Q2 2021 Magna International Inc Earnings Call
[music].
Yeah.
Greetings and welcome to the Magna International incorporated second quarter 2021 results.
During the presentation, all participants will be in the listen only mode. Afterwards, we will conduct the question and answer session at that time, if you would like to register. Please press. The 1 followed by the 4 on your telephone if you require operating system simply press Star Zero as a reminder of this conference is being recorded today Friday all.
<unk> 2021, it is on 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.
Turning me today are so let me quote of Gary and Vince the lithium yes.
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.
On the press release today's conference call webcast. The slide presentation to go along with the call and our updated quarterly financial review.
All of the Investor Relations section of the website at the 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 the 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 on 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 on U S dollars.
We've included in the appendix a reconciliation of certain key financial statement lines for Q2 'twenty..1 in Q2 'twenty between the reported results and results of excluding unusual items.
The earnings discussion today excludes the impact of unusual items.
Please note that when we use the term of 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 on this 1.
Thanks, Louis and good morning, everyone.
Happy to be here to provide you with an update on 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 the 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 on costs 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 re in the air.
I'm sure by now many of you have heard about qualcomm's unsolicited offer for <unk> yesterday.
And of the news likely at the same time as you did about 24 hour Segal.
We are evaluating our options and considering next steps in light of Qualcomm's announcement.
We will be disciplined in on approach and remain committed to earning appropriate returns on our investments.
We are excited about magna's future, particularly given our systems and complete vehicle knowhow and the approach.
We recently highlighted magna activities that reflect improved positioning in key megatrend areas.
The next year, we will be launching the industry's first application of.
The digital radar technology with our icon radar on the physical ocean with.
On the technology developed together with our partner <unk> dramatically improves the readout performance with the 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 of lighting technology, with which we were first to market on the Volkswagen I'd for Bep.
This technology offers many key features with respect to <unk>.
Which provides opportunities for future growth for us and lighting.
Lastly, we won 6 supplier of the year Awards from General Motors.
The annual awards honors suppliers that consistently exceed gm's expectations Magna.
The Magna is the only supplier to receive 6 of large in a single year and we just did it for the second consecutive year.
We are very 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. The remained 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.
The 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 the.
Intend to run strong production once the additional chip capacity comes on stream.
Points to a positive mid term 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% on it.
Adjusted EPS was $1.40.
And free cash flow increased to $178 million in the quarter, bringing our year to date level to almost $600 million.
Despite reducing our 2021 outlook is the result of the semiconductor chip shortage, we maintained our expectations for 'twenty, 1 free cash flow.
We returned $226 million to shareholders in.
And lastly, we reached an agreement to dispose of 3 loss, making exteriors facilities in Germany.
The transaction, which closed on July 3rd the improves our exteriors manufacturing footprint in Europe, and better positions us for the future.
All considered a good quarter from Magna with that I'll hand, it over to <unk> to take you through the specifics.
Thank you Swamy and good morning, everyone on.
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 Europe.
On the Magna weighted basis light vehicle production increased 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 the 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 <unk>.
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 of NEDA.
These were essentially offset by a favorable value out of tax settlement in Brazil higher tooling contribution in the net settlement of the 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 of sales represented the most significant factor in the lower earnings for our segments.
I am 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.
The investment activities amounted to $387 million, including $277 million in fixed assets of 93 million the 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 of the before at the end of Q1 and continuing the sequential quarterly improvement we have experienced in the second quarter of 2020.
And our liquidity remains strong at $6.9 billion at the end of the second quarter.
Substantially as the result of the semiconductor chip shortage, we have lowered our 2021 outlook compared to make our.
Our assumptions for light vehicle production from North America have been lowered of 1.2 million units or 8%.
About 500000 units because of the 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've 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.
Yeah.
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 Bbs includes.
Production of about $200 million of reduction of about 200 million as the result of the disposition of 3 German exterior facilities in early July.
And our outlook preceding 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 of Swami indicators early.
Earlier, we have maintained our 2021 free cash flow expectations of 1.6 to $1.8 billion.
The lower sales and earnings outlook. This mainly reflects the lower expected investment in working capital for the year.
In terms of the 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 per complete vehicles, largely due to a change in program mix relative to our previous expectations.
In summary, we had solid performance Inc.
For Q2 the challenging.
<unk> environment.
Spike the volatile production schedules due to the chip shortage, we did a good job managing our costs and decremental margins, including execution on the improved operational excellence and implemented restructuring actions, we generated free cash flow of the $178 million, bringing our year to date of amounts to almost 600 million when the.
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. The Swami mentioned earlier, we are evaluating our options and considering next steps with regards to EMEA.
We don't intend to answer questions about Qualcomm said of 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 the Aileen Smith on for John.
I wanted to follow up first on the commentary around the decremental margins specifically 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 on that.
It was incredibly question I think 1 the pullback.
I think decremental in Q2 with the.
And of the worst of it at 22% decremental as you think about the cadence of that Youre looking towards in the second half of the year. How do you think about all of the containing decrementals on if that's possible at all specifically with the 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 cheer on assumptions that internally as you think about decrementals on 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, the relatively impressive performance that you've already put out there in the pressured periods.
I think when you look at.
Kind of the very first half of the year and as we think of the second half of the year and depending on where we are in the ranges.
We're seeing that the.
The margins should actually be doing a little better in the second half versus the first half.
Which implies.
The 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 on a bunch of moving pieces, but the tape.
First of all I think of the seating operations has been disproportionately hurt in the first half of the year as a result of.
Product mix I think we kind of continue to benefit as we look at the second half of the year of some of the restructuring activities that we undertook last year. We saw some benefit last year, we saw the 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're seeing some some pretty good operational results across the organization.
Okay.
That's helpful. And then I wanted to ask the bigger picture question around the strategy and not specifically referencing be any of our but that's sort of related to it.
As we think about the the.
On the outlook I guess, the the thought process as we head into 2020 tail.
Whether or not needs of the inner acquisition ultimately goes the way you anticipate or not the presuming. It doesn't you know how does that change in any way your focus from a strategic perspective around what technologies do you think you may need access to accelerate the growth trajectory is their scale of hyper focus on 8 hours a day or separately.
Could you look at other areas within the portfolio of whether its powertrain electrification and try to get more aggressive debt.
Hi, Good morning, Amy This is from me on.
I think I would refer back to the strategy that we outlined during the <unk>.
April Investor Day, and we said.
Accelerate our investments are focused on the macro trend. There is debt remains an ada of being 1 of them right and we also.
If you look into what we have said in the past vs.
Have been investing in Adas towards the last number of years.
Have the building blocks to address the requirements of our Adas the sense of sweep the compute in the software.
The acquisition that we've talked about in 1 day would accelerate our position in Adas, but we had the path and we will continue on that on the electrification of aspect we talked today about the closing of the LNG JV, which addresses.
Some key building blocks as we've talked about an E machine and in orders.
We continue to make progress.
In the business of electrification we are.
The launching programs and our <unk> JV.
Have had wins on primary and secondary drive.
And there is 1 of the program.
The radius discussions that we'll be able to give color when the customers rely on.
Now us to do that so.
The strategy remains and we continue to make good progress.
Okay, Great. That's very helpful. Thanks for taking the questions.
Our next question is from Peter Sklar with BMO capital markets. Please go ahead.
Good morning.
With the first on the.
The semiconductor shortage so.
As the.
Particularly I think as the GM at the true.
So I think are going to be having more downtime over the next couple of weeks.
Just wondering like how do you plan to react to it. So I believe you have that plant near London, Ontario that does the frames for for GM truck so low.
Do you take do you take the plants down and send the employees home or <unk>.
The reduced shifts or how does magna react to the 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 kind of a lot of content in the platform.
The semiconductor shortages of you know is continues to be a dynamic situation and difficult to predict there's a lot of stock stops.
In terms of the 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 of from how we manage it kind of from mix of all day about debt you've talked about this.
On a very difficult to have what I would call a.
On 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.
The time.
On different programs, even sharing between different facilities between COVID-19 and semiconductor shortages.
Other things so it kind of from mix of all right Peter.
Okay.
And then swamping of 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 the 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.
On the recently closed transaction it will be focused on supplying.
On the E machines in the in waters.
So.
A little bit more color, maybe from a north American and European customer perspective, Magna powertrain remains the lead in the JV will be supplying the machine and the border.
From a Asian customer perspective.
The JV will take the lead from the customer interface perspective, but the 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 of themselves. So it allows us to look at the overall system, plus where necessary to supply the.
Addressable market of <unk> machines in the waters.
And what assets are they are in the joint venture now has.
Has the LG contributed like facilities that are up and running now or what what is the status on what needs to be built.
So as he 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 on a development center. The works on the E machine and in water.
The piece of it.
And we will continue to see where it makes sense to and as we as we get the additional programs. They currently have programs with Oems I think Luis we talked about roughly about $150 million or so in 2019.
That's correct.
Yes. They are also I mean, we haven't talked a lot of about the customer specifically the other than they've said that they have.
On the Chevy bolt for Jim and the <unk>.
The pace for the Jaguar I pace of business with all of 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 guidance.
<unk>.
2 questions 1 of our production and 1 about the Decrementals in second half margins. So I guess the first clearly I think some of the pace of the second half costs 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 on annual 11% now North American production outlook do you think you fully incorporated sort of some of the debt.
The down year over year on comments that the GM made on on production or are some of those comments new to you as well.
Yes.
Yeah, Chris Thats, a good morning its fence.
As we look at.
Overall production assumptions for the second half of the year, we started on 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 Carnival reflects low we had as production schedules on the last week, we can of hot.
Pretty current.
But.
Chris.
Things are pretty volatile both swamy and I have commented on.
The things could get better maybe to get a little bit worse.
I think we've got.
Most of the.
The court in our overall forecast things you shouldn't hopefully theres not much variance to that other than upside. Good news is of course the.
With the.
The sales being strong and constrained.
Of the flexible production gets pushed out it gets pushed out.
Strong on a couple of years of production going forward.
Yes.
No that's great. That's really helpful. And then maybe on the on the on the Decrementals were they.
They are actually pretty impressive if I adjusted the guidance it only looks like a 10% cut from where the the revenue was 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 of $100 million greener EBIT in the second half over the first half I was just wondering if we don't have to get specific.
The percentages on Decrementals, but when we look at something like body, where we had a pretty big drawdowns on Q2 of 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 of such a big driver and obviously has the most exposure to the to the <unk> where production could be the weakest from the second half skewed.
Okay.
Questions.
It is impacting.
And particularly in our body exteriors <unk> structures group the.
Second half margins. So remember we talked about disposing of 3 <unk>.
German facilities.
He said that.
Other day to margin second half versus first of all the business.
We probably had about a couple of hundred more lots of sales.
In the first half, but these divisions.
<unk> generated losses. So if you think about the second half sales.
Sales were lower as of the.
The bulk of non consolidated the street facilities and profits of Harris, because we don't have the losses, so thats going to be incremental.
The other income ourselves in.
In the us as well as well.
Most of the other groups as the restructuring activities that we started last year.
We talked about but of $200 million benefit from overall.
Structuring that we agree lives by the time, we got into 'twenty 2.
<unk> recognized about 25 per cent of that benefit in 2020 line.
When I recognize expected the half of that $200 million in 2021 and the balance in 2022. So if you look at that $100 million.
We're probably about halfway there in the first half.
Of that continues in the second half and then we get an incremental benefit from continuing on restructuring. So thats kind of help the overall margins and Bds is certainly going to be a beneficiary of those activities as well.
In seating, we're looking at magna seating as well had a pretty tough first half the expectation is based on production net debt.
It looks better in the second half of <unk> sales of stronger margins on it.
That's great and so Vince I was actually fully putting into the benefit of that this falls of the 3 German facility. That's obviously something that 'twenty 3 guidance and obviously thats something thats going to help 'twenty to it as well is that annualized the next year.
Yes it.
Well Chris.
We've been focusing on these divisions for some time, but they have not been contributing to the bottom line and we.
When you look at on an annualized basis day, it's probably about $350 million of sales.
The push that into perspective.
Chris.
Chris I forget on 2023, we're going to have to redo our tire volume.
Volumes during the change with the new program of sell off so, but if you look at this alone on the selling this will be better for overall margins going out to 'twenty 3.
Perfect. Thanks, so much.
Yeah.
As a reminder 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 sort of very hot in the.
As investors are focused on all of these start ups coming out.
I think 2 questions can you give us a sense, obviously without growing the competence of details on the discussion pipeline.
Or that just kind of I don't know if you have of formal pipeline.
The kind of something around what could be coming and then second.
Since there is a lot of interest we heard of it.
Cisco, sending very competent last night for example in your capabilities. There how you would think about the breakpoint because it is the very chunky business of <unk>.
Turning up of new facility to handle Additionally, the belts.
Good morning, Brian.
I think in terms of the.
Discussion of <unk>.
We have said in the past, we obviously continue to have strategic discussions with customers.
Debt are in production today.
Various discussions on that topic plus.
On the.
The new entrants because you talked about on.
Our.
The existing customers that are looking at the variance and so on so it's the mix of all of this debt we are constantly.
Currently looking at and when we talk.
If we look at the capacity that we have in place in Graz in Kochi in Europe.
And then we have the footprint in China.
Luis you can be.
The more specific but somewhere in the range of 200000 units.
In our hotel, principally the <unk> grants and about a similar 180 to 200 in China.
So we have the footprint of it we continue to look at the 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 of 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 a 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 activity for the weather 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 of going through it was.
As we have more proliferation of the readers we have to look at from 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.
<unk> looked at from object separation of credits and walking next to a guardrail.
About 75 meters or so or maybe even likely more.
To detect the ratio greater than 300 meters pedestrian and that kind of 50 meters. So rethought. This were all important things and that's the way we've worked with the startup on a partner of Wonder Theyre looking at the silicon side of things.
We continue to look at the call. It the overall integration of the system the software floor of feature functionality.
So as the system level.
Brian we would be.
Magna would be looking at it and working on integration with the customer and at the silicon level call. It the really the full be.
The imaging chip.
It will 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.
Tom.
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.
Of course.
Was it was mix.
A contributor to the the result 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 her.
How much of the margin was way down from supply chain pressures or labor inefficiencies on.
Start stop production of cost inflation as opposed to just pure.
The last.
False volume.
If you could just decompose the quarter the margin in the quarter of a little bit that'd be great.
Sure Dan its Vince on the.
Try to decompose a little of it for you so.
As I said on on a consolidated basis.
There were some puts and takes.
The higher commodity costs and additional.
The costs for new facilities and launch costs for new programs.
The Mexican labor law changes of negative in the quarter compared to Q1 of them there's a lot.
Compared to Q1 by the way.
And the certainly benefited from.
2 additional tooling contribution I did talk about it.
Brazilian VAT value added tax settlement.
And in Q1, we had.
The customer settlement that hurt margins of that reversed in Q2, but all of that debt I just talked a bit net to zero. The when you look at the the various segments.
It's a little bit different the story.
I think.
The stands out to me.
Now through it is the biggest set of that.
Certainly is cash.
And volumes and because of that all of the semiconductor situation and.
How of much of that is inefficient labor by starting and stopping.
What the desk the overhead.
A real challenge to try to measure on that but.
But I can tell you when I look at our seating business I think they've been disproportionately.
Bert.
From the sales and margin perspective.
And that's because when you look at.
Some of the larger programs the <unk>.
All of them just have not been close to what the markets performed debt.
I think when you look at some of the others.
Yeah.
I look at our body exteriors <unk> structures group.
I think the biggest negative.
Quarter to quarter, it was higher commodity cost.
That comes primarily on the form of 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.
Quarter over quarter of drag on margins.
Other than that.
Is.
It is a pretty clean order in.
Whether the had a different discussion if we didn't have the reduction in volumes.
The 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.
The relative to the North American production growth in European production, both of our top 30 programs that did underperform in the REIT you picked up Jim.
The impact of the GM trucks, but the price and maybe that's a big program it was actually.
Pretty significantly down in the quarters of few others like that as well so tough for the north.
North America did underperform.
Europe as well so it doesn't happen every quarter, but this quarter. It did have an impact of so overall sales negatively.
Great.
And then just to clarify commodity costs from the year did use the given update on that.
On.
So we talked about.
I guess from Q1 of the <unk> Guy.
<unk> on commodity costs.
And as we look from where we were at the law at the beginning of the year of Tomorrow.
Theres been mobile easing of.
Commodity costs, probably it's on the floor.
The $25 million to $30 million versus prior expectations, but year over year sort of neg.
Got it.
And that debt benefit.
That was primarily as a result of.
The rosin pricing.
Coming down a little bit of installed higher than our levels of 2020.
Great. Thanks, and then.
Second question, if you could just zoom out a little bit and look at the seating. It's it's been.
That segment has underperformed the other segments of debt 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 on.
The house seating is positioned today versus where it's been.
Historically or are you still trying to gain additional share or are you on boarding.
New customers the views on the vertical integration there just a bit of of zoom out on.
We're seeding stands today would be helpful. Please.
Yeah, maybe I'll start off.
Sure on the number of Swami maybe you can talk about overall strategy.
Youll recall.
In.
1 year of couple of years ago, we talked about getting some new business with the European customer or.
There wasn't 1 of the value out of it was just on top of that was kind of depressed margins not necessarily impact the 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 is.
We outlined in our Investor day of the R.
The beginning of the year call.
Sort of seeding the cell.
Good and above market.
But as I look at 'twenty 1.
<unk>.
At least for the first half of the year had been substantially outperforming on the revenue side compared to our other segments. They also have launch costs of Washington, the business so longer term.
When I look at this business here.
<unk>.
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 of 23, we're expecting growth of kind of ships of 13%.
On average per year and think about you know the market.
At that point in time on them.
Weighted basis is growing 6%. So there is.
So there's some outperformance on the sales side debt, which should help overall profitability.
So on the maybe just talk about kind of work of the group fits.
Sure.
If you just look at it is.
I would say of seating is really a good business in.
And our deliberate and looking at the programs.
We bring value to the table and just looking at the overall picture of the vehicle and.
With our business and how we are addressing the new entrants I think overall, it's really wrong and.
I also talked 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.
The ratio of continue.
Gonna have seats right. So.
Looking at the.
Baseline of where we are and how we continue to grow.
The faster than the market.
I would say it remains an integral part of the per strategy.
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. The 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.
The year over year decline in revenue 2 weeks 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 the outgrowth and then what you may be assuming in terms of any headwinds in terms of potentially.
Average, having partially of both vehicles and your parts of potentially assuming some worked out of.
Some of those.
Per partially built vehicles within your revenue outlook.
Yeah.
Kevin.
Alright.
Good morning.
Let me try to give you some color there I think when you look at the.
The first half sales.
About $19.2 billion.
Consolidated.
Our implied range for the second half is $18.8 to 23, so the mid point.
The show.
Slight increase in net sales second half versus first half.
When we look at overall content.
And the <unk>.
The comments about how <unk> been growing relative to the market.
We grew a little faster than the market, which will imply content per vehicle growth.
And in the first part of a little bit behind.
In the second quarter, but from the full year.
We're expecting to be kind of in line or maybe a little bit pause of debt.
So the IC.
On cost Central VSO.
Year over year really not much of a change.
Which is what we assumed at the beginning of the year on as you get out to 'twenty..2 'twenty 3 we start to see on our content per vehicle of growth all of the market on.
The accelerating.
I mean, if you look at production last year of the second half for North America was 8 million units.
We're implying a $7.4 per this year's second half of them I think if you look at last years Europe like 9.6% when that we're at $8.8 sort of pretty significant year of your decline.
Yeah.
I guess mark.
I kind of what the.
I'm disappointed with the semiconductor situation and how it's impacting our.
Our industry, but more importantly, how it impacts of magna.
But as I think about what's going to half of next year and sales are still strong.
Inventory level of sales or customer sales are so strong.
Inventories are low.
And very low historic low as interest rates are still at the FERC.
The muscles. So how is that looking for 'twenty, 2 and even beyond that.
I think the when I see some some of them.
Taylor loans from the benefit us.
At this year of will certainly next year.
That's helpful. And then my follow up question was.
On the same topic and could you go on to some more depth about what youre hearing from you on semiconductor suppliers in terms of.
Out 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.
When when potentially of the supply demand situation may of Mays. Thank you.
Good morning, Mark This is Tommy I think the semiconductor situation I would say, it's still dynamic and we have the 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 and it's the kind of a very dynamic situation on a daily basis through organic we've been.
Fortunate too.
Continue to support our customers, we didn't stop any customer because of the shortage from our site.
But it's really in this too wide. So if you look at it there seems to be a path.
In the next 3.4 months, but we've talked for the last quarter.
We got to continue to monitor the situation.
Kind of start seeing the leverage of relief towards the end of the year.
So thats.
It's very difficult to.
Give a definite answer to how it works out.
We already saw the production down by about $1.2 million and 400000 units in the North America and Europe, respectively.
Regarding the kind of wait and watch.
Thank you.
Our next.
<unk> is from Michael Glen with Raymond James. Please go ahead.
Hey, good morning.
Just first question, so when youre seeing the Oems.
Introduced.
The variance like full battery electric variance on existing platforms that you're.
That you are providing content on can you just discuss like how is how does your content there.
On the 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 kind of look at it.
There are some EV vary instead of the platform have any variant.
Yes.
You know in normal call it propulsion system.
When it's on hybrid we're talking about the hybrid DCT.
Awesome.
The pre BCP, which gives them tier 2 reductions, but when youre talking to the true.
The best let's say.
If you had it all wheel drive 4 wheel drive system, we would be now addressing debt with a primary or secondary E drive so from a content per vehicle perspective.
If you're replacing and all of them drive 4 wheel drive it's higher with the.
E drive.
If you are looking at the gist.
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 of the EV really of come is significantly higher for magna.
And if it is the replacement of ethanol real growth 4 wheel drive with a primary units that can do drive it all the feature functionality of the connective powertrains and torque Vectoring and so on then the content of a breakthrough would be higher there too.
And we talked about E beam as 1 technology there.
We believe the Oems would kind of a chance to get an EV varian without having to significantly change the existing platform. So overall, if you sum it up.
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 I was looking to add you may not see it all in.
And our sales because there'll be an element that's in.
Like LG, that's on consolidated but.
We're going to kind of keep track of that and provide some color on that as well as you can see the you think of the wholesale.
Both of our P&L.
Okay, Perfect and then just the capital allocation question.
Just help me look at the the veneer 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 the end 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'll go back to kind of what I've been talking about 3 years on the set of I'm talking about it more recently.
Just kind of overall philosophy.
And when you look at where Magna is north of the 3 is the more of scrubbing and.
The position, we hold in our unique capabilities.
For the right opportunities.
If we're investing in the business.
We're creating for the right returns, obviously, we're creating values and I call. It sustainable body. It becomes just kind of it's kind of each and every year, we'll generating value.
And Thats, our preferred of course of action.
And to the extent that we.
We have excess liquidity after that we're paying.
Dividends.
Buy back stock.
The buyback of the stock you painted somewhat reduced your share count on the 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 of it 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 the changing.
At all of the Magna.
Sure.
Okay. Thanks for taking the questions.
Yes.
And this is all the time, we have for questions Mr. Eric with the Gary 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.
Okay.
[music].
The first.
Right.