Q3 2021 Magna International Inc Earnings Call
Greetings and welcome to <unk> third quarter 2021 resolved during the presentation, all participants will be in a listen only mode.
Afterwards, we'll conduct a question and answer session.
At the time, maybe you have a question. Please press the one by the four on your telephone if a new time to conference. They could be sharper you can press star.
Zero.
They're minus conference is being recorded today Friday November 5th.
'twenty one.
Now I would like to turn the conference over to Louis Tonelli VP of Investor Relations. Please go right ahead.
Thanks, Tommy Hello, everyone and welcome to our third quarter 'twenty, One results conference call joining.
Joining me today are so let me go to Gary and Vince Galecki, Yes.
Yesterday, our board of directors met and approved our results for the third quarter, we issued a press release this morning outlining our results.
You'll find 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 web site at Magna Dot com.
Before we get started just as a reminder, the discussion today may contain forward looking information or forward looking statements within the meaning of applicable securities legislation.
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 dollars.
We've included in the appendix a reconciliation of certain key financial statement lines for Q3, 'twenty, one and Q3 2020 between reported results and results excluding unusual items.
The quarterly earnings discussion today excludes the impact of the 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 over to Swamy.
Thanks, Louis and good morning, everyone.
To be sure to provide you with a general update on Magna and also our Q3 results.
The industry pressures, we have been experiencing through 2021.
Intensified in Q3, leading to a very volatile operating environment.
All things considered we had a solid operating performance in the quarter.
Production for the quarter was much lower than we had anticipated back in August, particularly in Europe.
As a result, our sales came in well below our expectations and this together with a number of additional factors negatively impacted our Q3 earnings.
The industry challenges are expected to continue this carter, although to a lesser degree.
We remain focused on managing our costs through this volatile production period.
This includes ongoing activities to enhance our operational excellence as well as fully realizing savings from restructuring initiatives announced last year.
We are also not losing sight of investing for our future.
Longer term our portfolio positions us to continue driving sales growth over market as well as strong free cash flow generation.
I will highlight a few awards in key technologies that will contribute to future growth and we remain excited about magna's future, particularly given our systems and complete raiko Knowhow and approach.
The key market dynamics that are affecting our industry currently a relatively well known.
The ongoing global semiconductor chip shortage remains the most significant headwind to global industry production.
There have been some signs of improvement recently, however, where it remains to be seen when the industry will return to a more stable rate of production.
As a result of the chip shortages, our customers' production schedules are unpredictable, causing labor and other operational inefficiencies at our facilities.
On top of these factors, we have experienced inflationary cost increases and production inputs, including freight commodities and to a lesser degree labor and energy costs.
Market tailwind are largely unchanged from last quarter. The industry continues to experience strong auto demand that exceeds available supply.
This has led to historically low dealer inventory levels in certain markets.
These two factors together with indications from Oems that they intend to run strong production.
Additional semi chipset available continues to point to a positive and sustained midterm production environment for auto suppliers, assuming other factors don't hamper supply or demand.
Despite our strong efforts to manage day to day, the challenging operating environment took its toll on our cargo consol.
Consolidated sales were $7 9 billion down 13% year over year.
EBIT margin declined to two 9%.
Adjusted EPS was <unk> 56 for the quarter.
And free cash flow was slightly negative in Q3.
Regardless of the short term challenges, we remain confident in our underlying earnings power and cash flow generation capability that will create value over the longer term.
Before I move on to talk about a few of our technologies and recent program Awards I would like to point out two recognitions, we received by Magna that we're really proud off.
Magna was recently recognized as a top performing global supplier at the 23rd annual Ford World Excellence Awards.
This award is a testament to our team's commitment to foster trusted relationships with our customers.
<unk> relationships like this are fundamental to our mutual success and this transformative times.
We were also just named to the Forbes world's best employers list for 2021. This marks the fifth straight year of making this list a great accomplishment.
In the past we have highlighted the development of our free form seeding technology, which provides Oems with a wide variety of feed design possibilities.
We are currently launching this technology on a complete seat program for a global OEM customer.
We have also been awarded free form on three other programs, including for a new entrant that are launching in 2022.
And our pipeline of interest remains strong in the technology from various customers.
Recently, we have been showcasing our mezzo panel technology at close to market large format decorated front integration panel that we believe will change the face of electric vehicles.
<unk> panel enables integrated Adas, some lighting and features see them until late functionality.
It's a good example of Magnus integration capabilities that enable us to provide unique products to our customers.
We have been awarded a program from a European OEM using this core technology.
Our mezzo panel technology provides design distinction possibilities to Oems for their front end something that is getting good traction with our customers.
Lastly, we were awarded new business recently, and a couple of important technology areas.
We won business with Daimler on our family of transmissions for their next generation of compact and mid sized vehicles launching in 2025.
This includes our traditional Dct's reached we have been producing for Daimler since 2018.
As well as hybrid DCT.
It represents.
Third high volume hybrid DCD program, we have been awarded we begin launching the other two programs this quarter.
The shift to hybrid electric Dcp's for such high volume platforms provides long term stability in our transmission business.
It also allows us to continue to utilize our asset base, while the transition to full Evs continues.
This award supports our booked business and growth in powertrain electrification humira.
You may recall that we are targeting over $2 billion and manage powertrain electrification sales by 2023 and over $4 billion by 2027.
We also won new <unk> camera business with a European based global OEM.
The program will include our latest advanced camera technology.
This award is based on our core platform of ours that has applications already in production, which allows us to leverage the technology investments, we have been making in this area.
Award further bolsters Magnus, leading Adas position in cameras and supports our above market expected sales growth in this emerging area.
By now many of you know that Qualcomm made a higher bid for <unk> than the one we announced back in July and as a result, <unk> Board agreed to move forward with Qualcomm.
Although this transaction was expected to accelerate our position in Adas and provide further scale. We remained disciplined on price based on our valuation.
We have been investing in Adas over the last number of years and we have the building blocks in place to address the requirements for Adas, namely sensitive suite compute and software capabilities.
We will continue to invest internally as we have been and always will consider external investments that could add to our complement our adas portfolio.
We continue to expect a sales.
<unk> in our Adas business of around 20% from 2022, 2023, and 15% to 20% out to 2027.
Lastly, as we work through our succession planning process I am pleased to announce that our board of directors have approved a few management changes that are effective January 1st 2022.
Vincent <unk>, our current CFO has been appointed as president for Magna International.
In this role Vince will continue to support me on corporate strategy capital markets stakeholder relations and other matters.
Mccann has been promoted to executive Vice President and Chief Financial Officer reporting to me.
In this in his 22 plus year career at Magna Pat has served in a variety of senior finance roles at Magnus Corporate head office, including most recently as senior Vice President Finance.
That also served as vice President Finance for Cosmo, our largest operating unit between 2016 and 2019.
Anton Maya has been promoted to executive Vice President and Chief Technology Officer, having most recently served as executive Vice President R&D.
And Tony has held various other roles in his 35 plus years career at Magna.
I am very confident in each of these rule changes together with the strength of Magna's overall management team.
With that I will hand, it over to Vince to take you through the third quarter financials in more detail.
Vince.
Thank you Swamy and good morning, everyone I will start with a detailed review of the quarter.
As Swamy indicated earlier, the third quarter was a very challenging one for magna's operations. However, I would echo swamy sediments that we're proud of how our business is managed in the face of such adversity in the quarter.
Global light vehicle production declined 12% in the third quarter driven by year over year reductions of 19%, 20% on 12% in North America, Europe, and China, respectively.
On the Magna weighted basis production declined 18% in the third quarter of 2021.
Our consolidated sales were $7 9 billion compared to $9 1 billion in the third quarter of 2020.
Organic sales slightly outperformed weighted production in the quarter.
As a result of the lower year over year sales adjusted EBIT and EPS each declined from the third quarter of 2020.
As of last quarter, a more informative comparison is reviewing sequential results.
Comparing Q3 dollars 21 to the second quarter of this year Global light vehicle production was down 6% driven principally by Europe.
<unk> <unk> due to the semiconductor shortage.
This together with negative program mix in North America, and Europe, foreign currency translation, and the disposition of three loss, making serious facilities that toy sales being down 12% sequentially.
Each of our segments experienced sequential declines in sales the subsegment segments impacted more than others.
Our adjusted EBIT declined from 557 million in the second quarter of 'twenty $1 million to $229 million in Q3.
And EBIT margin fell from six 2% in Q2 to two 9% in Q3 of 2021, reflecting a higher than typical decremental margin.
The adjusted EBIT decline reflected a number of factors.
Reduced earnings on the $1 1 billion in lower sales.
Production inefficiencies driven by the unpredictable production schedules of our customers.
Increased inflationary cost for production of inputs, including freight on commodities.
A $45 million provision on engineering service contracts with the automotive unit of Evergrande and a favorable value added tax settlement in Brazil from the second quarter.
These were partially offset by lower profit sharing and incentive compensation lower launch costs and the positive impact of the sale of three loss, making serious facilities early in the quarter.
I am going to review, our cash flows and investment activities at this point.
During the third quarter of 2021, we generated $532 million in cash from operations before changes in working capital and invested $132 million and working capital.
Some of the working capital investment relates to higher than typical inventory on hand, as a result of ongoing supply chain on customer disruptions.
Investment activities in the quarter included $454 million to acquire our interest in the LG magnet joint venture $334 million in fixed assets.
$101 million increase in investments other assets, and intangibles and $3 million and private equity investments.
Under the terms of the sale of our three loss, making service facilities, we provided the buyer with $41 million of funding.
Which was an additional use of cash in the quarter.
Free cash flow was negative $25 million in the third quarter.
We also paid $130 million in dividends.
Our adjusted debt to adjusted EBITDA stands at 138 and our liquidity.
<unk> remains strong at $6 2 billion at the end of the third quarter.
We announced today that our board approved subject to approval by the Toronto, and New York stock exchanges, a new normal course issuer bid to purchase up to $29 9 million of our common shares. This EBIT will expire in November of 'twenty two.
Turning to our outlook my comments will be consistent with the press release, we issued last month.
We have reduced our light vehicle production expectations in North America, Europe, and China by 7% to 9% and 7% respectively.
Note that there are some differences between our year to date actual light vehicle production numbers and those provided by IHS. However, our Q4 volume estimates are aligned with the IHS mid October update.
We made some minor changes to our expectations for the Canadian dollar and Euro and each case relative to the U S dollar.
Currency changes have a negligible impact on sales and margin in our outlook.
Based substantially on lower volume assumptions, we now expect our total sales to be in the range of 35 four to $36 4 billion for 2021 down from a range of 38 to $39 5 billion previously.
We now expect our EBIT margin to be in the range of $5 one to five 4% for 2021 compared to seven to seven 4% range previously.
This is largely as a result of the decline in <unk> sales the operating inefficiencies driven by unpredictable OEM production schedules higher inflationary production input costs and the provision on engineering services with the automotive unit of aircrafts.
We narrowed our equity income range slightly and maintained our interest expense expectations.
We reduced our expected IRR.
Our expectation for net income attributable to magna, reflecting the lower sales and margin.
We also lowered our tax rate expectations, largely reflecting a change in the mix of earnings and.
And their capital spending range was reduced slightly from our last outlook.
In terms of segment margins.
All segments were significantly impacted by the decline in sales and production inefficiencies driven by unpredictable OEM production schedules. In addition, the provision associated with Evergrande represented an additional significant items negatively impacting EBIT margin and our complete vehicles segment.
We also reduced free cash flow expectations versus our August outlook, mainly as a result of our lower volume sales and earnings expectations.
Keep in mind that compared to our initial outlook for 2021, our sales expectations have declined almost $5 billion at the midpoint.
<unk> reductions and vehicle production assumptions of 16% and 11% in North America, and Europe, respectively.
In addition production inefficiencies driven by unpredictable Oems schedules and inflationary cost pressures have together resulted in a higher than typical decremental margin on the lower sales.
Despite all of this.
Still expect to generate about $1 billion in.
And free cash flow in 2021.
In summary, we had solid performance for Q3, and an increasingly challenged industry environment.
We managed through lower than expected volumes and unpredictable OEM production schedules.
Both due to the semi chip shortage as well as inflationary input cost pressures.
We continue to win business with our portfolio of innovative technologies.
We are investing for future.
Further growth and we remain positioned to support the anticipated strong recovery of vehicle production once the industry disruptions subside.
Thank you for your attention. This morning, we would like we would be happy to answer your questions at this time.
Thank you very much and once again, if you'd like to register your question press. The one followed by the four on your telephone.
Tom prompt Ignacio request. This question has been answered I'd like to draw your registration is for one of our three excuse me.
Speaker phone handset prefer entering your question one moment. Please for our first question.
And we'll proceed with our first question on the line John Murphy of Bank of America Securities Go right ahead.
First off guys, Congratulations Vince patent Anton on the on.
On the promotions, we're looking forward to continuing to work with you guys.
So congrats on that.
Maybe just a first question here.
Vince as we think about 2022 I know, it's very early days.
The gauge what's going on.
You did make one interesting comment about the sequential deterioration in mix for you from second quarter to third quarter.
And there is sort of positives and negatives to thinking about mix going forward, but as you think forward to like the next 12 months as production ramps up maybe a little bit next year.
How do you think about sort of the major factors outside of volume.
Including mix raws and other input cost that hopefully become more normal.
Yes, John Thanks for your comments.
As we think about.
What's happening in Q2, and Q3 and even in Q4, it's been chat has been challenging and we expect it to continue to be a little bit roster in Q4.
My own view is that I think we're kind of at the bottom in Q3 and things should start to stabilize and get a little better as we move into 'twenty two.
We get to the end of 'twenty to mid to end of 'twenty two.
We should get back to kind of a normal type production environment.
So as I look at.
Our overall cost structure.
I think some of the inefficiencies that we've been having with the start stop of production some of the inventory buildup that should all normalize so that should all go away.
In terms of some of the inflate.
Inflationary impact on our some of our production costs.
Silicon materials, when you look at labor in particular energy.
I got to believe that leavers labor is going to be there, we'll deal with that going forward.
That being a significant issue for us and commodity costs, a bounce around and with some of our resale programs, we should be able to manage through that.
And energy are just being an additional costs, which we'll have to again deal with through some of our productivity improvements.
I'm confident that as we're moving forward, we should continue on the track of expanding margins on the mix side.
John It's hard to tell I mean, we've had some positive mix us earlier in the year, it's a little bit negative this year.
Hi.
We have experienced some growth over market, we did expect going into 'twenty, one that crossover market.
Going to be some but it wasn't going to be significant but as we move on into 'twenty, two and 'twenty three we expect to accelerate our growth over market mix will have positive or negative impact.
It's too early to tell John right now given our previous expectations, we haven't actually talked about 'twenty two in the past but.
Whether we're plus or minus.
Certainly I think things are going to get better compared to where they were in Q3 of this year.
Just looking at looking at mix sequentially.
Sequentially GM had a tough quarter compared to what we where we were in Q2 and the Germans in Europe, which make up a good chunk of our business underperformed. The overall change. So that's kind of what we're talking about one time what makes sense.
Got it Okay. That's very helpful. And then just the second question around.
Acquisitions divestitures and the portfolio rebalanced.
<unk> is gone, but yet you stepped up on the LG.
JV and took them out I'm just curious do you eventually as you look at the opportunity set and this is for Swamy <unk> as well.
Youre going to have some room to make acquisitions over time, whether it be small or larger.
What is the what is the continued focus there.
What should we think about it as targets as far as size region customer.
Or product sets.
Hey, Jonathan.
Ill turn it over to Swamy afterwards.
I just wanted to kind of point out that our overall strategy on capital allocation.
It has been consistent and then.
It continues to be intact and that is.
Obviously, we want to generate good profit and the most amount of cash while we can from our operations and what we want to do with that is.
Number one primarily invested in the business organically and Inorganically.
Hey, Dave and that grows over time.
And to the extent that we are in our target leverage range as we have excess capital return that to shareholders. So thats kind of completely intact.
And from a investment standpoint, Inorganically, we've always talked about.
Transactions that add or complement our technology base, whether that's one.
<unk> of the world or another region in the World One test for another customer.
I think we're not really worried about where it is as long as it advances our overall positioning.
Swamy, if you wanted to add something to that.
I think you've covered it grow rents I think.
We're not focused on the size, we are just strategically looking at augmenting EBIT or our footprint.
Supporting our customer base are augmenting our product portfolio that is has always been the rationale for looking at investments either internal or external Jon and I think that would continue as a non more classes of business for us.
Okay, and then just lastly, real quick on fifth gear in the contract manufacturing there just curious from your <unk>.
Your side, how is that progressing how much more is just becoming more of a magna car overtime as you get closer to <unk> at the end of next year are you winning content there and what is that program mean, you may be financially or also sort of from a.
A banner of you can actually do this and help other startups seen are you getting other.
Interest coming in from startups, or even developed or existing customers.
So John I think.
The program is progressing well as we see it from our side obviously the details have to be.
Left out for fiscal year, two comment on just like any other customer.
I would say definitely.
<unk> be an example to show both from a component and a system perspective, as well as food away from engineering and manufacturing.
But just like we have said in the past dues continuing discussion with various customers.
Whether it be variants of new models and so on based on magna's portfolio and capability and we continue to have that conversations.
As we had in the past.
Okay.
I think from our perspective, it's progressing pretty well.
Great. Thank you very much guys.
Thank you. Our next question on the line from the line of Peter Sklar with BMO capital markets go right ahead.
Good morning.
First I wanted to ask you about.
Just to go back and review your comment your comments about vehicle electrification and the anticipated revenue stream for Magna I think you said $2 billion of revenues by 2023 and $4 billion by 2027 I just wanted to ask if you could review the the major.
We are product areas that are going to comprise that that revenue.
Good morning, Peter I think we as we have said in the past when we talk about electrification we are talking about.
The E drive systems obviously.
But we also look at some of the products that are.
Helping the transition so our hybrid DCT.
And products related to.
Through hybridization are part of it.
And I think you've got the numbers right. We're looking towards that 2 billion Mark by 2023 and getting to a full billion Mark in 2027, and as you've heard today the HDD portfolio continues.
To gain traction.
And we have talked about E drive systems going into production in the past.
We continue to have traction and interesting discussions on E beam as well as.
More drive programs.
And Peter I would just add that.
Thats on a managed basis so it's going to include.
Items that we equity account for like LG for instance, and it will also include <unk>.
Okay.
And I'm trying to recall, how many E Drive award have you announced so far I think it's is it three programs you've announced so far.
And we've talked about the readout VW business that we have.
In <unk>, we have another global OEM that launches in a couple of years also in hospital, we haven't disclosed additional business that we have we do have additional programs.
Primary and secondary but we haven't named a customer on that yet.
Hey.
And then just a couple of other detailed questions on the.
The $45 million.
Reserve Forever Grand is that.
Does that mean the receivable is fully reserved or is it possible that there could be further reserves down the road.
Peter.
We have fully provided for our exposure.
So there shouldn't be anything down the road.
Okay, and then lastly, the.
The $41 million of funding that you provided.
Provided to the.
To the purchaser of the exterior plants.
Is that like is that alone.
Does magna anticipate recovery of that $41 million.
Peter the $41 million.
As we look at.
The cash outflows in that businesses.
Part of the I guess.
Assets that we contributed into the three facilities before they were sold so that money has been written off.
And forms part of the $75 million charge, we took on disposal.
These operations.
An unusual item.
Okay.
Sorry, Peter just one of the thing as you get through the.
<unk> DNA at some point Youll find out.
There's another.
Funding obligation of $6 million down.
Down the road and we actually get provide for that already in the $75 million charge, but obviously, we haven't funded debt. So it hasnt made cash flow yet.
Okay.
And if I may just ask one more question.
Highlighting on the seeding the free form technology.
I'm not quite familiar with that technology I'm wondering if you could just elaborate a little bit what the technology is.
I think Peter free from gives the styling flexibility. If you just look at the seat from the radio high rate. It doesn't have what I would call. It seems that you would normally see.
And our feet with the complexity that just gives you.
As the Oems.
The ability to get the phone and the design aspects that need in there and it just helps from even the consumer maintenance perspective, how easily they can.
I guess keep it clean.
Be able to work through it and Thats fundamentally at the very base level. Obviously, there is a lot that goes into the process of making it and.
Seems to be a lot of interest given their design flexibility providing.
Okay. Thank you.
Thank you very much.
We'll go to our next question on the line from the Mark Neville with Scotia Capital go right ahead.
Great. Thanks, Good morning, first off congratulations Vince part polypropylene, congrats as well.
Maybe just first on inflationary pressures.
I'm thinking correct that you're you're covered on your materials, maybe ex resins, maybe just curious on freight.
Okay.
The market can you just repeat that I didnt hear all of that share just wanted to see inflationary pressures is my thinking correct.
Youre largely covered on your materials ex resin.
And I'm, just curious with freight costs, if you need to absorb that if theres recourse.
Yeah, just in terms of kind of input cost.
And as you look at.
Neil.
Customer resale programs that covers probably about 75% of our overall.
Bye.
So thats essentially a flow through that we do have some.
Commodity exposure on the balance on the resin side.
Our second largest commodity that we purchase.
We're probably about 30%, 25% to 30% on <unk>.
Resale and we're seeing more and more resin going on on resale.
With some of the other lines like aluminum for example.
Packaging pricing mechanism in there, where we have periodic adjustments to.
Price.
But remember as we are.
Looking at some of these inflationary pressures.
We have discussions with our customers on.
Price reductions each and every year.
Some of that is taken into account. So you might not see a kind of a direct offset but indirectly does impact.
Indirectly it delayed negate some of the commodity cost pressure we're feeling.
The other area that we're seeing some increases in Q3 is on the semiconductor side.
This charge is there and we're doing everything we can to make sure that we keep our customers up and running.
But.
We're looking at ways to recover.
Some or all of that through our customers.
And with the.
The supply disruptions just generally across.
The industry.
We're seeing some temporary surcharges in some of the components, we're buying I expect thats going to go away as things start to normalize, but thats certainly is impacting us in Q3.
There will be some impact as well in Q4.
Okay.
Okay.
This is in terms of labor.
I'm just curious how you're how you're managing it now I presume, there's not a lot of flex you can do that.
And in terms of in terms of these inefficiency costs.
Caused by changes in production schedules is there any recourse there that you could take your festival.
Hi, Mark.
Obviously like you said the inefficiencies and the unpredictable changes are causing us to.
<unk> not been able to flex in a planned way.
The reason for it.
We'll continue to have discussions with the customers and we are having those conversations.
Some of the material cost and the inefficiencies cost because of the tax stop.
But thats part of the normal commercial discussions that we would have.
Alright.
Maybe just one last question just on the NCI B C renewed it.
Presumably the near term.
Don't play to be too active, but maybe I'm wrong, but just thoughts around that and so it'd be sort of in this environment.
Hey, Mark.
I guess the <unk> expiring in November.
2014.
We are generating cash we expect to continue to generate cash and to the extent that.
In our view, we have excess liquidity and our leverage ratios will be active in the market.
When and how and how much.
We'll move on and Youll see our actions don't want to commit to something but certainly you've seen our strategy over the last pretty.
And what we want to do in 'twenty two.
Okay Alright.
Alright, Thanks, a lot for the time guys I appreciate it.
Thank you very much we'll go to our.
Next question on the line from Dan Levy with Credit Suisse go right ahead.
Hi.
Good morning.
Keane and congratulations Paul.
Vince and pattern and Anton will deal with on the new responsibilities.
Wanted to start.
Just on.
Incremental margins.
And I know there is.
So moving pieces on costs and mix, but maybe you can just remind us more simply just.
On the volume piece alone.
What type of contribution margin or incremental margin should we expect on higher sales next year, because I think we're really wondering how to sensitize. Your earnings if we get any form of production recovery next year.
Okay. Good morning, Dan Thanks for your comments.
Well, let me let me just start with.
Kind of kind of where we were this year and maybe I'll reference some of the comments that we made.
During COVID-19, what we just talked about.
Kind of what we would typically expect during that period.
Decrementals.
I'll get back to us.
Unusual items that are impacting us.
We're high in Q3 higher than Q2, and we expect some improvement as we move into Q4.
Certainly.
When we look at the starts stops thats been the biggest impact too.
Larger decrementals that than we.
Our custom too.
What we talked about last year in Q2 during the Covid shutdown and probably a good sort of benchmark.
Thinking about our organization, what we said was with our Bds segment that.
We should be thinking about.
Decrementals when we talk about decrementals at that time of above our.
Greater than 20% for RBS group as well as our power and vision group.
Seating around 20% and contract vehicle manufacturing less than 10% and when you kind of combined it back in Q2 that.
That was about 22% for Magna.
There's just a lot of moving things.
In Q2, and while the new thing things in Q3 as I had mentioned earlier in our commentary that Salon. These comments as well Q4 should get better.
But it's not going to be where we want it to be I think you've got to move into 'twenty. Two when you start to see normal decrementals and incremental margins in our business.
And just to be clear those figures are that's an all in number that's just purely on volume and price.
It's it's all as volume and price it deals with.
Back then in Q2 would have dealt with whatever there would have been from an inflationary standpoint.
And it would have excluded if we would've had.
A one time warranty charge or a recovery or a value added tax recovery that would've been excluded. So this is operational decrementals that I'm referring to.
Backing off some of the noise.
Okay got it.
My second question is on.
What was your bid for being here. So first I think we know some of the non alive or hardware components are going to be put up for sale.
And those assets even in <unk> and then maybe we could just revisit the initial be near rationale what exactly was it that you were seeking was it just the core radar or was it really.
The software capability and I guess, what I'm getting at is.
What are the things that you try you youll try to sneak now to make the business better would you say that the current active safety business is subscale or was this acquisition really something that was meant to enhance it but without it.
Still a fine business.
Good morning, Dan.
Maybe as kind of pricing.
<unk> business that we have.
Really good business and we continue to win business.
Talked about per day in one of the programs.
We see a good pipeline and traction.
In other.
Various customers and other programs.
Getting to the first part of your question I think the rationale when we looked at it was a couple of things one.
From a augmentin some capability.
We have a digital radar in place.
We have won that program that would have we said how do we get scale.
Just generally across different areas.
And when you look at the talent as you know not just in our industry, but across.
Augmentin talent along with.
Experience, which is a plus that.
We continue to do that on an everyday basis, and we will continue doing going forward.
We have as I said on the building blocks that are necessary in a sensor suite whether it's.
On camera rear camera surround view.
The digital data that I, just talked about we launched the lighter or with a partner we have to.
Ability to do the fusion and the features so this was really an augmenting what we had even further.
And like I said, we will continue to invest and we are starting to see the result of further investment in core platform technologies as we win programs.
And we'll continue to do that both internally as well as anything that might that we truly believe will add value to what we have but again to reassert that we have really good business and we will continue progressing.
Do you think you have ample software capability.
That's a relative question Dan.
Software is such a.
Uh huh.
The important basket going forward when we look at where it is not only restricted to <unk>. We are looking at it from powertrain from mechatronics and various other aspects that have software implications so rehab bout.
3000 software engineers, roughly and kind of flexes back and forth and we continue to add in different areas of magma.
Great. Okay. Thank you very much I appreciate the color.
All right.
Thank you.
Our next question on the line from the line of Mark Delaney with Goldman Sachs go right ahead.
Yes. Good morning, Thanks, very much for taking the questions and also let me add my congratulations for everyone on their new responsibilities I was hoping to start on the.
The JV with LG can you talk a bit more now that that has been completed around the improved capabilities, it's going to give magna and what kind of feedback you're hearing from your customers.
Good morning, I think the feedback from the customers has been very positive like we've said.
The important rationale.
Wants to do what's the integration and have the manufacturing capabilities for the E motors and being waters.
In addition to what we had.
We have the system knowledge in the integration and the software features software capabilities.
Adding this will further augment at a system level, what we needed to have in this business, but not only that as some of the Oems consider.
Manufacturing and doing systems on their own there is the E motors.
In waters are subsets of various things that we can participate in.
If Microsoft that way today.
As this market evolves and get to system outsourcing on a when it gets to a larger take rates.
We would already be at the table.
And we are seeing those discussions happening.
So.
It's very positive and we are excited about it.
That's helpful and my second question was on supply chain and you gave some comments already around your expectations, there and called out semiconductors, but we're hearing more on Illumina in particular in Europe and it was mentioned in your press release as well. So maybe you could talk a bit more in detail around your expectations for supply chain.
Next year, if you could touch specifically on aluminum in Europe, and what Youre seeing.
With that material it would be helpful. Thank you.
Yes.
So I think the semi as we talked about the flexibility of the supply chain.
We are seeing a little bit of improvement.
We believe.
Next year I think.
The grind of managing and going through will continue through the next year, but I would see it.
So if normally see towards the mid next year.
But again.
Therefore, we have to continue to monitor and manage this knowing the aluminum it's really.
Driven by the magnesium discussion that is happening around the industry.
Rich.
Becomes an important variable for aluminum supply.
We had a retrofit clearly monitoring it.
But at this point of time, we really don't see.
A short term impact.
Creating any stock reduced so on but definitely on our radar.
To monitor and manage.
Okay.
Thank you very much.
We'll proceed to our next question on the line.
From the line of Kevin Chiang with CIBC World markets go right ahead.
Thanks for taking my question good morning, everybody.
I know theres been a lot of questions.
On the decremental margins you.
Provided great, although there but that's.
Okay, Let me ask it a different way if you look at the <unk>. The high level of Decrementals. You saw is there a way to kind of bucket. It between the production inefficiencies you saw versus just the broad based inflation in terms of the contribution to the let's say the excess decrementals you printed in the third quarter.
Yes.
Good morning, Kevin.
I guess if I.
Maybe start by looking at desktop metals.
Sequentially call it or do you Wanna be sequentially on a year over year, because they are a little bit different.
Maybe from a sequential standpoint.
When I look through.
Kind of Decrementals.
Alright bucket just to roll on EBIT and margin percent. There are some items that are impacting as we've talked about them. There was yes.
The evergrande provision.
Provision that we took for $45 million.
There was in Q2.
This year.
Value added tax settlement, we called it out last quarter that about $20 million. So thats.
Quarter over quarter, Thats going to have a negative impact on our.
Our margins.
And then there's kind of a launch cost.
Employee profit sharing and incentive comp just commercial settlements.
Just higher commodity costs, but that all kind of really from my perspective as a wash when you exclude the provision in that value added tax settlement.
And the rest is just what we're seeing operationally from a decremental standpoint.
And so we backed up commodity costs, when I look at Decrementals and I'm looking at some of our groups like <unk>.
For example at Decrementals once you back out some of that noise, 45% sequentially apparent vision about 40% seems about 17%, so again significantly higher and I attribute that really to start and stop.
<unk>.
And then just moving inventory around once twice and three times that all adds to the cost.
On a year over year basis.
Just a couple of things I would point out.
And we did have the benefit last year in Q3.
Some COVID-19 employee support programs, we called that out last year, we said that that was a positive to margin of about 70 basis points.
And I guess from again from last year.
The back of the.
Year over year, the Evergrande provisioning get back out this employee support programs.
Again, there's a lot of pluses and minuses of launch costs and facility costs, the all kind of net to zero.
Okay Decrementals again are.
40 ish percent for Bbs, and <unk> and about 18% for seating.
Okay, I got to the strategy stops thats impacting our operations.
Okay.
That's helpful helpful color.
The second question here I appreciate the unpredictability of the current environment and I guess, you mentioned, Vince I think in your prepared remarks.
Maybe a line of sight to some normalization in the back half of next year.
Did notice you have your 2023 financial outlook in your appendix.
I guess just at a high level is that still an achievable target for you.
Just I guess, just maybe based on some of your macro assumptions around normalized.
Normalization of production is that still is that still in your line of sight or.
Or maybe not.
Yeah, Kevin I think.
You look at when we started the year and gave her a luck for 2003 was based on a certain set of volume assumptions.
I think when you look at the more recent IHS volume essentially earnings are down from there. So that's going to that on its own is going to have an impact on revenue subject to new.
New business coming on in mix and so on and exchange rates, obviously, that's going to have an impact.
When I look at that we don't have a lot of control on volumes. Unfortunately, we just got to go after the right programs, where we think the programs are going to be successful, where we have more control on directly is what we do from an operational standpoint.
And I looked at some of the actions we took in 2022 right.
Right size the organization, our cost structure and we still we're still seeing the benefits of that in Q3. This year, even though we've got lower volumes.
And I don't I don't see any reason swamy why as we get out to 'twenty three.
Even with lower volumes does not a big uptick in operating margins as we've talked about it in 'twenty three I mean, it may be a little different with them onto our business plan, yet I don't see any reason why we can't continue to see improvements in margins.
Okay, that's great color and again, congratulations you've been Patrick and then Tom and I'll leave it there. Thank you.
Thank you Kevin.
Hello, I've got her next question on the line from line of Rod Lache from Wolfe Research go right ahead.
Hey, This is Sean Patel on for Rod just a couple of questions.
I recall.
Last quarter, focusing on the seating business.
I think initially there was an expectation that.
That outgrowth, and then margins would improve with what's favorable mix obviously, the mixed environment has not been as strong.
But as you just asked.
Can you maybe talk a little bit about.
What are some what are going to be some of the puts and takes.
Supporting.