that they're in.
Intend to run strong production once additional chip capacity comes on stream.
Points to a positive midterm production environment for auto suppliers.
Overall, we continued our solid performance in Q2, despite facing a difficult operating environment.
Consolidated sales increased 2.9 billion.
EBIT margin increased to 6.2%.
Adjusted EPS was $1.40.
And free cash flow increased $278 million in the quarter, bringing our year to date level to almost $600 million.
Despite reducing our 'twenty to 'twenty 1 outlook as a result of the semiconductor chip shortage, we maintained our expectations for 'twenty, 1 free cash flow.
We returned $226 million to shareholders and.
And lastly, we reached an agreement to dispose of 3 loss, making exteriors facilities in Germany.
The transaction, which closed on July 3rd improves our experienced manufacturing footprint in Europe, and better positions us for the future.
All considered a good quarter from Magna with that I will hand, it over to <unk> to take you through the specifics.
Thank you Swamy and good morning, everyone.
I'm going to start with a detailed review of the quarter.
The second quarter of 2020 included the unprecedented industry wide production suspensions due to the COVID-19 pandemic, while the second quarter of this year included the production disruptions due to the ongoing global semiconductor chip shortage, making the quarter is difficult to compare.
Global vehicle production increased 58% in the second quarter, driven by significant increases in North America and in Europe.
On a magna weighted basis light vehicle production increased to 133% in the second quarter of 2021.
Our consolidated sales were $9 billion more than double the sales level in the second quarter of 2020.
Organic sales underperformed weighted production in the quarter. However, on a year to date basis, our organic sales growth is roughly in line with weighted production.
As a result of the strong year over year sales growth adjusted EBIT and EPS each improved dramatically from the second quarter of 2020.
Perhaps more informative comparison is reviewing sequential results.
<unk> Q2, 'twenty 1 to Q1 of this year global light vehicle production was down 10% driven principally by North America, and Europe and substantially due to the semiconductor shortage.
This led to our sales being down 11% sequentially.
Each of our segments experienced sequential declines in sales with some segments impacted more than others.
Our adjusted EBIT declined from $770 million in Q1, 'twenty $1 million to $557 million in the second quarter and EBIT margin fell from 7.6% from the first quarter to 6.2% in Q2 of 'twenty 1.
The reduced earnings on the $1.1 billion and lower sales effectively represented all of the net decline in adjusted EBIT and EBIT margin.
There were a number of puts and takes quarter over quarter.
We had higher commodity new facility in launch costs incremental labor costs in Mexico, and higher net application cost they need us.
These were essentially offset by a favorable value added tax settlement in Brazil higher tooling contribution in our net settlement of customer claims in the first quarter of 2021.
We estimate that our decremental margin on the sequential decline in consolidated sales was about 19%.
Similarly, the decline in sales represented the most significant factor in the lower earnings for our segments.
I'm now going to review, our cash flows and investment activities.
During the second quarter of 2021, we generated $777 million in cash from operations before changes in working capital and invested $249 million in working capital investment.
Activity has amounted to $387 million, including $277 million in fixed assets of <unk> 93, net increase in investments other assets and intangibles.
Free cash flow was $178 million in the second quarter.
We used $99 million to repurchase shares representing 1 million shares and paid $127 million in dividends.
Our adjusted debt to adjusted EBITDA stands at 129 down from 1.
Or at the end of Q1 and continuing the sequential quarterly improvement we have experienced in the second quarter of 2020.
Our liquidity remains strong at $6.9 billion at the end of the second quarter.
Substantially.
As a result of the semiconductor chip shortage, we have lowered our 2021 outlook compared to may.
Our assumptions for light vehicle production from North America have been lowered a $1.2 million units or 8%.
About 500000 unit sales decline came through in the second quarter.
For Europe, our production assumptions have been lowered by about 400000 units about half of which was experienced in the second quarter.
We are also slightly increased our expectations for the Canadian dollar the Chinese RMB and slightly lowered our expectations for the euro and each case relative to the U S. Dollar. These currency changes have a negligible impact on sales and margin in our outlook.
Mainly as a result of the lower assumed light vehicle production caused by the semi shortage.
We have reduced our sales ranges for all segments as well as consolidated sales outlook for <unk> includes.
Production of about 200 million a reduction of about $200 million as a result of the disposition of 3 German exterior facilities in early July and our outlook for seating sales has been impacted by ongoing negative program mix, the majority of which we experienced in the second quarter.
Despite the roughly 2 billion dollar decline in our consolidated sales range, we've only modestly reduced our adjusted EBIT margin range down by 20 basis points to a range of 7% to 7.4%.
We slightly reduced our equity income by $5 million at the top and bottom end of the range also reflecting the lower assumed vehicle production.
Interest expense has been lowered by $20 million to approximately $80 million.
Net income attributable to Magna has been reduced reflecting the lower sales and margin, partially offset by lower interest expense and our tax rate and capital spending expectations are unchanged from our last outlook.
And Swamy indicated early earlier, we have maintained our 2021 free cash flow expectations of 1.6 per $1.8 billion, despite the lower sales and earnings outlook.
This mainly reflects a lower expected investment in working capital for the year.
In terms of segment margins.
As a result of the lower 2021 segment sales outlooks, we have reduced our full year margin ranges for body exteriors <unk> structures power <unk> vision and seating. However, we have increased margins for complete vehicles largely due to a change in program mix relative to our previous expectations.
In summary.
We had solid performance Inc.
For Q2.
Challenging environment, despite the volatile production schedules due to the chip shortage, we did a good job managing our costs and decremental margins, including execution on improved operational excellence and implemented restructuring actions, we generated free cash flow of $178 million, bringing our year to date.
To almost $600 million and returned 226 million to shareholders through dividends and share repurchases and we maintained our 2021 free cash flow expectations. Despite lowering our 'twenty 1 outlook due to the ongoing semiconductor chip shortage.
Just before we turn to Q&A as Swamy mentioned earlier, we are evaluating our options and considering next steps with regards to EMEA we.
We don't intend to answer questions about Qualcomm standard, but what's the implications may be for Magna.
We remain disciplined and committed to earning appropriate returns on our investments.
Thanks for your attention. This morning, we would be happy to answer your question at this time.
Thank you.
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Our first question is from the line of John Murphy with Bank of America Merrill Lynch. Please go ahead.
Good morning, everyone. This is aileen Smith on for John.
I wanted to follow up first on the commentary around the decremental margins specific day as it relates to the outlook in the second half of the year.
Thank you I think 19% in the second quarter, if we're looking at the front half of last year.
It was incredibly question I think 1 when you put that.
I think Sacramento.
And the worst of it at 22% decremental as you think about the cadence that you're looking towards in the second half of the year. How do you think about sorry, the containing decrementals. If that's possible at all specifically with a commodities environment, that's going to be less favorable.
Yeah.
As your question related to.
Further deterioration to volumes compared to our assumptions.
8.
Thanks, Jeremy.
Yeah, not relative to your own assumptions, but internally as you think about decrementals in the second half of the year your own internal expectations are that way from a cost perspective, you could further try to contain the decrementals birthday relatively impressive performance that you've already put out there and yes, it's been pressured periods.
I think when you look at kind.
The very first half of the year and as we think about that.
Second half of the year and depending on where we are in the ranges.
We're seeing that.
The margins should actually be doing a little better in the second half versus the first half.
Which implies.
Decrementals.
Being the same or a little better than what they were in the first half.
And I would attribute that to.
A couple of things so a bunch of moving pieces, but sales.
First of all I think about our seating operations has been disproportionately hurt in the first half of the year as a result debt.
Product mix I think we are going to continue to benefit from.
I think the second half of the year some of the restructuring activities that we undertook last year. We saw some benefit last year. We saw some benefit in the first half of the year, we continue to expect to see debt benefit increasing as we move on.
In the second half of 'twenty 1.
But in terms of everything else I think theres, a lot of puts and takes but.
Generally we are seeing some some pretty good operational results across the organization.
Okay. That's helpful. And then I wanted to ask a bigger picture question.
Ron strategy, and not specifically referencing Danielle, but that's sort of related to it.
Think about.
The outlook or I guess, the thought process as we head into 2020 tail.
Whether or not the inner acquisition ultimately goes away, you anticipate or not but presuming. It doesn't how does that change in any way focus from a strategic perspective around what technologies. Do you think you may need access to accelerate the growth trajectory is there still a hyperfocus on 8 hours a day or separately.
Could you look at other areas within the portfolio, whether its powertrain electrification and try to get more aggressive debt.
Hi, Good morning, Amy This is swamy.
I think I would refer back to the strategy that we outlined during the April Investor Day, and we said.
Accelerate our investments are focused on the macro trend areas debt remains in a debt being 1 of them right and we also.
If you look into what we have said in the past vehicle.
<unk> been investing in 8 out towards the last number of years.
Have the building blocks to address the requirements for Adas the sensor suite the compute in the software.
The acquisition that we've talked about in 1 way or ex elevate our position in Adas, but we had the path and we will continue on that on the electrification in aspect, we talked today about the closing of the LPG JV, which addresses.
Some key building blocks as we've talked about an E machine then in orders.
We continue to make progress.
In the business for electrification.
Launching programs in our Haskell JV B have had wins on primary and secondary drive.
And there is 1 other program and.
Previous discussions that we will be able to give color when the customers will allow us to do that so.
Strategy remains and we continue to make good progress.
Okay, Great. That's very helpful. Thanks for taking my questions.
Our next question is from Peter Sklar with BMO capital markets. Please go ahead.
Hi, good morning.
With the first on the <unk>.
Semiconductor shortage so.
I am, particularly I think as the GM trucks, I think are going to be having more downtime over the next couple of weeks I'm just wondering like how do you plan to react to it. So I believe you have that plant near London, Ontario does frames for for GM truck. So like do you take do you take the plant.
Down and send the employees home or.
You reduced shifts or how does magna react to this volatility that we're seeing in the production schedules for your primary platforms.
Good morning, Peter I think Thats, 1 of the plants right, we have a lot of content in that platform.
The semiconductor shortages you noise continues to be a dynamic situation and difficult to predict there's a lot of stock stops.
In terms of volumes in terms of changes in variance.
In terms of the amount of releases.
It's been difficult, but we have been able to.
To support our customers'.
Through this dynamic time right now.
Regarding your question on from how we manage it kind of from mix all day about debt you've talked about this.
Very difficult to have what I would call a.
A playbook right I mean, we are reacting to a very dynamic situation.
As some of the volumes change and some of the lines have different from rates.
We are going through that part of the restructuring how we flex that.
Time.
On different programs, even sharing between different facilities between COVID-19 and semiconductor shortages.
Other things so it kind of from mix, So Paul right now Peter.
Okay.
And then Swamy and my last question I'm, just wondering if you could elaborate a little bit more on the LNG joint venture.
No.
When do you expect to be delivering products.
Which customers you're targeting.
And I know youll be doing.
Electric drives there, but there are other areas within magna that we'll be doing electric drive so.
So is it that the LNG joint venture is positioned more for Asian customers and wont be addressing the north American and European markets I'm, just wondering how you're carving up this E.
E powertrain market, because you seem to have a number of.
Areas of expertise that that we'll be pursuing that product category.
Peter I think from.
The electric drive systems perspective Magna powertrain.
<unk> remains the forefront.
When we talk about the LG Magna JV.
The recently closed transaction it will be focused on supplying.
The <unk> machines in the in waters.
So.
A little bit more color, maybe from a north American and European customer perspective, Magna powertrain remains to lead in the JV will be supplying the <unk> machine in the border.
From a Asian customer perspective.
The JV will take the lead from the customer interface perspective, but magna powertrain would still be providing the expertise of the overall system. So the JV is really focused on.
Supplying the <unk> machine in the <unk> part of it and we believe that's really advantages.
Some of the Oems.
Look at doing the system integration themselves. So it allows us to look at the overall system, plus where necessary to supply the.
Addressable market broker machines and in orders.
And what assets are they are in the joint venture now has.
Has LG contributed like facilities that are up and running now or what what is the status from what needs to be built.
So LG does have engineering and production facilities have Inc.
Korea.
Obviously complemented by the footprint of Magna elsewhere.
And they also have an engineering center, which are development center that works from the E machine and in water.
Piece of it.
And we will continue to see where it makes sense to add as we as we get the additional programs. They currently have programs with Oems I think Louis we've talked about roughly about $150 million or so in 2019.
Correct correct.
Yes. They are also I mean, we haven't talked a lot about the customer specifically other than they said that they have.
The Chevy bolt for Jim.
It pays for the Jaguar I pace of business with them, but they have multiple customers beyond that.
Okay. Thanks Louis.
All I have thank you.
Okay.
Our next question is from Chris Mcnally with Evercore ISI. Please go ahead.
Thanks, so much debt.
So.
2 questions 1 about production and 1 about decrementals in second half margins. So I guess the first clearly I think some of the pace of the second half caught caught us by surprise in the second half and GM definitely indicated that in the second half versus first half comments earlier this week.
Can you just maybe comment annual 11% now North American production outlook do you think you fully incorporated sort of some of the debt.
But down year over year comments that GM made on on production or are some of those comments new to you as well.
Yes, Chris Good morning, it's Ben.
As we look at.
Overall production assumptions for the second half of the year, we started out our internal forecasting process. Some time ago with a certain set of assumptions. We continue to refine our outlook based on the information that we're receiving from all of our customers. So I'd say that.
The outlook, we've got today, probably reflects flow we had as production schedules in the last week week and a hot.
Pretty current.
But the north.
Chris.
Things are pretty volatile both swamy and I have commented on.
Things could get better maybe to get a little bit worse.
I think we've got.
Most of.
Caught in our overall forecast nothing to share hopefully theres not much variance to that other than upside. Good news is of course with <unk>.
Sales being strong and constrained.
From a production gets pushed out.
Those will be.
Strong in a couple of years of production going forward.
Okay.
That's great. That's really helpful. And then maybe on the on the on the Decrementals where.
They are actually pretty impressive if I adjusted the guidance it only looks like a 10% cut from where the revenue was cut.
What I think is somewhat surprising is the second half margins.
Implied in the guidance actually assume like a 50 basis point improvement second half over first half roughly 100 million greater EBIT per second half over first half I was just wondering if we don't have to get specific.
Synergies on Decrementals, but when we look at something like body, where we had a pretty big drawdowns in Q2.190 basis points lower than Q1.
I am assuming its back up into the 8% 8.5 per cent range in second half and.
Even though revenue is not that strong could you just maybe talk about body because it's such a big driver and obviously has the most exposure to the <unk> where production could be the weakest in the second half.
Yes.
Questions.
It is impacting.
And particularly in our body exteriors <unk> structures group.
Second half margins. So remember we talked about disposing of 3 <unk>.
German facilities.
He said that.
Average day to margin second half versus first half the business.
We probably had about a couple of hundred more of those sales.
In the first half, but these divisions. These plants generated losses. So do you think about the second half sales.
Sales are lower.
Lots of non consolidated 3 facilities and profit to Harris, because we don't have the losses, so thats going to be incremental.
The other income that though.
In the us as well as.
Most of the other groups as a restructuring activities that we started last year.
We talked about but a $200 million benefit from overall restructuring that we agree lives by the time, we got into 'twenty 2.
We recognized about 25% of debt benefit in 2021.
When I recognize expect about half of that $200 million.
In 2021, and the balance in 2022, so if you look at that $100 million.
Probably about half way there in the first half so that continues in the second half and then we get an incremental benefit from continuing our restructuring. So that's going to help the overall margins and Bds is certainly going to be a beneficiary of those activities as well.
In seating, but look at magna seating as well you know had a pretty tough first half expectation is based on production net debt.
It looks better in the second half so total sales of stronger margin standard.
That's great and so Vince.
Actually fully putting in the benefit of the disposal of the 3 German facility. That's obviously something that <unk> 'twenty 3 guidance, and obviously thats something thats going to help 'twenty 2 as well as net annualized it next year.
Yeah.
Yes.
Chris.
We've been focusing on these divisions for some time, but they have not been contributing to the bottom line and when.
When you look at on annualized basis day, it's probably about 350 million net sales.
But to put that into perspective.
Got it.
So you know.
Chris I wouldn't get a 2023, we're going to have to redo our tire volume.
Volume during the change the net new program that settlement, so, but if you look at this alone on its own this will be better for overall margins going out to 'twenty 3.
Perfect. Thanks, so much.
As a reminder.
Minder to register you May press, the 1 followed by the 4.
Our next question is from Brian Johnson from Barclays. Please go ahead.
Sure.
Just want to.
Talk a little bit about the complete vehicle business, which was very hot.
As investors are focused on all of these start ups coming out.
I think 2 questions can you give us a sense, obviously without going in confidential details on the discussion pipeline.
Or that just kind of I don't know if you have a formal pipeline.
But kind of something around what could be coming and then second.
Since there is a lot of interest.
This percentage very competent last night for example, and your capabilities. There how you would think about the breakpoint because it is a very chunky business.
Putting up a new facility to handle additional EV sales.
Good morning, Brian.
I think in terms of the discussion.
<unk> said in the past, we obviously continue to have strategic discussions with customers.
Debt are in production today.
Various discussions on that topic plus.
The new entrants as you talked about.
Our.
The existing customers that are looking at the variance and so on so it's a mix of all of this debt we're constantly looking at.
And when we talk.
If you look at the capacity that we have in place in Graz in <unk> in Europe.
And then we have the footprint in China.
Louis you can.
Be more specific but somewhere in the range of 200000 units.
In <unk> facility, our approach in growth and about a similar 180 to 200 in China.
So we have the footprint that we continue to look at we have the flexibility.
To figure it out variance in how we go through the manufacturing process.
And I think we continue to say we remain open to the footprint in North America given.
The right business case viability, but more importantly, even if you just start from there. If there is a good visibility on the road map I think.
That's what's going to trigger.
Triggered the decision for us.
Okay.
So you would be open to it but you'd have to have confidence obviously in the volume estimates.
Just to follow on icon radar could you elaborate a bit more on that product line in particular, how much is dealt within magna and how much is using some of the radar products a few startups active according radar had on the market.
So this development goes back a few years and we've been talking about it.
The current process going through this or the rationale going through it was.
As we have more proliferation of the readers we have to look at some key attributes like interference mitigation.
Look at higher resolution.
And if you look at the.
Some key factors like object detection like you know you should be able to look at it higher on the road at 75 meters example.
Look at some object separation pedestrian walking next to guardrail.
75 meters or so or maybe even likely more.
To detect a vehicle greater than 300 meters pedestrian their 250 meters. So I've rethought. This they are all important things and that's the way we've worked with the startup of our partner owned or they're looking at the silicon side of things.
And we continue to look at the call. It the overall integration of the system the software for a feature functionality.
So as a system level.
You know, Brian we would be.
No we'd be looking at it and working and interfacing with the customer and at the silicon level call. It the really the full b.
Imaging chip.
We'll be done by wonder.
Okay. Thank you.
Our next question is from the line of Dan Levy with Credit Suisse. Please go ahead.
Hi, good morning.
Thank you for taking the question.
Wanted to dig in on the on the margin in the quarter and maybe you can help decompose a little bit.
Just a couple of pieces on this.
First how much was mix.
A contributor to the results in the quarter because.
I think we actually saw Gm's truck program hold up well in the second quarter, and we know that your largest program and on the flip side, maybe you could talk to.
How much of the margin was way down from supply chain pressures or labor inefficiencies on start stop production cost inflation as opposed to just pure.
Laughter.
False volume.
Could just decompose the quarter the margin in the quarter, a little bit okay great.
Sure Dan its Vince.
Try to decompose a little bit for you so.
As I said on a consolidated basis.
There were some puts and takes.
Yeah higher commodity.
At any cost and additional.
Costs for new facilities and launch costs for new programs.
The Mexican labor law change was a negative in the quarter compared to Q1 and it is up compared to Q1 by the way.
And we certainly benefited from it.
Fueling additional tooling contribution I did talk about.
Brazilian VAT value added tax settlement.
And then in Q1, we had a.
A customer settlement that hurt margins, so that reversed in Q2, but all of that debt I just talked a bit net.
Zero, but when you look at the various segments.
It's a little bit different this sorry.
Stands out to me.
Through it is the biggest set of that.
Certainly is a reduction in volume.
That all from the semiconductor situation and.
How much of that is inefficient labor by starting and stopping.
What that does to overhead.
It's a real challenge to try to measure and debt but.
But I can tell you when I look at our seating business I think they've been disproportionately.
Bert.
From a sales and margin perspective.
And that's because you look at.
Some of their larger programs.
Volume is just have not been close to what the markets performed debt.
I think when you look at some of the others.
I look at our body exteriors <unk> structures group.
I think the biggest negative.
Quarter to quarter, it was higher commodity costs and net.
It comes primarily from a farm resin.
With a little bit of steel, but primarily resin.
And.
In that 1 group again, they're launching a whole bunch of new business. So that was a.
Quarter over quarter, a drag on margins.
Other than that.
It's a it is a pretty clean order in.
It had a different discussion if we didn't have a reduction in volumes.
It's a pretty straightforward to talk about the quarter, but that's kind of what I see when I look at our business and then looking at mixed a little bit.
<unk> realm.
Relative to North American production growth in European production growth, our top 30 programs did underperform and Youre right you picked up Gms, Inc.
Of the GM trucks, but price and maybe that's a big program it was actually.
Pretty significantly down in the quarter. It was a few others like that as well so it's up 30.
American did underperform and like I said in Europe as well so it doesn't happen every quarter, but this quarter. It did have an impact so overall sales negatively.
Great.
Just to clarify commodity costs from the year did you give an update on that.
And we talked about.
I guess from Q1, we gave some guidance on commodity costs.
And as we look from where we were at the <unk>.
At the beginning of the year Tomorrow, there's been little easing of commodity costs, probably have done about $25 million to $30 million versus prior expectations, but year over year.
Negative.
And that benefit from this.
Primarily as a result.
Growth in pricing.
Coming down a little bit, but still higher than our levels of <unk>.
<unk> 'twenty.
Great. Thanks, and then.
Second question, if you could just zoom out a little bit and look at seating. It's it's been.
That segment has underperformed the other segments of it and I know that.
A large piece of it more recently has been on the volume side, but maybe you could just give a sense on how.
How seating is positioned today versus where it's been.
Historically or are you still trying to gain additional share or are you onboarding.
New customers the views on vertical integration, there just a bit of a zoom out on where seating stands today would be helpful. Please.
Yeah, maybe I'll start off.
The numbers Swamy, maybe you can talk about overall strategy.
Youll recall.
And.
Here are a couple of years ago, we talked about getting some new business with a European customer where.
There wasn't a lot of value items, just in time and that was kind of depressed margins not necessarily impact returns on capital, but margins. So we were anticipating that and we talked about Dennis as we bucket successor programs.
We're expecting that our content is going to increase so our margin should should expand.
So that's all kind of in line the growth.
We outlined in our Investor day.
Beginning of the year call.
For seating was still.
Good and above market.
But as I look at 'twenty 1.
Good day.
At least for the first half of the year have been substantially underperforming on the revenue side compared to our other segments. They also have launch costs are launching some new business so longer term.
When I look at this business here and.
Look at overall margins I expect margins to continue to expand and just to remind you when we talk to the growth in this business.
Back at the beginning of the year between 'twenty 1 into 'twenty, 3 we're expecting growth of kind of shifts from 13%.
On average per year and think about you know the market.
At that point in time.
Weighted basis is growing 6%. So there is.
Clearly some outperformance on the sales side debt, which should help overall profitability.
Yeah.
So let me maybe just talk about kind of where the group fits.
Sure.
If you just look at it as a.
I would say a seating is really a good business in.
Here in our deliberate and looking at the programs and how.
We bring value to the table and just looking at the overall picture of the vehicle.
With our business and how we are addressing the new entrants I think overall, it's really wrong and I.
I also talk about the.
Business segment that is kind of agnostic to the mega trends. It doesn't mean that there's going to be no product evolution of course that is going to be but as.
The ratios continue we are going to have seats right. So.
Looking at the.
Baseline, where we are and how we continue to grow.
Faster than the market.
I'd say it remains an integral part of the per strategy.
We feel good about it.
Great. Thank you.
Our next question is from Mark Delaney with Goldman Sachs. Please go ahead.
Yes, good morning, and thanks very much for taking the questions first question was to better understand what you're assuming with regards to your second half revenue outlook. If I look at the midpoint of the adjusted revenue guidance I believe it implies a slight year over year decline in revenue to range. This year.
Versus last year. So maybe you could talk a bit more around what assumptions are going into that both in terms of any content per vehicle benefits you may get in terms of outgrowth and then what you may be assuming in terms of any headwinds in terms of potentially Oems, having partially both vehicles and your parts potentially assuming it's from some work down.
Some of those.
Partially built vehicles within your revenue outlook.
Kevin.
Good morning.
Let me try to give you some color there I think when you look at that.
First half sales.
$19.2 billion.
Consolidated.
Our implied range for the second half is <unk>.
$18.8 to 23, so at the midpoint.
Joe.
Slight increase in net sales second half versus first half.
When we look at overall content.
Hmm.
You made some comments about how it has been growing relative to the market.
Was there a little faster than the market, which will imply content per vehicle growth.
In the first quarter, a little bit behind.
In the second quarter, but from a full year.
We're expecting to be kind of in line or maybe a little bit pause of debt.
So I'd say cost central VSO.
Year over year really not much of a change.
Which is what we assumed at the beginning of the year and as you get out to 'twenty..2 'twenty 3 we start to see our content per vehicle of growth over market accelerating.
Accelerating.
I mean, if you look at production last year in the second half for North America was 8 million units.
We're implying but $7.4 per this year second half and I think if you look at last year's Europe from 9.6% when that we're at $8.8 we feel pretty significant year over year decline.
Yeah.
I guess mark.
I kind of look at.
While I am disappointed with that.
Semiconductor situation and how it's impacting our.
Our industry, but more importantly, how it's impacting magna.
But as I think about what's going to happen next year and sales are still strong.
Inventory level sales our customer sales are so strong.
Inventories are low.
And very low historic lows interest rates are still at very.
Good levels. So how is that looking for 'twenty, 2 and even beyond that.
Yes, I think we're going to see some some.
Tailwind from a benefit to us.
At this year certainly next year.
That's helpful. And then my follow up question was.
On that same topic and could you go into some more depth about what youre hearing from your own semiconductor suppliers in terms of.
The back half of the year may shape up.
What sort of linearity or are you expecting in terms of improved chip supply and.
Yes.
When potentially the supply demand situation may Mays. Thank you.
Good morning, Mark. This is swamy I think the semiconductor situation I would say, it's still dynamic and we have task forces kind of looking at every program working with the customers.
Well as the chip suppliers.
We took the best forecast that we could.
It's kind of a very dynamic situation on a daily basis to look at it we've been <unk>.
<unk>.
To support our customers, we didn't stop any customer.
Because of the shrinkage from our site.
But it's really industry wide. So if you look at it there seems to be a path in the next 3.4 months, but we've talked to you last quarter.
We got to continue to monitor this situation be kind of start seeing immediate relief towards the end of the year.
So thats.
It's very difficult to.
Do you have a definite answer to how it works out.
And we already saw the production down by about $1.2 million and 400000 units in North America, and Europe, respectively.
We got to kind of wait and watch.
Thank you.
Our next question is from Michael Glen with Raymond James. Please go ahead.
Hey, good morning.
Okay.
First question, so when you're seeing the Oems into.
Introduced.
The variance like full battery electric variance on existing platforms that your debt.
You are providing content can you just discuss like how is how does your content.
Gary on those EV variance versus what you are producing now are you indeed, seeing an increase or is it doesn't seem relatively stable.
Good morning, Marc Michael I think if you just look at it.
There are some EV variant fitted a platform where you have an easy variant.
Plus.
And normal quarterly propulsion system.
Renison hybrid we're talking about the hybrid DCT.
Awesome.
<unk> per DCT, which gives them tier 2 reductions, but when youre talking to pool.
Beth let's see.
If you had it all wheel drive 4 wheel drive system would be now addressing debt with a primary or secondary E drive so from a content per vehicle perspective.
If you're replacing an algorithm drive 4 wheel drive it higher.
<unk> drive.
If you are looking at day.
And just a front wheel drive system, which was not an addressable market is now becoming an addressable market for us.
So I would say its total addressable market perspective is the EV variants come is significantly higher for Magna.
And if it is a replacement of an all wheel drive 4 wheel drive with a primary units that can do drive it all the feature functionality of connective powertrains and torque Vectoring and so on then the content per ratio would be higher there too.
And we talked about E beam as 1 technology there.
We believe that Oems would have a chance to get an EV varian without having to significantly change their existing platform. So overall, if you sum it up with <unk>.
Variants, increasing our addressable market and content per vehicle that we can address would be higher.
Okay, perfect and then.
Go ahead, sorry, Michael I was just is it going to add you may not see it all in.
And our sales because there'll be an element that's in.
Like LG Thats non consolidated but.
We're going to kind of keep track of that and provide some color on that as long as you can see the incremental sales at both of our P&L.
Okay, Perfect and then just a capital allocation question.
Just let me look at the <unk> transaction and I hear you make the comment during the opening opening remarks about magna being focused on generating appropriate returns on capital. So when you look at the amount of capital that was going.
That could potentially go towards being here, how do you assess that return on capital versus say.
Allocating such an amount to a substantial issuer bid for the stock.
Good morning, Michael.
I go back to kind of what I've been talking about 3 years or so on these set from talking about it more recently.
Just kind of overall philosophy.
And when you look at where Magna is north of the history is and where it's growing and.
The position, we hold in our unique capabilities.
For the right opportunities.
If we're investing in the business.
We're creating the right returns, obviously, we're creating values and I call. It sustainable just.
Just kind of it's kind of each and every year, we're generating value.
And Thats, our preferred course of action.
And to the extent debt.
We have excess liquidity after that we're paying.
Dividends.
Buy back stock and I look at the buyback with the stock you painted somewhat reduced your share count and return capital to shareholders.
But that value doesn't continue to growth so our preference and our approach and our strategy is to stay focused on our overall product strategy continue to fill the gaps or complement what we do.
And investing in the business, but we're going to be prudent about that.
And if it doesn't fit our strategy doesn't meet our returns.
We have excess liquidity then we'll return it back to shareholders, we've been doing that for years and I don't see that changing.
At all of the Magna.
Sure.
Okay. Thanks for taking the questions.
Yeah.
Yeah.
And this is all the time, we have for questions. Mr. <unk> I'll turn the call back to you for closing remarks.
Thank you thanks, everyone for listening and despite ongoing semiconductor related production challenges, we had a good quarter solid quarter. Despite the short term impact.
Encouraged by the mid and long term auto environment, and we remain focused on executing our plans and delivering solid results. Thanks again enjoy the rest of your day.
And that does conclude the conference call for today, we thank you all for your participation and ask that you. Please disconnect your lines have a great day everyone.
Okay.
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