Q2 2022 Magna International Inc Earnings Call
Right.
Okay.
Greetings and welcome to the second quarter 2022 results for Magna International during the presentation, all participants will be in a listen only mode.
The worst we will conduct a question and answer session.
At that time, if you have a question. Please press the one followed by the four on your telephone.
If at any time during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded Friday July 29th 2022.
I would now like turn the conference over to Louis Tonelli VP Investor Relations. Please go ahead.
Thanks, Silvana, Hello, everyone and welcome to our conference call covering our Q2 2022 results.
Joining me today are so let me go to Gary Vince could lithium Pat Mccann, yes.
Yesterday, our board of directors met and approved our financial results for Q2 'twenty two.
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 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.
These refer to todays press release for a complete description of our safe Harbor disclaimer.
Please also refer to as a reminder, slide included in today's deck related to our commentary today and with that I'll pass it over swaps.
Thank you Luis good morning to everyone a happy to be here to provide a general update on magna as well as our future results.
Key takeaways from today's call.
<unk> challenges have impacted our Q2 earnings however results were in line with our internal expectations.
Once again, we generated organic sales outgrowth of rated light vehicle production in the quarter a trend we expect to continue in the second half of the year.
We modestly increased our outlook for 2022 sales.
Despite the recent strengthening of the U S dollar.
We continue to make progress in our go forward strategy, which will drive our business for years to come.
I will briefly cover the current dynamics impacting the industry.
We continue to experience supply constraints, including semiconductors.
China Covid lockdowns in the quarter created further supply chain bottlenecks that are still being felt in the industry.
We do expect constraints to continue at least throughout 'twenty to <unk>.
The improvement in the second half of the year relative to the first.
Input costs to remain at elevated levels.
Highly focused on obtaining cost recoveries.
I have had some success.
And we continue to have discussions with customers at various stages at various levels.
The stronger U S dollar relative to other currencies in which we operate particularly the euro is negatively impacting our reported results and.
And maybe some risk going forward, the high inflation and rising rates will impact auto consumers.
In terms of tailwind dealer vehicle inventories remain low and underlying auto demand is relatively strong and constrained by the tight supply.
These factors support improving production levels in the second half of 2022, particularly as semiconductor availability improves and the China government recently announced economic stimulus that should help drive auto demand.
Our second quarter earnings were in line with our expectations.
Relative to the second quarter of 2021 consolidated sales were $9 $4 billion.
Up 4% compared to a 2% increase in global light vehicle production.
On an organic basis sales were up 12%, representing 4% growth over market.
In fact, our organic sales grew faster than production in Egypt, North America, Europe , Asia, and South America.
EBIT margin declined 240 basis points to three 8% substantially as a result of higher net input costs.
We also had operating inefficiencies at advance facility in Europe .
Inefficiencies negatively impacted the second quarter by about 25 basis points.
Our adjusted EPS fell to 83 cents for the quarter on.
On a U S GAAP reported basis EPS declined to a loss of 54.
Reflecting a noncash impairment charge on our investment in Russia that amounted $2 24.
And free cash flow was $52 million in Q2 down year over year, but up $151 million sequentially from the first quarter of 2022.
During the quarter, we repurchased three 5 million shares using $212 million in cash and paid out another $130 million to shareholders in the form of favorite apps.
While we are keeping our focus squarely on the short term challenges we are facing we continue to invest and prepare for the future.
Back in May we held an investor day in Pontiac, Michigan, where many of you had the opportunity to experience firsthand.
Our leading edge technologies.
At that event. We also provided an update on our progress with our go forward strategy, which focuses.
On accelerating deployment of capital towards high growth areas, driving operational excellence and unlocking new business models and markets.
We roll this strategy out a year ago and I am pleased to report that we're executing on that strategy and in many areas performing even beyond our previous expectations.
We highlighted that as we accelerate deployment of capital towards high growth areas. We are on track to meaningfully shift our portfolio in these areas.
As our business continues to grow from 18% to 24% of our business by 2027 based on our plan.
We also highlighted how we continue to drive operational excellence through Digitization and factory of the future tools.
We believe these actions will ultimately allow us to continue to win business manage ongoing price pressures cost inflation and contribute to margin expansion.
Lastly, as we examine the broader market for mobility, we see an expanding ecosystem for us to go beyond the traditional supply and manufacturing of vehicles and we see a lot of opportunity to participate in this growing market.
The current operating environment is challenging however, we are managing through it and I'm excited about what the future holds for Magna and our shareholders with that I will hand, it towards the path to take you through the financials.
Thanks Swamy and good morning, everyone first I will start with a detailed review of the quarter.
Global vehicle production increased 2% in the quarter, driven by North America, which was up 14%, partially offset by China, and Europe down, 5% and 1% respectively.
Our consolidated sales were $9 4 billion up 4% from the second quarter of 2021.
The increase was primarily due to higher North American vehicle production higher.
Youre Assembly volumes, the launch of new programs and price increases to recover certain higher input costs.
These were partially offset by the negative impact of foreign currency translation lower sales in Russia, net divestitures and customer price concessions.
On an organic basis, our sales increased 12% year over year, representing a 4% growth over market in the second quarter.
Adjusted EBIT was $358 million and adjusted EBIT margin declined 240 basis points to three 8%, which compares to six 2% in Q2 2021.
The lower EBIT percent in the quarter was substantially due to higher net input costs.
Other items that negatively impacted margin.
We're operating inefficiencies and other costs at a facility in Europe reduced earnings on lower sales in Russia.
A favorable value added tax settlement in Brazil in Q2 of last year.
Lower tooling contribution and lower equity income.
These items were partially offset by higher favorable commercial settlements lower net warranty costs and divestitures of loss making entities.
Equity income was down $19 million year over year to $25 million in the quarter.
The decline reflects reduced earnings on lower sales and higher net input costs at certain equity accounted entities and electrification spending and our <unk> JV.
Our adjusted effective income tax rate came in at 24, 9% in line with our Q2 expectations, but higher than Q2 of last year.
Net income attributable to Magna was $243 million compared to $426 million in Q2 2021.
Reflecting lower EBIT higher interest expense and a higher tax rate.
Diluted EPS was <unk> 83, compared to $1 40 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 the purchase and cancellation of shares during and subsequent to Q2 of 2021.
I will now review, our cash flows and investment activities.
During the second quarter of 2022, we generated $560 million in cash from operations before changes in working capital and invested $139 million and working capital.
Investment activities in the quarter included $329 million for fixed assets and $80 million increase in investments other assets and intangibles and $2 million in public and private equity securities.
Overall free cash flow was $52 million in Q2.
We also repurchased $212 million.
Of our common shares and paid $130 million in dividends.
At the end of the second quarter, our adjusted debt to adjusted EBITDA was $1 48.
And our liquidity remains strong at $5 2 billion, including almost $1 7 billion in cash.
Next I will cover our outlook.
We upheld our production estimates in line with our previous outlook.
And we assume exchange rates in our outlook will approximate recent rates.
Given recent currency moves we now expect a weaker euro Canadian dollar and where maybe for 2022 relative to our previous outlook.
Yes.
We have increased our expected ranges for BS power envision seeding and consolidated sales largely reflecting improved program mix, partially offset by the strengthening of the U S. Dollar in particular relative to the euro.
Our complete vehicles segment has also improved mixed programs. However, this benefit is more than offset by our assumption of a weaker expected euro leading to a slight reduction in the sales range.
Interest expense has been reduced to approximately $80 million from approximately $90 million previously primarily reflecting higher interest rates.
And our expectations for the adjusted EBIT margin equity income tax rate net income attributable to Magna and capital spending are all unchanged from our last outlook.
And we have maintained our free cash flow projections, and the range of $700 million to $900 million.
In summary, our second quarter was in line with our expectations.
And we anticipate stronger results in the second half of the year relative to the first half.
Our sales outgrew weighted production for the quarter and this is expected to continue.
This is driving the increase in our outlook.
We continue to focus on operational excellence and managing our costs and obtaining customer recoveries to help address the current challenges and our future.
And we are making progress in our go forward strategy.
Thanks for your attention. This morning, we will be happy to answer your questions.
Thank you.
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One moment please for the first question.
Our first question comes from John Murphy with Bank of America Securities. Please proceed with your question.
Hey, Good morning, guys can you hear me okay.
Yes, John Hey, John .
So I guess I guess the first question is the second quarter came in a fair amount weaker than we were expecting.
But you maintained the full year. So I'm just curious if you look at this as a reasonably meaningful acceleration in the second half versus the first half EBIT.
What are the kind of the key drivers there is it a function of volumes coming through or there being more stability and schedules and raws you think what are the key drivers there.
Hi, John Good morning.
I think you've covered most of the key drivers and it really is driven by volumes.
Our scene.
When you neutralize for the amount of FX.
Given the euros decline, we are seeing improved I would say production activity, that's being offset by the foreign exchange. We have positive volumes. We also have positive mix.
To your point earlier as well as we are seeing improvements in the cadence of our recoveries.
And finally, we are seeing some stability coming into the production schedules. So I think all of those factors are driving that.
Cadence, but I think it's both John .
I know the expectations.
Your expectations for Q2 at one level I have to reiterate that our expectations more in line. So we executed against our expectations in Q2.
Okay, Alright, that's helpful.
And then just a second question.
Traditionally when times get tough you guys win a decent amount of takeover business in it depending on where you sit in the value chain.
And what kind of a top five particularly for some smaller suppliers. So I'm just curious if any takeover business that you see either now that may be coming available for you for especially as volumes rewind and some of these other supplier can't handle the ramp back up I mean have you are you seeing any of that now we're expecting that some time ago.
In the coming quarters.
Good morning, John .
I would say we are keeping our eyes wide open right now.
Discussion.
To an extent I would say.
Looking at <unk>.
Core business control arm I think.
As the current economic conditions continue.
Hopefully soon but as it continue for the next short period of time.
I think there could be.
Kennedy's in.
Whether it's customer interaction and learning from them and looking to help out there.
Just opportunities that come to us.
Being very attentive, let's say.
Yes.
It's why we maybe just the last one I mean when you when you look at what Ford is doing in a reordering.
Reordering and re segmentation of it's not just counting but its internal ops around evs and.
What does that mean for you I mean, there are obviously, a large customer and you see other large customers taking anything like that.
It may either be good or bad for your business.
John I think it's a fluid condition, but we are having a lot of conversations whether it's with <unk> or other customers who are looking at re prioritizing they're looking at optimizing the best way to I.
I guess, they address both segments strike, which as I said well, let's see.
Plastics and breaking EBIT market.
But if you just look over the ultimate organizational perspective of the purchasing functions work.
Development work is done I think it will have an impact.
Our conversations with them as you know as with most of our customers we have holistic.
That is the roadmap discussions so we added the table given the variance.
Products that we are in.
I think overall, it's going to be helpful for us and we have said that in the Investor day and in many other occasion as we've talked about system integration and bringing things together.
And providing overall optimize costs at a system level rather than each of the product I think magnum has a benefit as.
As you talked about.
Electrification what happens through the end of the body and therefore its impact on the seats are a good example, we talked about Dms we're.
Inside mirrors can work with camera in Ada and we are talking about connected powertrains in the future.
So if you look across Magna I think bringing things together.
Fleet will give us an advantage as.
As we have this conversation.
Okay. Thank you very much guys appreciate it.
Thanks, John .
Our next question comes from ethane Mccalley with Citigroup. Please proceed with your question.
Great. Thanks, good morning, everyone.
Just first wanted to hone in on two items in the quarter first I was hoping you could quantify the operate operating inefficiencies at the facility in Europe , and second maybe talk a bit more about the safety margin.
Are you expecting that to get back to maybe mid 4% in the second half just hoping you could kind of talk.
The quarter and the bridge there for second half of the year.
I think Pat you can talk a little bit about the seating margins, but the best facility I think from a program change perspective.
Our complex product led.
Lead to inefficiencies.
In terms of drop and therefore side it started to impact.
I would say the capacity allocation meeting all the customer expectations in terms of production.
The team in place.
There is a very clear understanding of the issue very good plan as you can imagine if we look at.
Any situation like that it takes a little bit of time to get to full stability of the production. So thats really the impact we're not getting into the specifics, but it have.
Have you heard Pat talk about I think it was about a 25 basis points impact on the Q2 and I would say about a 20 basis points for.
For the second half of 'twenty two.
And as far as the seating when you look at the margins going forward I think I would frame them more is that margins are stabilizing and returning to returning to expectations.
Our seating business.
Was disproportionately hit I would say in each one and in particular in Q2 with.
The nature of the business so with the stop start nature of what we've seen in the first half of the year and some of the negative mix, where we have some higher vertical integration. So I think what we're seeing is we were disproportionately hitting Q2, ending each one and as we move into <unk>, we're seeing that stabilize in <unk>.
Turning to previous levels, it's a normal launch costs in the first half, but that subside in the back half as well.
So that's very helpful. And then just two other quick follow ups first.
To what extent is it sort of a second half margin rate a good baseline to think about for 2023, and there's a lot of noise with customer recoveries, but hoping you can maybe give us some help there and then maybe for Swamy, hoping you can maybe update us on just overall booking and quoting activity kind of what youre seeing in new business in the second quarter.
Yeah, we're not going to get specifically into our 'twenty three.
Margins were.
It's the cadence we go through and it's not a new.
Situation, but we're going to start our business planning process, but if you start doing the cadence of our earnings from <unk> into <unk>, you do see an improvement in our earnings so our exit margins should be more reflective.
Go forward I think the we were disproportionately hit and each one on some of the commodities and we're seeing improvements as we go forward.
Yes, I think.
The second part of the question that you asked in terms of bookings.
We kind of look at the overall year plan and there is I would call. It lumpiness, sometimes on the decision making process heater, but if you take a look at today, where we are I would say we are.
It's pretty much in line with the plan and doing well and feel comfortable.
<unk>.
We'll talk to the plan, if not better I would say.
Sitting where we are right now.
Great. That's all very helpful. Thank you.
Our next question comes from Peter Sklar with BMO capital markets. Please proceed.
Good morning, Pat a question for you in the last two quarters, you've given us an update on the magnitude of the Unrecoverable incremental costs I believe your last update was $565 million on an annual basis now there seems to be some puts and takes listening to the discussion. This morning, it sounds like.
You do you have had some successful.
Commercial settlements with your customers.
It sounds like commodity costs are easing somewhat I'm just wondering if you could give us an update on that number.
Yes.
The number.
It Hasnt really moved Peter I think to your point there has been some puts and takes between the gross to net but we're we're holding firm at the 565. If you remember we started the year at $2 75, we saw some acceleration in April primarily driven by Russia as a nation of.
Ukraine, driving a lot of energy costs throughout the European continent. So when you put it all together and where we stand today as you said, there's some puts and takes but we're holding up to $5 65.
And so I think some of that stability is coming in.
Okay.
And then my next question is I believe it was just over $400 million of impairment charges. You took during the quarter is the lion's share of that.
The impairment of the Russian assets.
Exactly Peter So when you when you break down the other expense. There is like you said just over 400 404 in a quarter roughly.
And of that four in a quarter 50 of it relates to mark to market on warrants and other.
Private public entity securities, but the bulk of it does relate to the Russian impairment, which was $376 million and effectively what we've done Peter is giving given the accounting rules and our ability to generate cash flows out of that market. We've imperative, we fully impaired the assets other than the cash balances.
We're not able to do under accounting standards.
Okay, and Pat when you say fully impaired do you mean, it's impaired to zero, so we won't see that in future quarters.
Exactly.
Okay and then my last question Yeah. Thanks, and then my last question for the management team.
I'm just wondering if you could give some flavor around the performance of the.
The power and vision.
There is no revenue growth.
Margins deteriorated year over year, I think from about down to 3% ish.
I thought you might have had some growth there and improvement is.
Your your Adas programs come on so I Wonder if you could just talk a little bit about what's unfolding in that segment.
I can start and I think swamy can jump in as well.
When you break the numbers down Peter when you think about what's happening in the industry.
<unk> talked a lot about it on higher input costs, whether it's inflation.
And whatnot. This group is disproportionately hit in that space, because they are exposed to much more to the chip space and they have also at the other issue or fact is that they have more of a European footprint and when you think about what's driving our 565.
Relative to the size of this group has a higher amount of that those costs in this area. So when you when you look year over year.
We're down 380 basis points substantially all of that decreases inflation.
Type items.
Okay, and Theres no revenue growth I thought some of your Adas programs would be wrapping by at this time.
Yes, I think the Adas program strength is.
A slow ramp as we start going into the launch.
The programs you might be talking to you, but generally overall from the perspective of Adas powertrain operationally as well as the <unk>.
Call It the general health and the booking traction.
We feel good in terms of the plan that we've talked about.
In the Investor day out in the previous quarters.
And we're going to see some of that growth is going to come through on consolidated sales team.
And our consolidated results are still coming through.
Meaning it's in the equity line.
That's correct.
Yeah, Okay. Thank you for your comments.
Perfect. Thanks, Peter Thank you Peter.
Our next question comes from Chris Mcnally with Evercore. Please proceed.
Got it thanks, so much team.
I was wondering if we could follow up on the.
$5 65.
Headwind.
Inflation for the year is it possible to broadly bucket.
In percentage terms, how much are hard to recover.
Hard to quantify.
Yeah.
Probably it's going to taking a more like 12 to 18 months for things that are more direct raw material related just not covered by pass throughs can you just imagine things like utility.
And transport, it's going to take longer because we're in sort of new territory and any sort of way to bucket. So we can just have an idea how those recoveries would work would be super helpful.
Good morning, Chris.
I wish I could give you the granularity but.
You're kind of looking at a resumption then if you look at the estimate last quarter year over year, I would say that net input costs for.
22 was mentioned.
The number you mentioned the 465, obviously right.
Summer months have changed and as I mentioned, our discussions with the customers that are ongoing we have had some success and we are not even looking at just 22 right. We got to look at some of the costs incurred in the past, we're going to look at how to.
Carryforward these discussions into possible continuing effects in 'twenty, three and beyond so it's kind of a complex equation trying to figure out how best to address this.
Obviously, the big topics I would say of the commodities the semiconductors and other material that is energy.
And given the production conditions.
Not being very stable I would say right.
Our primary goal is now to keep.
Putting our customers. So there is premium wages and freight and other and so on it's really difficult to put a pin on each one of them and categorize this chris but it would be.
We're very much focused on not just looking at therefore 65 in it.
It's a continuing conversation.
Going forward, what price 65, starting Tonight.
Various customers.
No that's very helpful and again.
It's more of a question of the high level for the how Magna is thinking about going back to the OEM. So these compensation just because I guess the other way we could think about it is in February you gave a guide for 2024, obviously volume dependent eight one to eight 6% margin over the next couple of months you incur another $200 million.
In sort of extraordinary cost due to the war.
Question is do you think if we got back to that volume level. We have over the next two years the ability to make up that 200, so that broadly speaking and obviously you're going to give an updated guide.
You remain on target for 2024 volume dependent.
So Pat you might you can jump in but.
We talked about Chris that's exactly what we kicked off as a normal.
<unk> business planning process, right now and we'd go kind of bottoms up right.
And if you look at the last three years three months the volumes have changed a few times right.
Certain.
Uncertainty still so we look at the volumes, but broadly speaking Greg you got to consider the current economic conditions.
And.
Recovery discussions that we're having.
Some of it and it comes in various forms, but give backs or productivity improvements in businesses and so on and so forth.
I think the intent would be to take all of that is.
Best guess.
Insurance had best get the best effort to put things together and that's what will help us come to the guidance when we come to February of 'twenty three.
But we have to take all of this in.
Inflation and what we end up at the end of the year with our conversations or discussions with customers. All of this will play a role.
I don't know Patrick do you want to add something yes, the only thing I would add Chris it's not a linear calculation right. So it's not you just carry these numbers forward part of the discussions we have with our customers is not just looking at 'twenty, two and asking for a check to recover so what we're looking at is multiple factors you are looking at Apio changes, which will continue the other factor we look at it as do we.
We.
Can we have an ability to pass that cost through to the customer be a customer programs that we are derisking, our our bombs and some of that de risking strategy.
Youre pushing it through.
Effectively pushing your cost up to the customer and it allows us to focus on what we're good at which is manufacturing and so we look at de risking strategies.
Whether it's on energy materials, and just to clarify on your first.
When we started this conversation when you think about the pass through costs, we have significant costs.
Commodity costs are on pass through programs that are already.
Cost.
So directly to the customer so when you look at changes on the price of steel if we're on a customer resale, we're not exposed in that area.
So apologize for the long answer.
It's a very complicated and flex the gel.
And no it is.
Tough question. Thanks, Pat Thanks, Amit thank.
Thank you. Thank you.
Our next question comes from Mark Delaney with Goldman Sachs. Please proceed.
Yes, good morning, and thank you very much for taking the questions first one is to better understand the full year top line outlook, you've left your global production assumptions.
Change, but you did tick up to the full year revenue guidance, even though I think there was some FX headwinds there. So maybe you could talk a little bit more on what's leading to the slightly higher revenue view, despite the unchanged production outlook.
Good morning, Mark.
I think we will.
When we break down our our volume mix a part of part of the the wind actually happened in Q2s, we outperformed in Q2.
I think when you get a chance to see the MBNA, but we're seeing a couple of things thats driving that we have.
You think about we have positive mix. So when you look at some of the mix on the volume side of it we're seeing positive mix in Q2, but also continuing out through the balance of the year and Thats really just program volumes. The second area, where we have in some positivity relates to content on the programs and mix within the various programs.
And then finally.
What we're also seeing as we're talking about a lot of these recoveries some of them will do come in the form of appeal adjustment.
Whether it's a path like a resale program or some of the recoveries receiving.
From our customers. That's all of those factors are driving an increase in net content per vehicle I would say.
To your other point Youre right, we do have.
Impact, but the other way on foreign exchange and Thats, primarily driven by the <unk>.
Europe declined significantly in the last three months.
If it mixes are impacting us in the back half of the year than what we saw in Q2 that is a positive in Q2, but more and more of the blackout.
Okay. That's helpful. And then my second question is on Europe .
Hoping you can share more details about what magna as seen in Europe related to potential gas and energy shortages, maybe you can speak to what magna and perhaps the industry more broadly or are doing to potentially mitigate impacts and to the extent natural gas flows to sustain at very low levels. Do you have any early assessment about how much production can be impacted in Europe . Thanks.
Yeah.
Good morning, Mark I think it can be very difficult and its conditions do have an assumption of what the production impact could be.
Given the fluidity of the situation there but.
Whether it was core window or whether it was chip shutdowns.
We are reacting to a call it a very volatile situation, but.
Whether it was the sustainability efforts that we have taken up and looking at optimizing energy how do we plan.
All of these things come into play.
Hopefully help us in thinking through the energy part of it to the extent possible we have contracts in place but.
Given the current state.
We have to see what it might be.
I think the answer correctly that youre talking about.
In Europe .
He has a much larger impact beyond even automotive in Europe , I think the secondary effects could it could be plateau treating.
Rather than looking at the DNA of resilience and being agile in working with the customers I don't know if there is a whole lot that could be done from an energy perspective.
Understood. Thank you.
Our next question comes from Joseph Spak with RBC. Please proceed.
Hi, Thanks, good morning, everyone.
Sorry, I, just just to sort of go back to some of the change in guidance understanding you think mix since EBV and some of the recoveries are better on the top line.
But then you sort of you sort of still kept us $5 65 of headwinds, which I think was a net number right. So I guess the implication would be that.
Maybe are you also raised your gross commodities and we are starting to see some some some falling there. So can you just help me understand exactly I understand there is a little bit about maybe giving a take between sort of how you assumed some of those some of the netting of the gross headwind was going to occur, but it's still I'm still having a lot.
The trouble.
Difficulty sort of squaring some of your comments I think you're right Joe.
You talked about puts and takes in the in the net number is some things some things went up some of those input costs went up whether it be commodity otherwise.
But some of our recovery expectations went up as well so the net number did not change, but I wouldn't say, that's a huge number but theres a little bit of incremental.
Recoveries, that's built into our plan at the bigger element I think is the program mix.
Okay.
Do you think you can get to a better.
Not all the way neutral, but to a better price cost equation by the end of the year.
Yeah.
Good morning.
I think we continue like I said, our discussions with your customers right.
When we talk about the plastics, if I say.
It is our plan number obviously, it's going to be and we continue to push in all directions and as.
Louis said.
You look at some of the recoveries that we had already built in.
No.
Before we talked about the net 565 number and as they come to start to flow through would be.
The same climate cost of sales line, they remain kind of margin neutral.
Like I said again, we are not just looking at 'twenty two we are looking at.
Recoveries in general.
Holistically, what could it mean to us as a business in the long term.
As you are looking at new codes.
We looked at new economics.
As part of these conversations.
It's a it's a multi variable equation makes you say that where we are having conversations right now.
So.
All I can say is we will be focused not tied to the 465 number but.
Overall.
How much more can we optimize on how do we optimize strike.
Okay.
Thanks for that maybe just to go back to.
The Europe , and energy and I understand like quantifying sort of potential impact is.
To your customers is.
Pretty much impossible at this point, but but specifically with with your stier our business there.
If you like how does it work contractually with your customers that you are making cars for if you have to if you have some higher energy costs.
Where does that get absorbed.
Good morning, Joe.
Yes.
To be honest, if it really varies depending on the contract that we have so.
When you think about our <unk> business. It has some significant.
Production is under a couple of contracts and it really varies depending on which customer and which contract we're working on.
I think the vast majority of our contracts in Europe .
Outside of Shire would be.
Primarily it's.
The economics are responsibility and that's fully reflected in the $5 65, and the recoveries that we're targeting and the recoveries that we have achieved already.
Sure.
Okay. Thank you.
Okay.
Thanks, Joe.
Our next question comes from Colin Langan with Wells Fargo. Please proceed.
Oh, great. Thanks for taking my questions.
Just wanted to follow up on the $5 65 and input costs can you just remind us of the cadence through the year.
How much was it again in Q1 and how much was that actually this corner.
Good morning Collin.
Pat here.
I can jump in as far as the cadence.
If you have follow on but when we when we look at the breakdown by 65, what we had experienced in the.
The first quarter.
It was both in the range of about $200 million, just broad brush and we experienced the same in the second quarter. So when you think about the cadence going forward.
We're not going to provide a split by quarter, but.
That's going to leave.
Just under $200 million for the back half of the year on a year over year basis.
So each two of 2022 versus <unk> of 2021.
Got it okay, and I think that sort of helps my my second question, Sir if I look at the mid point of guidance. It looks like sales are up just 2% first half to second half, but about 30% EBIT, so how's that pretty well.
<unk> contribution on that.
Biggest delta, it's going to be much lower input cost headwinds, it's not really driving that high contribution on sales recovery.
Recoveries against those comps.
Recoveries on those input cost sorry got it okay, and then why the 2% I guess year over year first half second half get a little wonky, but.
Why just 2% growth considering I think IHS, that's up nine for first half second half is that just really FX starting to tip.
On to sales.
Yes, I think thats the biggest driver of it.
Yes.
The euro decline.
Significantly from our previous estimate so what youre seeing is that as I said earlier, if you have an increase in production activity in local currencies and it's been deteriorated or reduce that.
Benefit because of foreign exchange.
Translation yeah.
Yes, I don't think that when we looked at it we were that far off IHS.
And the reasons. So we're pretty much in line is hardest currency impact.
Got it alright, thanks for taking my questions.
Thanks Cole.
Our next question comes from James Picariello with PND Perry Bob. Please proceed with your question.
Hey, good morning, guys.
Just on electrification and the LG powertrain and Heska JV.
Can you just talk about magna's progress in general the major programs.
Do you have in the pipeline and just how things are progressing relative to the multi year.
Sales ramp you have targeted over the next few years.
I believe the LG JV.
Broke ground on a facility in Mexico back in April just wondering what the update is there timing.
Hi, Good morning, I guess, the short answer would be it's progressing well, but I can give some color.
Great.
I think if you go back and look at it we looked at the 2019 as a basis for <unk>.
G magnet joint venture and kind of talked about a 50% CAGR or the three year period at that time.
I would say we are progressing well.
As we continue to gain traction.
Plant city implementation there.
Our results with the <unk>.
Breaking ground in Mexico for the facility there.
And if you refer to.
<unk>.
Our investor deck slides and so on in our past commentary, we kind of talked to roughly about $4 billion in there.
Electrification sales.
Looking forward and we came back in that.
Yesterday, and said, we upped it to $4 5 billion now because we continue to.
Execute on our plans and see further traction right.
You talked a little bit of book or practical JV.
Our wholly owned business I think.
I would say we continue to launch the programs that we have talked about in the past and we also continue to gain traction in.
We're looking at new business.
From our customers.
So all in all I would say according to the plan that we communicated were in line or.
Beating.
The discussions we have had a year ago.
Got it that's great.
And I know you touched on this.
This aspect, but can you share your thoughts on just what the contingency plans might be for the energy rationing possibilities in Europe , and you just have magna's position from that standpoint.
I wish we could have a say in the policy implementation of energy rationing, but.
I would say it is a lot of discussions with our customers because you know.
Not having one part is not going to get the carbonate. So I think that cohesive effort I would say from the customer and the entire supply base to see how we can.
Keep the pipeline full.
And no pun intended benefit pipeline.
Yes.
So other than that I mean honestly there is no clear answer to this strike at all looking to see how we can stay resilient and function through.
All of it is just not.
The company solution I think it's going to be industry wide.
Solution for this one.
Yes. Thank you.
Okay.
Our next question is from Rod Lache with Wolfe Research. Please proceed.
Good morning, everybody.
Just.
First of all just one.
Clarification, so on the quarter the $200 million.
Year over year decline in EBIT I see material up by 300 basis points as a percentage of sales and then you commented on the $200 million impact of non recovered costs.
Basically the reason for the decline, but I'm not sure I'm seeing any contribution on the 800 million or so of <unk>.
Organic sales growth.
And just to clarify is that largely because.
That growth was actually reimbursed Smith for the the gross impact.
Of the cost that you're incurring.
Good morning, Rod it's Pat.
I think there is quite a few puts and takes but quickly answer. Your question, we do see pull through on our sales. So there is a boat or rate loss, you mentioned, you've got to back out the FX.
If we start at the top.
Headwinds on FX rates, so thats $600 million plus on <unk>.
Sales and when you back out.
Translation work there is not much pull through on that number.
Basically pulling throughout the the average FX.
Margin rate by the regions. So you back off the FX. So we do have positive sales activity again I would say.
Higher than the $800 million and it does have a positive pull through more of the range, where we experienced in the past.
The other thing to consider is our operations in Russia on a year over year basis. So we guided previously that we have in the range of $400 million of sales in the Russian market. So maybe just picked up by quarter Youre talking roughly another 100 and the pull through on that would not be at our standard pull through because we've effectively idled all those offers.
<unk>. So your Decrementals there are pretty significant.
Again, we talked about our <unk>.
25 basis point impact on our operation in Germany.
Continuing.
And as I said, that's why we mentioned earlier, we expect that to continue go forward range of about 20 basis points.
Then you have some other puts and takes when you put it all together.
Very long answer Rod and I apologize, but we are seeing pull through on our incremental sales to answer your very specific question.
To your point.
Theres index contracts anywhere.
We are getting a price adjustment, it's really a margin neutral rate, we're adding a higher cost of sales higher sales.
It's margin neutral and that dragged the margin down a little bit.
And that's.
So we're going to talk about last quarter and this quarter.
So so what's the gross impact or the.
When you are talking about $200 million of non reimbursed.
Expense.
There was a reimbursement component can you just maybe give us a sense of.
How large that is.
Your growth over market is coming from the.
The reimbursement of of higher cost.
Growth over market year to date. The majority of that is just pure content growth, but there is a portion that is related to a recovery whether it be index type contracts or other recoveries.
In the quarter, we had let's say a higher proportion of it was related to recoveries, but we had we had just pure organic growth related to mix and content growth et cetera also in the numbers. We're not we're not disclosing the gross numbers, we've only been talking about the net numbers from there on.
On the net input costs.
Okay.
Just two other things so.
So Ford on their earnings call mentioned that they've had they had 550 suppliers at risk in Europe .
In the event of rationing and that they are building a 30 day buffer stock are you hearing anything along those lines with regard to <unk>.
Building up additional inventory from your from your customers.
And then lastly swamy.
Your prepared remarks.
You talked a little bit about going beyond the supplier manufacturer of vehicles could you just elaborate what you were what you.
You were referring to.
Yeah, absolutely I think good morning.
When we talk about the energy rationing.
Talked about it we are seeing various initiatives I should say across Oems.
To see how we can.
As much possible.
As.
As you can right given.
The condition there to figure out how to protect production, whether it's inventory build ups and so on I Wouldnt say there is one thing that we are seeing across the board. There is a mix of everything but definitely that is very much in focus.
The second point.
I talked about beyond.
You've heard me talk about mobility ecosystem.
How can we leverage magna overall from a system perspective.
Beyond.
Our core businesses.
And system supplier and contract vehicle manufacturing.
Whether it is.
Delivery logistics.
Looking at what magnet can bring them as platforms, whether it's last mind, whether it's micro mobility.
Possibly.
For my part.
Automotive infrastructure related topics, whether it's charging stations and so on.
In our preliminary.
Evaluation and we continue to have several discussions on that topic, but I would say, it's pretty preliminary that's what I meant by that comment in my prepared statement.
Okay alright, thank you.
Thanks, Ron.
And our final question comes from Michael Glen with Raymond James. Please proceed with your question.
Alright, thanks for thanks for getting me in maybe maybe just.
To start on M&A environment.
In terms of what you're seeing are you seeing an uptick in opportunities present themselves.
Like is there anything looking interesting to you at this point in time.
Good morning.
I would say we continue to scan the M&A landscape landscape more I would say in a very deliberate fashion looking to see how.
From <unk> perspective, addressing whether it's a technology customer geography footprint.
That continues.
I think in the initial comments to your question I said.
Given the economic condition.
There might be opportunities that come along mbo vary.
Attentive I should say.
And stay focused to see it in.
We are in the industry, we are well known and they all come to the table. So I don't think our approach to M&A changes because of it but we will.
I would say.
Ear to the ground.
Yes.
And just maybe one on Europe .
Going across the segments, let's.
With the Q1 result.
I believe there was a comment indicating that body and exteriors.
And impact to think about from rising energy prices and I think earlier in the call.
Indicated power envision as well or are those the two primary segments, where you would see pressure on the on the rising energy or in which segment sees more pressure.
And I don't know whether its a segment question I think it would be more of the process related question right.
Where you have energy intensive processes right.
<unk>.
Machining or.
Molding and so on and so forth, so I think a quarter.
Correct, it crossed but given the nature of the product and the <unk>.
Mix of the processes I would say the B segment.
Powertrain would be.
High energy.
Utilizing.
Their processes in place given that logic I would say your assumption is correct.
Okay. Thanks for taking my questions.
Thanks, Michael.
Mr. <unk> I'll turn the call back to you for closing remarks.
Thank you and thanks, everyone for listening in as I said, the industry environment remains difficult, but we continue to.
Demonstrate resilience, while staying focused on our go forward strategy is not just about today, but the future.
Hopefully you heard that in our message and enjoy the rest of your day and have a great weekend. Thank you.
That does conclude the conference call for today, we thank you for your participation and ask thank you. Please disconnect your lines.
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