Q3 2022 Magna International Inc Earnings Call
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Greetings and welcome to the Magna International Q3, 2022 results conference call. During the presentation. All participants will be in a listen only mode. Later, we will conduct a question and answer session.
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As a reminder, this conference is being recorded Friday November 4th 2022.
It is now my pleasure to turn the conference over to Louis Tonelli, Vice President Investor Relations. Please go ahead.
Thanks, Tina Hello, everyone and welcome to our conference call covering our Q3 'twenty two results. Joining me today are swamy quota, Gary Vince can liffey in Pat Mccann.
Yesterday, our board of directors met and approved our financial results for Q3 'twenty. Two we finished we issued our press release this morning outlining our results.
You'll find the press release today's conference call webcast. The slide presentation to go along with the call and our updated quarterly financial review all in the Investor Relations section of our website at <unk> 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.
Please also refer to the reminder, slide included in today's deck related to today's commentary and with that I'll pass it over to Swamy.
Thank you Louis good morning, everyone.
Happy to be here to provide a general update on magna as well as our Q3 results.
Key takeaways from today's call.
Continue to manage through a difficult operating environment and our results for the third quarter improved both on a year over year basis, and on a sequential basis compared to last quarter.
Excluding the disappointing performance at certain facilities, which impacted our third quarter and is contributing to it or do you have to outlook. Our results were in line with our expectations.
We expect another sequential improvement of earnings in Q4, including as a result of our efforts to secure cost recoveries from customers.
And we have reduced our sales and margin outlook for 2022, mainly reflecting increased operating inefficiencies and lower production assumptions.
And while we are highly focused on addressing short term external and internal challenges. We continued to make progress on our go forward strategy to drive our future business.
Let me briefly cover the current dynamics impacting the industry.
We continue to experience supply constraints in particular semiconductors <unk>.
Improvement in the second half of 2022 is not as much as expected at this point, we anticipate some ongoing.
Could you choppiness through the end of the year and into the first half of 2023.
Input costs remain elevated with higher energy costs in Europe . The most recent factor.
<unk> to make progress in customer recoveries.
And our discussions with customers continue.
Relative to our previous outlook, we expect only a modest increase in our net input costs for 2022.
The stronger U S dollar relative to other currencies in which we operate particularly the euro continues to negatively impact our reported results.
And there remains risk going forward, the high inflation and rising interest rates will impact auto consumers.
In terms of tailwind dealer vehicle inventories remain below historical levels and to this point underlying auto demand remains resilient and constrained by tight supply.
And global Auto forecasters continue to expect increased light vehicle production in the coming years.
Now turning to our third quarter earnings.
Relative to the third quarter of 2021.
Consolidated sales were $9 3 billion up 17%.
On an organic basis sales were up 27% compared to 24% increase in global light vehicle production, representing 3% rated growth over market. This.
This outgrowth includes the impacts of continuing customer recoveries.
EBIT margin increased 190 basis points to four 8%.
Increased vehicle production was the largest positive factor.
Higher net input costs, what's the most significant offsetting factor in Q3.
Our EBIT margin improved year over year in every operating segment.
Our adjusted EPS growth, 91% to $1 seven for the quarter.
And our use of free cash flow was $210 million in Q3.
During the quarter.
<unk>, three 1 million shares using $180 million in cash.
And paid out another $125 million to shareholders in the form of dividends.
Pat will take you through the details of our revised 22 outlook later, let me take you through the broad strokes.
Compared to our previous outlook, we are reducing adjusted EBIT margin at the midpoint by about 30 basis points to a range of four 8% to 5% mainly related to three factors.
We are experiencing a higher level of operating inefficiency in a.
Few facilities.
The EBIT impact from Dis operating inefficiencies is about 15 basis points.
The most significant is the <unk> facility that we have highlighted last quarter.
We have identified the issues and action plans are in place.
We expect progress in improving the run rate of losses going forward.
Our lower volume assumptions in North America, and Europe , resulting in lower sales and.
And relative to our last outlook, we are seeing more disruption cost from production schedule changes.
These are partially offset by contribution on higher sales in China.
Together, the volume sales and scheduled volatility impact is approximately 10 basis points.
Lastly, there has been some movement in a couple of areas of our net input costs, but overall, we are expecting about $20 million and higher costs, which is essentially the impact of lower sales of <unk> steel and aluminum compared to our previous outlook.
The result of lower market prices.
Despite bringing our outlook down we still expect improved sequential earnings in Q4.
<unk> to Q3, mainly reflecting lower net input costs, partially offset by higher engineering expense.
While we are tackling short term industry challenges, we continued to take steps in our go forward strategy.
Leveraging <unk> capabilities and platform technologies in areas, such as 48 volt battery management software stack and sensors to enter growing adjacent mobility markets such as micro mobility.
Our recent <unk> investment allows us to enter the world's largest growth market for two wheel electrified mobility with India's largest to build electrified mobility as a service business and through both our collaboration with Kotkin and our own internally developed robots, we are addressing last mile delivery.
Yeah.
In the area of powertrain electrification, we are launching hybrid dct's forced Atlantis.
Starting with Jeep and Fiat models.
Our agreement also includes additional future hybrid models for Europe .
Our scalable hybrid technology is an important step in helping our customers electrify their fleet to improve fuel efficiency and performance and to meet regulatory requirements.
To date, we have been awarded hybrid DCT business with three global Oems.
BMW Mercedes and still active.
Earlier this year, we broke ground in our LG joint venture on a new facility in Mexico that will supply in orders motors and onboard charges. This is an important step in our ability to support our customers' powertrain electrification plants in North America.
Lastly, we recently won another automotive news pace Award our sixth such award in the past eight years for a solution that offers real time.
Adjustments during the staffing process we are.
We're also awarded an automotive news pace pilot innovation to watch.
For a better performing aluminum die cast alloy use for structural applications.
Innovation provides both a lower cost and lower carbon footprint.
These awards recognize our efforts to drive innovation and technological advancements across Magna and <unk>.
Very proud of our continued success here.
I'll pass the call over to Pat.
Thanks, Swamy and good morning, everyone.
I'll start with a detailed review of the quarter.
Global vehicle production increased 24% in the quarter with all key markets up by a similar percentage.
Our consolidated sales were $9 3 billion up 17% from the third quarter of 2021 on.
On an organic basis, our sales increased 27% year over year, representing a 3% weighted growth over market in the quarter.
The increase was primarily due to higher global vehicle production higher assembly volume 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 and customer price concessions.
Adjusted EBIT was $441 million and adjusted EBIT margin increased 190 basis points to four 8%, which compares to two 9% in Q3 2021.
The higher EBIT percent in the quarter reflects earnings on higher sales commercial settlements of $45 million provision on an engineering services contract with ever ground in 'twenty in Q3, 2021, higher tooling contribution and divestitures of loss making entities.
These are partially offset by higher net input costs.
Operating inefficiencies at our facility in Europe .
Higher launch and net warranty costs and reduced earnings on lower sales at facilities in Russia.
Equity income was down $7 million year over year to $27 million in the quarter.
The decline reflects higher net input costs at certain equity accounted entities.
And higher electrification spending in our algae JV to support new launches and additional growth, partially offset by earnings on higher sales at certain equity accounted entities.
Our adjusted effective income tax rate came in at 25, 5%. The higher rate compares to Q3 2021 was due to lower R&D credits and a change in the mix of earnings partially offset by favorable changes in reserves for uncertain tax positions.
Net income attributable to Magna was $308 million up $138 million compared to Q3 2021.
Reflecting higher EBIT and lower interest expense, partially offset by the higher income tax rate.
Diluted EPS was $1 seven compared to 56 last year.
Foreign exchange reduced our EPS by about 8%, sorry, <unk> <unk> per share.
Okay.
I will now review, our cash flows and investment activities.
During the third quarter of 2022, we generated $591 million in cash from operations before changes in working capital and invested $353 million in working capital.
Investment activities in the quarter included $364 million for fixed assets.
$125 million increase in investments other assets and intangibles and $25 million for our investment in <unk> mobility.
Overall, we used $210 million of free cash flow in Q3.
We also repurchased $180 million of our common shares and paid $125 million in dividends.
At the end of the third quarter, our adjusted debt to adjusted EBITDA was $1 39, and our liquidity remains strong at $4 6 billion, including $1 billion in cash.
Next I will cover our outlook.
In North America, and Europe , our most significant markets, we slightly reduced our vehicle production expectations from our previous outlook.
And we increased our volumes in China.
We assume exchange rates in our outlook will approximate recent rates.
Given recent currency moves we now expect a weaker euro Canadian dollar and RMB for 2022 relative to our previous outlook.
We have reduced and narrowed our expected ranges for segment and consolidated sales largely reflected lower volumes and the strengthening of the U S. Dollar in particular relative to the euro.
Has swampy indicated earlier, we've reduced and narrowed our EBIT.
Margin expectations.
We now expect a margin range of four 8% to 5% compared to 5%.
To five 4% previously.
We slightly raised and narrowed our equity income expectations.
Our expectation for net income attributable to Magna has been reduced and narrowed largely to reflect lower sales and lower adjusted EBIT margin.
And we lowered our expectations for capital spending this year.
Lastly, we reduced our free cash flow protections to the range of $400 million to $600 million.
This mainly reflects expected lower earnings and higher working capital, partially offset by lower capital spending.
With respect to higher working capital, we have been carrying increased levels of safety stock given ongoing supply chain volatility we.
We had expected that to decline by year end.
We are now assuming remain above normal levels through the end of 2022.
The higher working capital also reflects a change in timing of tooling collections.
In summary, our third quarter results were improved over both last year and last quarter, Although we had expected a little bit better.
We anticipate further sequential earnings improvement in the fourth quarter.
We continue to focus on making improvements in our underperforming operations, managing our cost and obtaining customer recoveries to help address the current challenges.
And we are making ongoing progress in our go forward strategy.
Thanks for your attention. This morning, we would be happy to answer your questions.
Thank you if you would like to register a question or comment. Please press. The one followed by the four on your telephone.
Here are three two on prompt technology a request. If your question has been answered and you would like to withdraw your registration. Please press the one followed by the <unk>.
One moment please for our first question.
Yes.
The first question comes from John Murphy Bank of America. Please go ahead.
Good morning, good morning, guys.
A first question on the implied guide for the fourth quarter I think.
The midpoint of the range and the revenue is like $9 6 billion and the.
Adjusted EBIT is about $5 50 so.
Our March improvement.
Sequentially from the third quarter.
And a pretty significant improvement in profitability I was wondering what the key factors are sequentially.
That are driving that because I mean, it also looks like it's about $110 million improvement in EBIT sequentially in only a 360 million improvement in revenue sort of at the mid point. So it implies sort of some big incrementals as well.
Good morning, John .
Thanks, Thanks for the question so looking from Q3 to Q4.
We provide a range if you look at the midpoint I think roughly where youre looking.
Sure.
That math makes sense.
When we look at sales, we're seeing an increased volumes from Q3 into Q4, but we're also expecting higher recoveries as we progressed through the year.
A good portion of that is booked through revenues as well and then the offset against that would be foreign exchange headwinds on translation.
On the margin side.
As you look at our progression of customer recoveries in our input costs on a net basis, we are expecting improvements in Q4 relative to Q3, and then theres. Some small puts and takes primarily spending and timing of engineering and then DNA, increasing just a normal course programs launch those would be the big drivers.
John .
Okay. That's helpful. And then just a second question.
The commercial settlement seem like they are.
A reasonably material certainly in the third quarter and in the fourth quarter.
Can you kind of alluded to we're really detail, whether theyre relative to cost inflation or relative to you.
Some of the cost that youre incurring from volatility and schedules of the automakers seem to be playing ball with and how we should think about those go forward. So maybe third quarter.
<unk>, what you're expecting for the fourth quarter actual how much of that is in period and what is it specifically for cost inflation or volatility in schedules as well.
Yeah.
When we're breaking out our commercial recoveries, John speaking specific lead not about customer recoveries related to input costs or production volatility that's reflected in our <unk> or our 565 or 570 number that we've been guiding previously.
When we talk about commercial recoveries. This is normal course recoveries that we would have.
Every month I would say, so there's ups and downs that just happened this quarter.
They tended to go in our favor, but it covers areas such as tooling launch.
Our production schedules.
Program cancellations. So there's a whole list laundry list of issues that go into that category and they bounce around from quarter to quarter.
Like like we said in the discussions that they just went in our favor this quarter, but.
We don't forecast those in our numbers.
Okay and then just lastly, just wondering philosophically there used to be buffer stocks in the automotive value chain that used to sit on dealer lots as finished goods. That's now been worked down pretty dramatically.
And theres buffer stocks seem to be backing up into the suppliers like yourselves I mean, how long do you think youre going to maintain these but these buffer stocks.
I mean, how consequential do you think this will be a 2023 or is this something that will get worked out early in 2023, and you'll be back to pretty lean just in time.
Inventory levels.
Good morning, John Great question, I think one of the.
Big impacts that we have is due to a best start stop.
And because of trying to keep the continuity to the customers.
Midstream metrics within our plants and having this buffer stocks.
The volatility has not improved as much as we had talked to report in the second half of this year.
Hopefully it does and I think that to make a difference for sure in 2023, but if you just look at it.
The production versus the slack timber value stream.
Down to the tier and I think is going to determine.
How stable can production releases be and not just their needs, but being able to stick to the relief I think it's going to make a difference I believe it's going to start improving but then to.
To get to a state of equilibrium I think it's going to be a little bit beyond the first half of 2023 from what we see today.
I'm sorry, if I can just one follow up on that will you know when you have an idea of this stability or is it just going to happen when it happens.
I mean, you are there any guidepost you can look to.
So John I think typically if you would ask me that question I am not going to be a hard question, yes, no no no it's fine.
If you had asked a question about two or three years ago right. We would have said we had a decent view into 13% to 15 breaks out right we get it released.
Releases from the customer 30% to 15 weeks out, but yes. The issue has been the releases don't materialize when you come to it right. The parts are not picked up or something and so on and so forth that has been the issue. So yes get the relief and hopefully there'll be it fixed I think is what we are hoping for starting next.
Here.
Okay. Thank you very much guys.
Thank you. The next question comes from Adam Jonas Morgan Stanley . Please go ahead.
How are you doing I just had a follow up on the working capital safety stock question. Thanks for the clarity on maybe taking beyond first half for equilibrium, but what is the quantum of working cap that we kind of have trapped in our system. Just so we can kind of have an idea of whats <unk>.
What's in the bathtub and what could come out over time.
My first question.
Can you write.
Yes.
Adam I think.
When you look at the working capital, it's a bunch of things obviously right.
It changes from quarter to quarter, a little bit and part of it is.
Buffers that we have been talking about.
Hi.
I think it's difficult to quantify exactly maybe we can look at.
Year to year.
At this point.
I would.
I won't be very accurate item to quantify exactly how much of that working capital is due to about four sources that those things.
I would attribute most of the change to the normal average working capital that we have versus what we're seeing now definitely to the to the buffers and the safety stock.
And Adam if I could just sorry, just getting some data we didn't hear your question but.
When we look at the working capital Swamy is talking to a couple of buckets to it. So theres safety stock. That's why he was referring to specifically and when we look at that quarter. If we look.
If you look at our average inventory turns where we expect things to be that number's, probably in the $200 million type range.
When you the other piece that is driving working capital higher than expectations. When we get to year end is really when you look at.
The way the industry works, our working capital our receivables are pretty automatic once they get into the system. If they get paid per per the Oems tncs. The one area, where we can get slippage, where we're realizing it is the timing up your Pee Pap approval and your collections on tooling. So that's also driving some of the the higher receivables.
At year end so.
If you think about the inventory $200 million of safety stock in that range and then the balance would be primarily related to timing of tooling collections.
That's really helpful color just as a follow up.
We're heading into a global downturn, where in some form of global downturn already and as.
As a supplier you felt it on the production schedules for four years, you've already been in a downturn them anyway. So.
Are you seeing any signs right now that your OEM customers.
It might be cutting back on some of the science projects focusing on more of the proven moneymakers like internal combustion.
Argument can be made that when everyone's generating all time high margins and moneys free that you can kind of launch on this big ESG campaigns in the expensive stuff and sell lossmaking, Evs and avs and all that and maybe that posture changes into a downturn I don't know if youre seeing any indication of that yet.
On a forward look for customers.
Yes, Great question, Adam I think when we look at the long term planning mutually added the table talking about strategically the three to five years out.
And we've always talked about what is the sustainable plan when I say that long term plan.
Taking into account.
The transition of the product from where we are over the next 10 years.
Haven't significantly changed are seeing a change.
In terms of their portfolio or program management.
And obviously be.
Have an internal view also as we work on different.
Platform, so our product lines.
NSF Grant award.
I think right for the next 510 years.
But I Wouldnt say there has been a drastic shift on any of the <unk>.
Customer viewpoints.
<unk>.
Our previous discussions today.
Thanks Rami.
Thank you.
The next question comes from Peter Sklar with BMO capital markets. Please go ahead.
Hi, good morning.
Pat.
I'm just a little confused on what the net impact is.
Not normal course commercial.
Commercial recoveries, but all of these extraordinary.
Inflationary impacts your feeling on.
Energy rents et cetera. So.
What is the impact in Q3, and what is the impact in Q4, when you look at that elevated level versus the.
The commercial recoveries that you benefited from in Q3 as you negotiated reimbursement for those extraordinary costs.
Is that a positive or negative I'm, just trying to figure out where youre at.
Good morning, Peter let.
Let me.
Try and cleared up so when you're thinking about.
So forget about the commercial piece, if we're talking specifically about our 565, we've talked about historically.
We would have guided in the range of about 200 basis points in Q1 in 200 basis points in Q2, when we got into Q3, the number is coming down and the impact of headwind year over year would be in the range of about 180 basis points and that's primarily as we launch year from last year was a little bit elevated but were.
Also our recoveries were back and so when you work through the math basically we're looking as we move into Q4 with a minimal amount of.
Input cost headwinds on a year over year basis Peter.
Okay and then just.
180 basis points since Youre talking about the $5 65.
That number that's elevated costs less recoveries correct.
Everything on a net basis Thats correct Peter.
Yes, Okay next.
Question.
Could we have an update on managements thinking on how things could potentially unfolds in Germany. This winter if there is an energy shortage and.
If the German government was required to ration industry.
How do you think that would play out do you think that they would curtail production of the auto industry in Germany.
Yes, I think.
As you can imagine Peter this is a little bit more suicides or even just the industry in.
<unk>.
At least from the information that we see the macerich as stocks seem to be ahead.
Compared to that normal years.
But you have to see the harshness of the winter.
The rest of the staff.
Got it.
From our conversation.
The industry in general is talking to the policymakers too.
Safeguard as much as possible, but that is something to be seen.
It's no different than any supply shortage. It only takes one component and the entire supply chain to stop break in production.
I think we are part of all of these conversations with Oems and policy makers to stay at the table to understand it.
Okay.
Other than being.
The remaining agile to address as it comes along there is not a whole lot that we can do from our side other than production planning.
<unk> and possible.
Okay. Thanks, and just my last question.
In your discussion on the downward revision to the margin guidance, the 30 basis points due to plant inefficiencies if I do my math correctly that's about.
A loss of $27 million in the quarter.
I think you touched on it last quarter, but do you mind reviewing.
This plants in Europe .
Most of the loss what it does and what the issue is there.
Yes, Peter I think just a correction I think it's 15 basis points.
And Youre right Peter most part of it is in one facility as we mentioned in Europe .
If you just.
Step back and look at it.
We had a capacity constrained there was a.
A change in sort of a change in the program kind of.
Put the facility over the cliff.
In terms of the capacity constraints, and therefore had to do some outsourcing of parts to it.
Turnover Magna divisions, and external as you can imagine when you're shipping parts.
There is premium associated with it and that is what.
Half cost the issue that we're talking about.
The issues have definitely been identified and there is action plan in place.
Clearly.
As you can imagine to rebalance the capacity.
It will reduce the premium costs it takes time.
So the plan is in place we understand the issue.
It's a matter of executing to that end.
Bringing back capacity in an orderly way and reduce premium costs I think that's that's.
What I meant when I talked about.
Reducing losses, and improving run rates going forward.
Okay. Thank you for your comments.
Thank you. The next question comes from Chris Mcnally Evercore. Please go ahead.
Thanks, So much team. So just a real quick one because I think the comments around Q4 were pretty important so.
In the old framework I think of the $560 million. It was 400 on an absolute basis in first half 160, <unk> implied in the second half I think.
The comments.
Where that Q4 would almost be be neutral.
Does that mean that there is a chance that maybe by the first half of the year given the normal pace of the conversation that we could have a tailwind.
From this non commercial recovery inflationary bucket.
Good morning, Chris.
So your math is bang on.
Look it's 200 200.
160 brings us to.
To the 560, <unk>, so theres, a little bit of leakage year over year, when we get into Q4, I think when we get into headwinds and tailwind for 2023, where we are in the middle of working through our business planning process and as you can imagine the number of moving parts. This year given inflation in energy.
It's been an incredible process trying to work through it.
Remember, Chris if you go back to our guidance from February of last year, we did breakdown inflation into a couple of buckets and we bucket them basically between sticky inflation, primarily labor and then non sticky inflation being commodities and since that time energy as well so when I think about a headwind I don't think.
We're going to have a tailwind on labor pressure I think labor, so sticky type of scenario and we're going to work.
Automation projects and bringing efficiencies into the plants to team to negate those cost headwinds when you think about the other bucket primarily energy.
It's really going to be dependent on what swamy talked about earlier, whether it's rationing or whatnot. That's one piece of it but looking again just at the energy curves in Europe , and where we settle that's really going to be the big driver of.
<unk> 23 shakes out and then on top of all that what we can recover as far as.
Customer expectations.
Sorry for the long haul.
No.
That's very helpful and then maybe a second on.
On fire and a lot of interesting things going on in and obviously auto tackling the IRI and just sort of a two part question, maybe an update or a reminder, sysco is launching in the first half of next year, how does it work in terms of either cost overruns or the launch cadence.
<unk> take a little bit of a margin hit.
<unk>.
Launched the program with them just to remind us how costs are shared and then a bigger picture Swamy, sorry, I always ask this but it sounds like the.
The potential for a bigger move inspiring in North America. It makes even more sense with with everything domestic for Iras. So just any update there.
You can share there on fire.
So I think from my perspective, the North American footprint.
We've always said that and I think the answers Tim <unk>.
If there is a appropriate business case, we have radio open for that.
The footprint in North America.
There is obviously various discussions on that topic can be continue.
We have always said.
<unk> very disciplined to say it has to make sense in the long run.
On the other part honestly I don't think it's right on our part to talk about cadence so.
Launches and so on we would leave that to the customer.
Let them talk to it.
We have so many launches that we do with various customers. We don't comment on it then we would.
It would be not in the right place for us to talk about.
Customer cadence and launch here.
And it's one forget about this specific case.
Typically in a launch year for a new program is there a an investment period on magna's part where the.
If I think about BMW, historically, where stier margins would get.
I would say that obviously the it depends very much on the with the ramp curve and the launch and it differs from customer to customer.
How they get their milestones.
Is going to drive that but usually right.
We take that into account as we are going through the planning process and to the extent when that plant changes obviously because of programs.
The maturity and so on and so forth.
That is what Pat talked about.
Now the launch biggest puts and takes.
From one quarter to other depending on customers and programs.
It's really difficult to say it is a one particular cadence every time during our launch with <unk> in some cases there is more some cases I think you just stick to the plan exactly so it's difficult to quantify I'm not trying to go around but I wish I could give you a more concrete answer.
No much appreciate it thanks, so much team.
Thank you.
The next question comes from Joseph Spak RBC Cm. Please go ahead.
Yes.
Thanks, Good morning, everyone.
Maybe.
Just I know I think to John's first question, you talked a little bit about some of the.
The factors here for the fourth quarter, if we single and specifically on NBS in power and vision, where it seemed like there was some.
Larger quarter over quarter margin assumptions, it's almost like a 190 basis points MBS and 150 in power and vision I think yes, you sort of talked about some of the.
Efficiency improvements and in Europe I was wondering if you could help us help quantify maybe how much of that sequential improvement is there and what's driving the rest and then what's driving the improvement in power and vision quarter over quarter.
Robert.
Joe.
I'll have to look at that sequentially I don't have a good handle on what looking at it by segment I think.
Yeah.
Okay. Thank you.
Excuse me sorry, Joe when you look at a couple of big items. If you are focusing on Q3. There is that we did have the unusual warranty charge and the <unk> group, which will.
It's obviously, it's a onetime in nature.
What are the big drivers when you look as well as far as customer recoveries. Those two big groups do drive a disproportionate amount of the change in headwinds just given the.
They're heavy industrial groups.
That's another piece of it and.
So those are the two big off top my head.
Okay issues, but as Lewis said, we have the detailed we'll just have to put it into.
Tight package for us.
Yes.
Follow up on.
We can take a follow up I guess.
<unk>.
Maybe just one sort of quick one you pointed to FX, obviously, we could all sort of see that on our screens I mean, it seems like.
Current spot that could be like.
Maybe like a 1 billion three billing for sort of top line hit to you next year I was wondering if you could if you sort of if you think that sort of ballpark correct and then just at the EBIT level remind us I think it's mostly translation, but is there also some transaction exposure you have within within Europe or anything.
And my recollection Joe.
From past above a one cent change in euro.
<unk> dollar is about $150 million annually. So it is pretty significant.
$10 less significant but its probably $60 million for onetime change so depending on what assumptions, you're making there that I missed can be a pretty big yes.
Okay.
And then Joel.
Yes, sorry, John the second part of your question you are correct its primarily translation impact.
We do have a mature foreign exchange hedging process.
Magnum, which negates the majority of the transactional impacts.
Okay, and so Rami I guess, just very big picture I know you don't update the 'twenty four targets you have but.
At a very high level and no one has a crystal ball on production I just want to really understand.
If we do get back to the volume levels you assumed when you issued those targets do you think that is still attainable or has something else happened. Since then that sort of structurally change that view I guess I guess said differently like is it really just sort of volume that's sort of the key driver to sort of sensitize, what we should assume for.
24 margin targets.
So.
Joe I think it's a good question I think if you just fundamentally we look at our operations and our plan I would say it's really soon.
Like you said the key things one is volume and in my previous comments I did mentioned is also.
Equally important is the inefficiencies that are cost due to this tax stop in production.
I would say those from an operational perspective.
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To be very transparent we have to address the underperformance that I talked about.
Other than that if you look at the foundational part type thing.
Feel pretty pretty good.
The input costs and the inflation stickiness that Pat talked about is obviously going to have an impact on how we're doing what we do.
In short I think if the extraneous events are.
Not volatile.
And I'm not changing significantly then I would say.
The margins that we have talked about.
Very reachable.
So there is not an underlying that put a question mark.
We feel pretty confident.
You've got to address all of these market conditions that we are going through right now.
Thanks for that I appreciate it.
Thank you.
The next question comes from Colin Langan of Wells Fargo. Please go ahead.
Oh, great. Thanks for taking my questions.
Just to clarify I mean, what is the light vehicle production assumption when we're looking quarter over quarter because your growth I think at the midpoint is something like 4% I know a lot of suppliers are talking more flattish.
I mean, you talked about 4%.
Are you talking about global Singapore.
Yes, just overall global Q4, what youre kind of baseline of.
Well I can tell you what it is so our assumption for the full year so year over year is about plus two.
It's I think it's pretty much in line with maybe even a little conservative at IHS.
That's where we are.
Full year globally.
Okay Alright.
And if I look at the Q4 sort of implied rate margin sort of jumped to like a $5 seven ish at the midpoint.
Should we think about is that the right launch sort of rate as we look into 2023.
Or are there some seasonality or any maybe retroactive recoveries.
Are impacting that sort of exit rate.
Yes, I think all of the above apply column like I said earlier, we're really in the middle of.
Our budget cycle here that we're kicking off.
Sure.
We are going to come to the market in February with our Q4 results given that guidance.
Would it be fair for us to give a number at this point because we're really trying to see what ran on where we're going to land.
Okay, and just lastly, any retroactive recoveries in the Q3 and Q4 results and how we should be thinking about.
Yes. So there are if you think about the cadence of our our headwinds on our net input cost of the 565 that we had guided earlier. It gives you a perspective that they were frontloaded and part of that.
Benefit in the second half of the year part of it was just.
The year over year impact on the cost side of it but the other piece of it is.
We are some of our recoveries are geared towards the back half of the year and a portion of that would relate to the first half, but we haven't broken it down so we haven't met that detail.
Okay, alright, thanks for taking my questions.
Thank you.
As a reminder, via the phone lines you May Press Star one to register any question or comment no one followed by the full year.
Our next question comes from Michael Glen Raymond James. Please go ahead.
Hey, Thanks for taking my question I, just wanted to dig into the Europe energy.
Situation, just a little bit more so if we look back earlier. This year you guys had increased that cost guidance based on energy prices in Europe .
And if you look at the way energy prices in Europe trended in front half of year versus what we saw in Q3 in particular, you had some pretty significant escalation take place in the Europe energy market, but it doesn't feel like you guys. So much pressure from that I'm, just trying to understand how when we're looking.
At the spot market.
For natural gas, how we should think about that translating are impacting our results.
And maybe I'll set that you can add I think.
If you look at the energy cost both the gross costs were higher and also expected recoveries were higher but overall I should say the net costs for us are higher.
Obviously, we can.
The discussions with the OEM are I think they understand the issue.
As we have some of these discussions.
You can get into the details obviously, but.
The granularity of the discussions in each case.
I would say that's the key point there.
And I think the other thing.
Mike you have to think through as well as we do have hedging on energy to protect.
Our lock in a secure supply related to that so it's not we're just not looking at the 30 day forward curve in our numbers and moving up and down the majority of US what swamy talked about that we're in to the customers like most of our competitors on energy because it's such a significant impact that's the first piece and it spiked in Q2.
Three for a short period of time and if you look at the curves today, they're they're back down to March levels.
The market's really bouncing around but we're tracking it and managing it with the customers.
So at this point would you say then that energy is now largely on pass through with customers does that now been embedded into.
Youre arrangements.
I think when.
So part of this.
Mike.
I think we're in a situation where in our main markets. We've operated in a virtually zero inflation environment some of our other markets.
Whether it's in Brazil, or Turkey, or some of these evolving markets. We've had success in <unk>.
These costs through so we're we're looking that model and using it in our more traditional areas on a go forward basis, when you think about energy or or anything else. We can derisk. Our quotes on that's one thing we have done to move the economics into it when you think about what Swamy is talking about we're talking specifically pulling in them with raw.
Data factual a good portion of the cost that's not just our utility build those are surcharges coming to suppliers and some of those suppliers are directed supplier. So we are going through with Fox with data fully transparent and have any discussion with them.
And Mike if you remember we spoke earlier, it's an industry issue, it's not a magnesium and we've had more success when it's more of a broad industry issue.
Okay.
That's good information and then finally, just in terms of what Youre thinking about it from a technology investment standpoint, you've shown appetite to invest in some early technology ventures over time I'm. Just wondering is there anything on the battery side battery materials battery.
<unk> technology I know.
You produced the battery trays, but.
Is there any appetite for you to step in and get involved in the battery in any significant way.
So I think the.
I guess, the appetite or our direction and investing in some other technologies.
Always being very.
Thoughtful we have a roadmap in terms of where our technology.
Sit today, and how we see them evolving given how their vehicle of the future. It is evolving.
So it's really around the talked through how we're doing what we do.
And we are following that process on the specific topic on the batteries.
I think as we sit back and look at it from a system perspective, as you said, we make the battery enclosures, but there is enough Tac rich.
Gives us.
The front row seat to understanding how the terminal management has done how the controls and affirm our battery management perspective, if you look at our LPG joint venture what we do there in terms of the onboard Chargers.
And so on and so forth I think from that perspective, we are.
Focused on figuring out.
Where can we play a role in the ecosystem.
But I would say.
Sales at the cell level is not something that we are currently looking at.
Okay. Thanks for taking the questions.
Thank you that was our final question I will turn the call back over to Tommy <unk> for any closing remarks.
Thanks, everyone for listening and we are obviously still facing a challenging industry environment.
We remain focused on working with our customers to address cost inflation and equally important here.
Focused on addressing our underperforming operations. Thank you enjoy the rest of your day.
Thank you. This does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your lines. Thank you and have a good day.
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