Q1 2022 Magna International Inc Earnings Call
Yes.
[laughter].
Yeah.
Greetings, everyone and welcome to the Q1 2022 results call.
During todays presentation, all participants' lines will remain in a listen only mode. Afterwards, we will conduct a question and answer session with instructions to follow it.
If at any time during today's presentation, you need to reach an operator, Please press star zero on your telephone please.
Please note today's call is being recorded Friday April 29 2022.
It is now with pleasure that I turn todays presentation over to Mr. Louis Tonelli, Vice President Investor Relations. Please go ahead Sir.
Thanks, Bridget Hello, everyone and welcome to our conference call covering our Q1 results. Joining me today are swamy coding theory since the lithium Pat Mccann, yes.
Yesterday, our board of directors met and approved our financial results for Q1 2022, we issued a press release this morning outlet aligning 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 website 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.
We've also referred to as a reminder, slide including included in today's debt related to our commentary today and with that I'll pass it over to Swamy.
Thank you Louis good morning, everyone.
Let me start by saying that our thoughts go out to all those that are suffering as a result of the situation in Ukraine.
Although we don't have facilities in Ukraine, we have the privilege of working with Taiwan, Ukrainian colleagues and our Magna operations around the world.
As well as doors at our facilities in Russia, we're sharing the same values, so human rights diversity and inclusion.
We continue to operate under very difficult industry conditions facing additional challenges that began this past quarter.
Under the circumstances, we are pleased that our results outperformed our expectations.
We continue to focus on operational excellence cost controls and customer recoveries to mitigate the pressures we are facing.
Our organic sales outgrew light vehicle production and the cargo.
As a result of the worsening geopolitical and macroeconomic environment, we have lowered our outlook for 2022, reflecting.
Reflecting reduced vehicle production assumptions weaker expected currencies relative to the U S dollar and unexpected further increase in input costs.
As we look past the short term turmoil, we continue to win business and our portfolio positions us to continue driving sales growth over market as well as strong free cash flow generation.
I'll briefly cover the current dynamics impacting the industry.
We started the year anticipating continued supply constraints, particularly in semiconductors.
We're expecting the constraints to remain throughout 'twenty, two but improve.
We improved in the second half of the year relative to the first.
Russia invasion of Ukraine and measures taken by G. Seven countries in response had cascading economic effects.
Substantially all of vehicle production in Russia has been idled.
The industry is experiencing additional supply chain challenges.
Routing and vehicle production suspensions, particularly in Europe .
Global economic uncertainty has increased and input costs already elevated levels have risen further.
In addition, China's zero Covid policy in the phrase authorizing cases have resulted in lockdowns in certain regions impacting industry sales and production in the country.
In terms of tailwind dealer vehicle inventories remained low underlying auto demand is relatively strong and constrained by the tight supply and the industry Mega pad Mega trends like electrification and driver assistance continued to drive new business and growth opportunities for well positioned.
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Our first quarter earnings came in better than our expectations, reflecting our focus on operations, even as the industry environment worsened as the quarter progressed.
Relative to the first quarter of 2021.
Consolidated sales were $9 $6 billion down.
Down 5% compared to a 7% decline in global light vehicle production.
On an organic basis sales were only down 2% representing 5% growth over market.
EBIT margin declined 230 basis points to five 3% substantially as a result of higher input costs.
Our adjusted EPS fell to one to $8 for the quarter.
And fresh cash flow was negative 19 9 million in Q1.
During the quarter, we repurchased five 8 million shares using $383 million in cash.
Paid out another $113 million to shareholders in the form of dividends and used cash to redeem our senior Canadian debt.
I will take you through the details of our revised 22 outlook later, but let me take you through the broad strokes.
Our global vehicle production assumptions have been lowered and we now expect an overall vehicle production increase of about 3% in 2022 compared to about 6% and our initial outlook in February .
We have reduced our European vehicle production assumptions by $2 1 million units of.
Which slide 9 million is in Russia.
At this point, but assuming that the global Oems will not produce in Russia for the remainder of 'twenty two.
We have also reduced our record production assumptions in North America, and China for the balance of the year relative to our previous outlook.
The impact of lower sales due to the lower production assumptions together with assumed higher net input cost has resulted in the lowering of our outlook for sales and earnings in 'twenty two.
Despite our lowered outlook, we are continuing to invest for our future in the form of engineering and capital to support future growth.
He is our lifeblood and we have the balance sheet and cash flow to support this ongoing investments that will benefit magna relative to the future.
Before passing the call over to Pat I want to highlight two recognitions received by Magna, which I'm very proud of we recently earned six 2021 General Motors supplier of the year awards, the only supplier to achieve this in a single year and we have done it in each of the <unk>.
Last three years.
GM also selected Magna to receive to Overdrive award for launch excellence and accelerating innovation.
In addition for Magna technologies have been named as finalists for the 2022 automotive news pace Awards.
<unk> innovations two foot products at two four processes are the most received by any company this year.
We're also named as a finalist for a pace pilot award.
These recognitions reflect our ongoing focus on bringing innovations and operational excellence to our customers both of which should contribute to our continued strong competitive position in the industry.
Finally, we are hosting an investor event on May tap at the M. One race track in Pontiac, Michigan.
We will provide an update on progress in our go forward strategy that was outlined last year.
We will have on road driving experiences and interactive displays of our latest technologies.
We'll have the opportunity to catch up with Magna senior leaders, our first opportunity to do this live 2020.
I look forward to seeing many of you there for this great event with.
With that I'll hand, it over to Pat to take you through the specifics on our financial Pat.
Thank you Swamy and good morning, everyone.
First I will start with a detailed review of the quarter.
I would like to reiterate swamy sentiment, we are facing tremendous industry headwinds and our operations have done a great job managing through the challenges.
Once the challenges subside, we should be well positioned to drive higher margins and free cash flow.
Global vehicle production declined 7% in the quarter, primarily as a result of 16% lower volumes in Europe .
Our consolidated sales were $9 6 billion down 5% from the first quarter of 2021.
The decrease was primarily due to lower global vehicle production and lower Assembly volumes.
The impact of foreign currency translation, net divestitures and customer price concessions.
These were partially offset by the launch of new programs and price increases to recover certain higher input costs.
On an organic basis, our sales fell 2% year over year for a 5% growth over market for the first quarter.
Adjusted EBIT was $507 million and adjusted EBIT margin declined 230 basis points to five 3% a.
A strong result, considering what we are facing.
This compares to seven six in Q1 2021.
The lower EBIT percent in the quarter was substantially due to higher input costs.
Other items that negatively impacted EBIT percent, where inefficiencies and other costs and certain underperforming divisions.
Higher electrification spending and lower equity income.
These items were essentially offset by favorable commercial items.
Lower launch costs employee profit sharing and incentive compensation costs and lower Adas application engineering spend.
Equity income was down $27 million year over year to $20 million in the quarter.
The decline reflects increased electrification spending and our LG JV and reduced earnings on lower sales and other equity accounted entities.
Our adjusted effective income tax rate came in at 17, 3% in line with our Q1 expectations, but lower than Q1 last year.
Net income attributable to Magna was 383 million compared to $566 million in Q1 2021.
Reflecting lower EBIT and higher interest expense and minority interest, partially offset by the lower tax rate.
Okay.
Diluted EPS was $1 28, compared to $1 86 last year.
The decrease is the result of lower net income, partially offset by a lower number of shares outstanding.
The lower number of shares outstanding primarily reflects the impact of share repurchases during and subsequent to Q1 2021.
I will now review, our cash flows and investment activities.
During the first quarter of 2022, we generated $749 million in cash from operations before changes in working capital and invested $569 million in operating assets and liabilities.
Investment activities in the quarter included $238 million in fixed assets, a $64 million increase in investments other assets and intangibles and $2 million in public and private equity investments.
Overall free cash flow was negative $99 million in Q1.
Okay.
We also repurchased $383 million of our common shares paid $133 million in dividends and early redeemed our Canadian bonds.
Yes.
At the end of the first quarter, our adjusted EBIT to adjusted EBITDA was 155 times and our liquidity remains strong at $5 $5 billion, including almost 2 billion in cash.
Next I will cover our outlook.
And Swamy covered earlier, our outlook reflects lower expected vehicle production in both North America and Europe .
Our assumption for production in China is higher than our previous expectations for 2022, but lower for the balance of the year.
We assume exchange rates in our outlook will approximate recent rates. Therefore, we now expect a weaker euro and Canadian dollar for 2022 relative to our previous outlook.
We have reduced our ranges for segment and consolidated sales largely reflecting lower production assumptions and the decline in the euro.
We lowered our adjusted EBIT margin to a range of 5.0 to five 4%.
Interest expense increased.
Increased to approximately $90 million from approximately $80 million previously, reflecting lower cash balances in different regions of the world.
Net income attributable to Magna has been reduced reflecting lower sales lower margin and higher interest expense.
And our equity income tax rate and capital spending expectations are unchanged from our own look from February .
Largely as a result of expected lower earnings in our revised outlook, we have reduced our free cash flow projections to a range of 700 million to $900 million.
Compared to one one to $1 3 billion previously.
Okay.
In summary, considering significant ongoing industry headwinds, we are pleased with our Q1 outperformance.
We are deeply focused on operational excellence cost controls and customer recoveries to mitigate the impact of an increasingly challenging environment.
Our balance sheet and cash flow allow us to make ongoing investments to drive future growth and our portfolio positions us for growth and free cash flow as the market ultimately recovers in the future.
We hope to see many you would need at our investor event in Pontiac.
Thank you for your attention we would be happy to answer your questions.
Thank you very much we do encourage you to register questions or comments by pressing the one followed by the four on your telephone you will hear a three ton prompt to acknowledge your request. If your question has been answered or you would like to withdraw.
Registration. Please press one three again to register your questions or comments. Please press one four on your telephone one moment. Please for the first question.
And our first question comes from the line of John Murphy of Bank of America. Please proceed with your question.
Good morning, everybody.
Just a first question it wasn't mentioned in the outlook or in the course of the first quarter results as sort of the volatility and schedules and I know you kind of implicitly have this in your guidance and in your discussion, but just curious if you could talk about how.
Much pressure that created in the quarter, if you see any stabilization in schedules going forward and how important that is.
Obviously to the remainder of this year.
John Good morning.
Hi.
We are still continuing to see some uncertainties, but as we mentioned the sales were higher than what we had expected our plan. So that is a positive sign.
But it's not still last table.
The release of this and how we are able to process them is creating a little bit of stress in the system.
With the operating.
Systems that we have and processes, we have in place we are able to address.
Their needs so I think that they are.
Right right.
Big issue because of this uncertainty these data cost in the schedules.
So hopefully as we go forward, we hope to see a little bit.
Stability in the second half.
But I think it's still something that we're monitoring very closely and we have not.
Over the hill yet.
And do you get the sense that there might be some building of inventories in.
Channel.
The automakers, where they're ordering but maybe not producing I am.
I'm just curious if youre seeing anything like that.
John it's difficult to say.
At this point I don't see a lot of build yet because there is so much pent up demand and you can look at their dealer lots and what's available.
I think it's still far from being.
Starting to fill the pipeline update metrics.
Okay and then just the second question on Slide 11 and 12.
You highlighted price increases to recover higher input costs, and then favorable commercial terms in the quarter.
It seems like the automakers are becoming more receptive to these discussions given the very high levels of inflation on raws as well as other input costs I'm. Just curious if your conversations are changing there and when you talk about that $290 million of higher input costs in your in your outlook.
Is that net or gross of these discussions.
Yes, I think John what we are talking about is that.
As we mentioned the numbers.
The discussions with the customers that are ongoing and it's a.
Various forms of discussions.
In terms, so whether it is a freight whether it's the commodity whether it's various things that we are seeing and the discussions at various levels.
A lot of <unk>.
Transparency and lot of objective data.
Our target is to close all of the <unk>.
Positions that are open today.
I don't know Patrick do you want to add some specifics to that.
I don't think I have much to add swamy.
John just to be clear the $2 90 is on a net basis and that would be incremental to the $2 75, we've spoken to you in February .
Got you, Okay, and then just lastly, I mean, obviously, there's a lot of noise and a lot of stuff going on here in the short run, but just curious how our booking activity is going as far as youre quoting is there any.
Youll push out or delay in the discussions or is it sort of more normal course.
There.
On bookings.
John .
I think it's difficult to say over the year. It changes so significantly, but I would say if I look at what we generally target for the year and what we look I would say we have made good progress for the first quarter.
Yes.
Okay, and then moving to sneak one more interest in the 'twenty 'twenty four outlook doesn't look like it changed.
At all I mean somebody you could argue that because of the near term volume pressure you might see some upside in 'twenty. Three 'twenty. Four is there is pent up demand is released or volume its released around the world but.
But Conversely, you can argue that input costs are up I mean, how are you guys thinking about that 2024 outlook or is it something that you had.
Yes, we have not.
Put a new opinion just curious what your thoughts are there.
Hi, John It's Pat again, I think its the latter we still haven't put a pin in our 2024, so our processes unchanged from prior years, where we are.
The current year and three year outlook, our internal processes.
With that in the sense that we focus on a rolling 12 month forecast. So we have an updated 24 at this point.
Okay, great. Thank you very much guys.
Our next question comes from the line of Mike Kelly of Citi. Please proceed with your question.
Great. Thanks, Good morning, everyone wanted to go back to the $290 million net input costs and maybe hoping you could talk about how you plan on recovering that over the next.
A few years and particularly the question is I'm curious kind of what youre getting in new contracts.
And the content per vehicle higher.
Replacement contracts and new bookings to reflect go forward.
Cost inflation.
Or kind of maybe other ways that you plan on recovering that over time.
Yes.
Yes.
Sorry go ahead, sorry, I was going.
First off just.
And just a moment you could jump in on the customer side. So <unk> morning is when we think about the $2 90.
Really that's being driven in the short term.
Really by higher energy utility, including freight type costs, that's what's driving the bulk of that increase.
When you turn to what we're doing on the quoting side.
Our view has been to take.
Take advantage of customer programs, where they have been available I think with the changing environment, we are evaluating all options, including expanded customer programs or hedging strategies.
Okay perfect.
And then just two other follow ups. One I was hoping you could talk to maybe the cadence of margins for the rest of the year how to think about that and also for Capex, what kind of low in Q1 relative to your full year guidance.
On the first question.
Okay.
We don't specifically give guidance on a quarterly basis, we provide annual guidance.
That being said my expectation would be that the first half of the year.
Be feeling.
Feeling the decrementals from the higher input costs higher in the first half relative to the second half.
And it's a factor of that it's not necessarily a linear calculation, whether it's 2021 or 2022.
On the second part of your question on the capital I think the capitals.
Tends to be lighter in the first quarter as to what we do see as the year progresses and.
There is a disproportionate number of launches that happened in the back half of the year. So the capital.
Historically, our expectations will continue to be that it's back it's rearended.
Perfect. That's very helpful. Thank you.
Thank you.
Our next question comes from the line of Peter Sklar of BMO capital markets. Please go ahead good morning.
<unk>.
Sorry, I'm still little confused on the $290 million of net input cost is that I thought the comparable number when you released the initial guidance was $190 million and therefore, that's up $100 million is that correct or not correct.
Sorry, Peter good morning.
When we released in February our guidance included $275 million total year over year, let's call it inflation costs.
The $275 million 190 related to commodity type cost, whether it was oil steel resin.
So that was the 190 that we had referred to what we're seeing now is an incremental above the 275, another $290 million. So full year, we're talking in the range of $565 million, 2021% to 2022.
Impact of higher input costs, whether it's labor.
And Peter just to be clear on the incremental 290 <unk> the majority of that increase relates to utilities.
Energy.
Primarily in Europe , and we also have freight, which we are getting surcharges related to higher input costs on their end.
Okay. That's clear now thanks Pat.
My next question.
On the normal course issuer bid if I did my math correctly, you bought back about 2% of our stock during the quarter.
Your debt to EBITDA ratio is at 155.
Which is slightly through I think the high end of year.
The range, where you'd like to be albeit on a very low denominator, given where global vehicle production volumes are.
And but youre through the high end of the range and I noticed your <unk>.
Like what the revised 2022 guidance your free cash flow estimates are coming down so.
What should we.
Back on the CIB going forward.
I think our capital allocation strategies haven't changed Peter we're going to continue down the path of investing in our business and where we do have.
Cash that's available for.
Share buybacks, we're going to continue down that path.
Specifically for this year, we're slightly above that 155, I think the one thing that should be considered is that we do have excess cash sitting on our balance sheet. That's available for you. So it's more than an EBITDA play.
At 1.5, we do have excess cash.
If you think about our cash balances were probably in the range of.
Just slightly under $1 billion needed to run our business.
Which means we do have excess cash to fund either further investments, but also in CIB.
Okay. Thank you and then just my last question is in the write up when you're talking about the quarter being a little bit above your expectation and I believe we were in earnings.
You said one of the reason was higher commercial items.
I wasn't too sure I don't think Ive heard you use that expression before or is that price adjustments from customers are what our commercial items.
I wouldn't.
And <unk> jump in but when we talk about commercial items I think thats I think we've used in the past.
It primarily in the MD&A going back in and Peter's Theyre not regular course price increases. These are these tend to be.
Onetime in nature, he might be on a period, we might be settling something related to 'twenty one sometimes they go in our favor sometimes they go against us and really what happened. This quarter. We did have some which is good news we had some positive settlements and when you compare that to last year, we had a couple of that win.
Against Us so net net we were up.
The onetime in nature, but they are fairly didn't happen.
Many times, it's not uncommon that we have these favorable or unfavorable.
Okay. Okay. Thank you for your comments.
Thanks Peter.
And our next question comes from the line of Chris Mcnally of Evercore. Please proceed with your question.
Thanks, so much team and good morning.
Apologies I'm going to beat the dead horse and go back to the $290 million.
Given that we see that the reduction in guidance.
<unk> and body.
I would assume that maybe it could be a timing difference.
And some of the raw material pressure could be coming in.
But it seems like the comment just made was.
The majority of the 290 was utilities energy freight.
In Europe could you just talk about wide body would be hit the most is that specifically because of the amount of production.
And facilities for body.
In Europe , and then I can ask a follow up after that.
If you think not going to get down into the specifics. So youre correct prism since it wasn't really a steel driven issue and that's primarily because we do have a lot of.
Customer programs related to our steel buying when you think about the energy.
Western Europe .
BFS group would be disproportionately hit in the sense that.
They are huge energy consumers when.
When you think about our footprint.
In particular, our body and chassis group has a significant footprint in Germany, Austria.
So there is a little bit of a disproportionate hit given the sense that they are heavy energy users in particular in Europe .
The other piece when you look at the <unk>.
<unk> group we spoke.
Briefly about our operations in Russia, and we disclosed that we had $371 million of sales in our restaurant operations and we removed.
Okay.
Effectively what we've done is we have zero sales for Russia on a go forward basis for 2022, and Russia disproportionately hits our <unk>.
Sentiment as well.
Okay actually thats I would divide that into two so essentially will take some large hit.
From Russia theoretically.
It's one time until you can actually physically closed the facility. So it could be just ballpark over 100 million so thats a big number.
Our body, but then just to go back on the energy cost.
Chris can I, just ask sorry, Chris.
Sorry, Christian so I don't want to cut you off I just wanted to be clear on the Russia piece, we haven't taken any impairment charges related to our Russia operations. So we still have announced recorded on our balance sheet. What I was referring to on the BFS segment was our outlook in February assumed sales in the range of $400 million.
Consolidated Magna and profitability of those operations are.
Our current outlook assumes zero sales on a go forward basis, and a cash burn in those operations. So on a delta basis, we have a deterioration primarily in RBS segment related to Russia.
Yes, no absolutely and I was just doing the mental math of taking 400 times, 30% plus in getting over $100 million of.
Of EBIT I think were on the on the same page there to back though to the energy cost I know you are not going to give a number but.
Lots of other industrials other suppliers have talked about energy cost as a percentage of revenue maybe being about 1% of revenue and a lot of their contracts being sort of fixed on the energy sides of the amount that floats with things like Nat gas is only about 25% I'm just curious if it's still a very long.
Large number that 290, so I'm curious is expedited.
<unk> from the tier twos is that a big number two because I'm just trying to make my own estimates for 290 <unk>. When you think about just energy cost, it's a really big number.
Yes, so to be clear on the 290 <unk> that includes.
Multiple.
Items, it's going to include some leakage on other.
Items, whether its purchase components, there is a little bit of labor in that number.
In the case of energy that is.
The bigger portion of it I would say it's as.
It's higher than 50%.
When we think about our energy cost, it's really hard to.
Given number of what the energy would be as a percentage of sales it really fluctuates from.
Process the process.
Historically energy Hasnt been an issue for us it's been a fairly stable market.
All of the obviously the energy costs have been driven by Russian invasion of Ukraine, and what we're seeing in Europe , we have gone into the market too.
Hedge a portion of our buying.
To secure supply.
And.
We're going to have to see how this plays out Chris.
Some of the things like.
Additional commodity related tier twos that some of that's energy as well as our customers suppliers are having energy issues or freight it's energy as well some of them in some ways. They are tied to energy, but they're not necessarily tied to our sales are tied to it.
No other companies' businesses and that's coming through.
The charges on us.
Okay, Great I appreciate the detail I'll follow up offline. Thanks, so much team.
Thanks, Chris.
Our next question comes from the line of Mark Neville of Scotia Capital. Please proceed with your question.
Hi, good morning.
Yeah.
Maybe not maybe just putting aside the $290 million just sort of costs general.
I'm, just curious sort of when you think about the cost inflation you're facing.
So what you think is.
It's more structural.
So if you think there's any longer term sort of implications for margin and maybe some of the.
Things you can do to offset some of those costs.
Good morning, Mark.
Part of it is obviously continuous improvement looking at the cost structure, which we did in the last three years, we are continuing to look at that operationally.
Again, I think Pat touched on it as we look at the new codes.
Reflecting the new economics and in some cases mechanisms that reflect.
Today's reality to derisk it as much as possible.
On the other side. We can also have to look at inflation, which was pretty stable and modest in our mature markets that's not so.
We look at it.
So that goes to some of the discussions that are ongoing with our customers.
Alright are difficult to predict the timing, but it's an ongoing discussion.
All Oems.
To see how we can look at different ways to address the cost that we are seeing.
I would say structurally there is substantial.
Substantially different other than how the commodities or the labor market might set a new baseline.
We have to see going forward in the next years to come.
Yeah right.
I guess on the $5 65.
For the year can.
Can you maybe rank order again I appreciate the the 290 is it sounds like energy freight, but could you maybe rank order.
That.
The components of that by 65.
I mean, certainly the first 275 is that a good chunk of that is commodities and labor on top of that in the worst of all consolidated and I think Patrick Patrick between the $2 90.
And the total of all 65, we've looked at it that way because of it.
Directionally that's it.
Okay.
Thanks, Thanks, a lot.
Maybe just to follow up I think it was Peter's question on the NCI B. So if I'm reading it correctly, the the 155 or the one five it's not a hard stop.
There is.
We should expect some buybacks this year correct.
Hi, Mark I think.
Lately.
I don't think we really guide on where we're going to be honor in CIB.
We work within our framework, it's a strategy on capital allocation that hasn't changed in many years, where if there is an opportunity to grow the business.
Appropriate value, we're going to do that first and where we do have excess liquidity, we are going to use that cash if appropriate to continue in cibc's, yes, that's how we've always done it and we're doing the same now.
Really kind of forecast what our own outlook.
Outlook for sure.
Share buybacks.
Yes, hi, good morning.
Sure.
It's very good jewelry market Center, and let me just add to that Pat If you don't mind I have been in the room here I'm trying to say something.
In the past I think is a great job so keep it up.
I think when you look at the.
Our capital structure.
There is a point in time, we've got a quarter. So you look at I think we're past the number was $1 55, and you got cash on the balance sheet, but the approach that we've been taking for years is really look at our business plan and look at our outlook and we're looking at the current year, but looking over the next couple of years.
We look at how that changes as a result of macroeconomic event past stock. So that's why we've talked a lot about input costs and volumes and you kind of address the and are of course issue a bit on that basis and tried to look at it and if youre doing buybacks.
Historically as.
I know that over the course of the year not trying to bundle it in one quarter or so.
I think the right way to think about it is that we've got a long term strategy.
And out of the market that will be impacted by certainly what.
What we see opportunities are.
But.
We're kind of looking at capital structure and with the right structure to have not making sure. We have the right amount of liquidity not too much liquidity and then to the extent, we have excess liquidity approach to market.
So yes.
Much broader than that.
In time Mark.
No. That's helpful. Appreciate it thanks for the time.
Thank you.
Our next question comes from the line of Dan Levy of Credit Suisse. Please proceed with your question.
Hi, good morning, Thank you.
I think our margin. We know there is obviously cost inflation is a big driver here, but we also know that there is a relatively low level of production and the number of production inefficiencies. So maybe you can give us a sense of just.
Backing backing out the production.
Backing out the cost inflation, what would the underlying margin structure look like I don't know if that $2 90, as an inclusive number or if there is other numbers as well that are labor.
Labor you mentioned, it's just utilities and energy I don't know if labor is something incremental and if we assume the cost inflation doesn't go away, but that and improve production level comes in more stable production. Maybe you can give us a flavor of what your earnings power is with higher volume even in the face of higher cost inflation in there.
Potential for significant improvement.
With higher LDP, even if inflation is what it is and it doesn't get any better.
Hi, Dan panel.
I'll start with this and Louis and Swamy can jump in.
When we think about the first quarter and we looked at the termination in.
Profitability from Q1 last year to Q1 this year.
Yes.
The vast majority basically all of it relates to inflation.
Type items. So you get a sense of operating we're still operating I would say efficiently I think Q1 of last year was a strong quarter.
The semi issues really start to accelerate during the year with the stop start.
I'd say.
Operationally I think thats, our comments that we had a strong quarter operationally that despite some of the stop start we did have a strong quarter. If we fast forward that into our full year outlook with the additional 590.
We are seeing subject to the sales declines we're seeing in our Decrementals in line with our expectations.
So my view would be as.
As volumes come back my expectation would be that we're able to flex back up an appropriate incremental merchants.
Okay. So the incremental margin on the recovery would be similar to what you've talked about in the past, which is I think something like in the low 20% range is that correct.
Okay.
It varies by segment, Dan, but historically, that's what we've seen ex stop start.
Issues.
Great. Thank you and then.
As a follow up.
You've guided to.
It sounds like Youre, maintaining your guidance to for annual engineering expense related to Mega trends.
Which makes sense.
But I just wanted to confirm that within this.
Is that everything is intact or that there is pieces that are maybe a bit more discretionary and thats youre pushing out maybe you could just give us a sense of in this environment, where you have <unk>.
Higher.
Inflation, how you think about the megatrend spending is it just the <unk>.
<unk> is what it is it's not going to change or are there more discretionary elements that are being re prioritized.
Hi, Dan good morning.
I think when we look at most of the savings plan, whether it is core that means you are looking at.
<unk> are looking at technology for the future, which we continue to.
If you look at application engineering that <unk> programs that we have and we are working towards the launch.
But in either case, whether it is under the given the economic conditions that are not we have a very rigorous process to hit milestones and performance.
Target for the project to say are we getting there so we have that.
Call It <unk> in place and we continue to look at that but obviously, Andrew given the circumstances.
Oh, yes.
Tactical efficiency matters to see how we can.
As much as possible, but at the same time.
Like we said we are talking about the next 357 years. So we are very cautious not to.
Sure.
Take or pay anything for that to build our future.
I would say we are on the path to continue with.
The right amount of.
Richard Lenz too.
Look at the tactical items.
Alright. Thank you and then sorry, just a clarification on the on the earlier point on the contemplation I just wanted to confirm that the $2 90, an exhaustive number or is there are there other pieces of inflation that are not included there most notably on the labor front. Thank you.
Hi, Dan the $2 90 captures virtually everything there might be a little bit of leakage, but it's it's.
That's our inflation increase that's our assumption thats our assumption.
Great. Thank you very much.
Our next question comes from the line of Joseph Spak of RBC. Please proceed with your question.
Thank you very much good morning, everyone.
I guess I just want to.
Go back to some of the discussion on.
On recoveries that I just wanted to be clear is your going assumption that.
Inflation as it relates to.
Energy logistics et cetera that is going to be.
More difficult to recover from your customers and then straight commodity inflation.
Hi, Good morning, Joseph I think there's two aspects one we are talking about recoveries on.
Of course that are already there today based on agreements and so on so those are ongoing discussions that we are targeting to close.
But as I mentioned before if you are looking at future programs.
We look to reflect the new economics and figured out what are the different ways to derisk further whether it's hedging strategies are beyond customer programs are.
And other mechanisms.
Okay. Thank you.
And then just on China I know you mentioned you raised your outlook, but it sounded like that was really the first quarter vantiv lowered it for the rest of the year does it does that.
Contemplate.
Potential disruptions on what we've already seen from the shutdowns in China like is there a little bit of a.
Sort of.
Hedging factor there for sort of the <unk>.
Known unknowns that might arise from from the shutdowns we've seen to date.
Well you know when you're forecasting it's always at a point in time.
Information that you have so I don't know I don't know exactly how to handicap exactly what is in there it definitely reflects.
Some reduction related to the Covid shutdown, whether they had everything to date.
Hard to say honestly, but it definitely implicitly bringing it down.
Reflecting the shutdowns of the information that we know at this point in time.
Okay. So the lower for the balance of the year is basically for what we've seen.
Announced.
I think as of today okay.
And I guess, just finally, just on Russia, I know you sort of didn't take any write downs or I mean, what would you need to see to write off Russia or what or maybe what are some of the options with those assets.
Yes.
I said.
The operations are pretty much substantially idled.
And Pat talked about some of the numbers.
What we have on the balance sheet.
What we had as annual revenue and so on.
As you can imagine, it's a pretty complex matter with so many elements in terms of government requirements and limitations then how do we honor sanctions that are in place.
And most importantly, I think we're looking at.
What.
Customers are guiding.
How they are going to look at going forward.
Keeping in mind also.
What's the best way to.
Safeguard.
And projects in Russia.
So theres a bunch of complex factors here Joseph.
But for 2022, our assumption is that there is no sales or no production from.
From the Oems, there, but we have to kind of wait and watch and see.
Let me give you an update as we move forward.
Thank you.
Thank you and our next question comes from the line of Colin Langan of Wells Fargo. Please proceed with your question.
Great. Thanks for taking my questions.
Just sorry, if I missed this.
265, how much was actually in Q1 and any color on the cadence of how that headwind rolls out.
Your comps in the second half.
Hi, Collyn.
We're not going to get into specific cadence by quarter, we do given annual guidance.
On a year over year basis in Q1.
Yeah.
Given that the.
The entire reduction in profitability relates to.
Inflation type items so.
You can do the math and thats going to work out to in the range of 200 million plus.
Which when you back off that from the 560 <unk> say you have in the range of $3 50 left.
It's not going to be a linear calculation because we did have rising inflation costs through 2021. So what we are going to expect I would say just broadly would be that the inflation impacts will be heavier weighted towards the first half of the year compared to the second half of the year.
Okay. Thank you.
And that's an escalation in towards the end of the first quarter, so youre going to see that impact hitting us in the second quarter fully.
So you did five 3% margins in the first quarter, but the guidance for the year. It's five to five four so not much of a change.
Volume for the market as opposed to improve in the second half.
<unk> factors are moderating in the second half.
So why not.
Margin improvement in the second half with those benefits.
Offsetting that.
Yes.
Okay.
We look at some of the impacts that we're seeing in first quarter kind of started towards the end of the first quarter. So before we start seeing an upswing.
Felipe.
On the second half of the year.
I think there is the second quarter student to reckon with.
All of that's happening.
I would say.
Yes.
Second half should be better.
Second quarter to contend with.
Okay.
And then just youre slightly below IHS now.
What are you seeing that's making you more cautious and any color in particular on the semi conductor supply from your visibility.
And it seems like it's still holding in for improving in the second half do you see anything different.
Yes, I think we started the year assuming.
Continue.
On the semiconductor supply.
Two things.
The constraints real estate throughout 'twenty, two but definitely improve in the second half of the year relative to the first right.
Sure.
I think.
We can reasonably say that.
Although we are expecting improvement going forward.
Will a progression we were expecting has slipped a little.
And there is really no slack in the supply chain, so any small disruption can put there.
The production behind.
Again, so it's something that we have to still continue and we do continue to monitor it carefully.
There've been a few disruptions or do you see the earthquake in Japan to zero Covid policy in China, and so on so.
Conditions are still pretty fluid.
Yes on the volume side I don't think were very far off but I think Russia.
Our view on loss share versus IHS.
Quite a line so thats part of it.
Alright, thanks for taking my questions.
Youre welcome.
And our next question comes from the line of James Picariello of BNP Paribas Exane. Please proceed with your question.
Hey, good morning, guys.
Yes.
Within our complete vehicles, just curious how stier, who is managing the current supply chain by many is the storyline.
Similar to other.
Other Oems with respect to semi supply challenges and all the mitigation efforts put in place.
Over the last two years.
Yes.
Good morning, James I don't think there would be any different.
We are putting.
Full vehicle Assembly operation, there, but we work.
Where we are responsible to look at the logistics and the supply chain.
Also working with the Oems in this case.
So I would say, it's no different than what we are doing with the.
The rest of the product lines.
So is there an element of the chip sourcing.
You are running through the OEM and <unk>.
Indirectly, reaching you guys are.
I don't know if thats, what you were trying to get at.
And some of the cases, the Oems actually manage.
<unk>.
The chips are some of the products that they would be buying in.
Passing it through to our complete vehicle Assembly.
Got it okay. So most Oems are saying second half improvement there is no reason to think that that <unk>.
Higher.
It also being the same cap understood.
I would say it's specific to us directly.
It has to all our product lines, because we have various touch points with the customer says we deal with them <unk> happens to be from a complete vehicle Assembly perspective.
Yes that makes sense.
And then just on electrification.
Two full quarters now.
LG powertrain JV fully operational.
Is there any update to the jv's prospects that trajectory the 50% CAGR trajectory.
Just based on what both sides to bring to the table in.
Three months it'll be a one year anniversary somehow.
Yeah.
I would say we are still in that timeline to reiterate a 50% CAGR that we've talked about.
But James I would still face pretty early right.
Let's start with the intent of the long term strategy, but.
Yes, we are still on track for the 50% that we talked about in the us.
Peter.
Got it thank you.
And our next question comes from the line of Rod lift Shea of Wolfe Research. Please proceed with your question.
Hey, this is <unk> on for Rod.
I just wanted to come back to the question on the energy on the energy spend if I if I looked at your <unk>.
The inability to report from from 2020, which was the last one I was able to find.
I believe in there you mentioned that your global electricity spend with something like $314 million.
So so.
If I'm doing the math on the incremental $2 90.
And I think you mentioned about 50% was the was tied to energy. That's 145, I mean is it.
Is it right to say, therefore that you or your energy spend.
Something like 50% or is that.
Not the right baseline.
Yes, I think it's.
And I think that's it.
It's a very good analysis.
When we talking about energy pumps, what we've included in that number includes energy charges that are being passed through to us in the form of surcharges from our sub suppliers. So are.
Yes.
The baseline on the <unk> that we're using on the electricity side makes sense.
We're also including that number would be Nat gas oil.
Basically.
And surcharges.
So we do have much more increases rather than just electricity included in that.
And that number you mentioned.
Okay.
I think.
And also you got to look at the sales that we might have had in 2020 versus the sales we are having now could be different.
And also just not electricity, but gas and others like Pat mentioned.
Okay understood and then just to clarify on the <unk>.
The loss revenue in Russia, I mean is there.
Is it right that we should be assuming kind of like a typical decremental margin on that or would it be more so because.
All right.
Because the plants are completely idle at this point.
And to clarify that.
Aye.
We're not going to comment specifically on one country.
To be honest.
<unk>.
The decrement, you're we have $400 million of sales I think Chris is back at the envelope completion point wasn't far off.
From earlier.
<unk>.
But it's not a normal situation, but I wouldn't say it's material.
Or are we going to be different when we up or down.
Okay alright, thank you.
Youre welcome.
And our next question comes from the line of Brian Johnson of Barclays. Please proceed with your question.
Hi, yes, good morning.
You don't want to talk I don't want to get into that 290, <unk> plus or minus because more want to get your.
Your discussion of the managerial processes that you're pursuing to make sure that the offsets because you did say that 290 was a net number and I'm really kind of thinking about three levels of magnitude just given how solid and operator you have been over the years.
First how given your profit center goals at the plant manager levels to those individuals get involved in those discussions too.
Given the Oems will be serving multiple will be served by multiple of your plants across multiple product lines, how does that come up to segment and in particular.
Vincent soccer and getting involved in those discussions are you writing like a program management office around inflationary input costs and then third when you talk about the contracts going forward. We did have one supplier earlier, who have extensive operations in Brazil talked about perhaps going to the South American model.
Just indexing everything wages freight.
Food in the cafeteria, and then sitting down with Oems on a monthly basis and getting recoveries and when you talk about new contract forms going forward would there be any movement to embedding Colo type increases across a variety of factors.
Brian Good morning, Great question.
If you look at some of the operational activities that you talked about.
From a client or division level, obviously, there is a.
Tactical focus on an everyday basis.
As we continue to work through the uncertainties that bill was.
I'm talking about.
Each of their product line.
Has that highly.
Highly focused approach.
What's happening at every division and what does it mean to that product line.
But it just doesn't stop there like we did in.
The last two years when there is a industry wide.
<unk> like we were talking whether it's commodity or freight or inflation.
We as a management team.
Group leadership and management leadership go through this on a monthly basis.
At the minimum and if there is some other topics that do come up the senior.
Senior leaders take a magna wide approach so that there is lessons learned Ben.
How do we share across.
Now talking about the coding obviously cannot do a black and white turned the switch on and off but we continue our discussions with customers at various levels almost on a daily basis and.
Are there ongoing discussions there I would say they are open and transparent as some of them are top and bring that data and the rationale and we will continue to stay focused on it to close all of the items that we have.
Going forward, though I think I've said this a couple of times today.
We will try to reflect in unit economics.
In our primary markets in North America, and Europe inflation has been stable and modest for a long time as an example.
But now it is high and we have had some success in securing recoveries related to inflation.
Including with some of our global customers now thats a little bit different.
The environment in this primary markets, we're looking at different arrangements going forward.
To see how we can recover increased costs. So it's a mix of things.
Tactical and everyday plus the.
Strategic view of how to incorporate some of this in the framework going forward.
Okay.
Thanks.
And our final question comes from the line of Michael <unk>.
Glenn of Raymond James. Please proceed with your question.
Okay. Thanks for getting me in just on the overall margin rate reductions.
Just give a characterization how much of the decrease related.
Two to your European business versus your North American business.
Yes.
Yeah.
Yeah.
Hey, Mike It's Pat.
Yes.
I wouldn't say.
We don't.
We don't report on a geographic basis to be fair. So.
The analysis, we focus on reflects the way, we're managing the business, which is by our product categories and I think thats fully reflected in the.
In the numbers.
Volumes are down pretty significantly in Europe , and a lot of the energy is Europe related to this.
Hard to quantify that impact this business.
Chunk of it I think that's the.
The European impact.
Okay. Thanks, and then just overall can you characterize like in terms of what Youre seeing.
Communicated from your customers in Europe versus your customers in North America, just how different are the environments and the outlook.
Progressing.
So.
It's already making what since what do you mean exactly sorry.
How bad how bad is Europe relative to North America.
I think our outlook from February to where we are today.
I would say Europe struggling more than North America more broadly on an industry not necessarily just a magnet issue. So if you think of the.
The most significant impact of what's happening in the quarters, obviously the invasion of Ukraine.
And Western Europe . So when you think about volume guidance in Europe broadly, we've taken out 100% of volumes in Russia for our customers for the balance of 2022, So thats, a Russia, that's a European impact to <unk>.
Disproportionate impact that's happening.
With Europe versus North America is the supply chain issues, primarily on product come in with Ukraine disproportionately hits, our European customers as well so you'll see that the second hit the volumes that we've taken.
In Europe relative to North America, we did take volumes down somewhat in North America, but to a much lesser extent.
The third piece I would say on the input side as the input costs are disproportionately hitting Europe , primarily on the energy side and again, that's driven to a great extent by.
Yes.
The energy Western Europe , Germany, and Austria in particular, relying on their energy.
From from Russia.
Okay. Thanks, Thanks for taking the questions.
Youre welcome.
Yeah.
And there are no further questions in the queue. Mr. <unk> I'll now turn the call back to you. Please continue.
Thanks, everyone for listening in to say, the least challenging times, but we remain focused on managing the aspects under our control and investing to position us for the future.
The rest of the day and hope to see most of you on May tap. Thank you.
And that does conclude today's presentation. We do thank you for your participation and ask that you. Please disconnect. Your lines have a great rest of the day and a great weekend everyone.
Okay.
Yes.
Yes.
Okay.
Great.
Yes.
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Yes.
Yes.
Sure.
Okay.
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Okay.
Sure.
Okay.
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