Q3 2022 Magna International Inc Earnings Call

November 4, 2022

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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.

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Thanks, Tina Hello, everyone and welcome to our conference call covering our Q3 'twenty two results. Joining me today are so when we go to Gary Vince can Liffey in Pat Mccann.

[music].

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 result.

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.

Okay.

Thank you Louis good morning to everyone.

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 at that time. If you have a question. Please press the one followed by.

Happy to be here to provide a general update on magna as well as our Q3 results.

Key takeaways from today's call, we continued 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.

The four on your telephone.

But any time during the conference you need to reach the operator, Please press star zero.

Excluding the disappointing performance at certain facilities, which impacted our third quarter.

As a reminder, this conference is being recorded Friday November 4th 2022.

And it's contributing 200 used outlook our results were in line with our expectations.

It is now my pleasure to turn the conference over to Louis Tonelli, Vice President Investor Relations. Please go ahead.

We expect another sequential improvement of earnings in Q4, including as a result of our efforts to secure cost recoveries from customers and.

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.

And we have reduced our sales and margin outlook for 2022, mainly reflecting increased operating inefficiencies and lower production assumptions.

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.

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.

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.

We continue to experience supply constraints in particular semiconductors improvement in the second half of 2022 is not as much as expected at this point.

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.

Anticipate some ongoing.

Schedule 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.

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.

Continue to make progress in customer recoveries and our discussions with customers continue.

Thank you Louis good morning to everyone.

Happy to be here to provide a general update on magna as well as our Q3 results.

Relative to our previous outlook, we expect only a modest increase in our net input costs for 2022.

Key takeaways from today's call, we 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.

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.

Excluding the disappointing performance at certain facilities, which impacted our third quarter and is contributing 200 used outlook. Our results were in line with our expectations.

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.

We expect another sequential improvement of earnings in Q4, including as a result of our efforts to secure cost recoveries from customers.

And global Auto forecasters continue to expect increased light vehicle production in the coming years.

And we have reduced our sales and margin outlook for 2022, mainly reflecting increased operating inefficiencies and lower production assumptions.

Now turning to our third quarter earnings.

Relative to the third quarter of 2021.

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.

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% weighted growth over market.

Let me briefly cover the current dynamics impacting the industry.

We continued to experience supply constraints in particular semiconductors.

This outgrowth includes the impacts of continuing customer recoveries.

<unk> in the second half of 2022 is not as much as expected at this point.

EBIT margin increased 190 basis points to four 8%.

Anticipate some ongoing.

Increased vehicle production was the largest positive factor higher net input cost was the most significant offsetting factor in Q3.

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.

Our EBIT margin improved year over year in every operating segment.

We continue to make progress in customer recoveries.

Our adjusted EPS rose, 91% to $1 seven for the quarter.

Discussions with customers continue.

Relative to our previous outlook, we expect only a modest increase in our net input costs for 2022 <unk>.

And our use of free cash flow was $210 million in Q3.

The stronger U S dollar relative to other currencies in which we operate particularly the euro continues to negatively impact our reported results.

During the quarter, we repurchased three 1 million shares using $180 million in cash.

And paid out another $125 million to shareholders in the form of dividends.

And there remains risk going forward that high inflation and rising interest rates will impact auto consumers.

I can take you through the details of our revised 22 outlook later, let.

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.

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.

And global Auto forecasters continue to expect increased light vehicle production in the coming years.

Okay.

We are experiencing a higher level of operating and efficiency.

Now turning to our third quarter earnings.

Relative to the third quarter of 2021.

A few facilities.

The EBIT impact from these operating inefficiencies is about 15 basis points.

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 based.

The most significant is the B S 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.

This outgrowth includes the impacts of continuing customer recoveries.

Our lower volume assumptions in North America, and Europe resulted in lower sales.

EBIT margin increased 190 basis points to four 8%.

And relative to our last outlook, we are seeing more disruption cost from production schedule changes.

Increased vehicle production was the largest positive factor higher net input costs, what the most significant offsetting factor in Q3.

These are partially offset by contribution on higher sales in China.

Together, the volume sales and scheduled volatility impact is approximately 10 basis points.

Our EBIT margin improved year over year in every operating segment.

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 cost, which is essentially the impact of lower sales of cut steel and aluminum compared to our previous outlook.

Our adjusted EPS rose, 91% to $1 seven for the quarter.

And our use of free cash flow was $210 million in Q3.

During the quarter, we reaped.

The result of lower market prices.

Purchased three 1 million shares using $180 million in cash.

Despite bringing our outlook down we still expect improved sequential earnings in Q4 relative to Q3, mainly reflecting lower net input cost, partially offset by higher engineering expense.

And paid out another $125 million to shareholders in the form of dividends.

Happy to take you through the details.

Mid 'twenty two outlook later, let me take you through the broad strokes.

While we are tackling short term industry challenges, we continued to take steps in our go forward strategy.

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%.

Leveraging magnus 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.

Mainly related to three factors.

We are experiencing a higher level of operating efficiency.

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.

Few facilities.

EBIT impact from Dis operating inefficiencies is about 15 basis points.

The most significant is the B S facility that we 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.

Yeah.

In the area of powertrain electrification, we're launching hybrid dct's forced Atlantis.

Our lower volume assumptions in North America, and Europe , resulting in lower sales and.

Starting with Jeep and Fiat models.

And relative to our last outlook, we are seeing more disruption cost from production schedule changes.

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.

These are partially offset by contribution on higher sales in China.

Together, the volume sales and scheduled volatility impact is approximately 10 basis points.

To date, we have been awarded hybrid DCT business with three global Oems.

Lastly, there has been some movement in a couple of areas of our net input cost, but overall, we're expecting about $20 million and higher costs, which is essentially the impact of lower sales of cut steel and aluminum compared to our previous outlook as result of lower market prices.

BMW Mercedes and still anticipate.

Earlier this year, we broke ground in our LPG 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.

Despite bringing our outlook down we still expect improved sequential earnings in Q4 relative to Q3, mainly reflecting lower net input cost, partially offset by higher engineering expense.

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 di adjustments. During the staffing process were also awarded an automotive news pace pilot innovation to watch.

While we are tackling short term industry challenges, we continued to take steps in our go forward strategy.

We are leveraging magnetics 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.

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For a better performing aluminum die cast alloy use for structural applications.

The innovation provides both a lower cost and lower carbon footprint.

Our recent <unk>.

This award recognized our efforts to drive innovation and technological advancements across Magna and.

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.

Very proud of our continued success here.

Dan I'll pass the call over to Pat Thanks.

And through both our collaboration with Kotkin and our own internally developed robots, we had addressing last mile delivery.

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.

In the area of powertrain electrification, we're launching hybrid dct's forced Atlantis.

Our consolidated sales were $9 3 billion up 17% from the third quarter of 2021.

Starting with Jeep and Fiat models.

Our agreement also includes additional future hybrid models for Europe .

On an organic basis, our sales increased 27% year over year, representing a 3% weighted growth over market in the quarter.

Our scalable hybrid technology is an important step in helping our customers elect to find their fleet to improve fuel efficiency and performance and to meet regulatory requirements.

The increase was primarily due to higher global vehicle production higher assembly volumes, the launch of new programs and price increases to recover certain higher input costs.

To date, we have been awarded hybrid DCT business with three global Oems.

BMW Mercedes and still anticipate.

These were partially offset by the negative impact of foreign currency translation lower sales in Russia and customer price concessions.

Earlier this year, we broke ground in our LNG joint venture on a new facility in Mexico that will supply in orders Motors and onboard Chargers. This is an important step in our ability to support our customers' powertrain electrification plants in North America.

Adjusted EBIT was $441 million and adjusted EBIT margin increased 190 basis points to four 8%, which compares to two 9% in Q3 2021.

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.

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.

Also awarded an automotive news pace pilot innovation to watch.

For a better performing aluminum die cast alloy use towards structural applications.

These are partially offset by higher net input costs.

Operating inefficiencies at our facility in Europe .

Innovation provides both a lower cost and lower carbon footprint.

Higher launch and net warranty costs and reduced earnings on lower sales at facilities in Russia.

These awards recognize our efforts to drive innovation and technological advancements across Magna and.

Equity income was down $7 million year over year to $27 million in the quarter.

Very proud of our continued success here.

The decline reflects higher net input costs at certain equity accounted entities.

That I'll pass the call over to Pat.

Thanks, Swamy and good morning, everyone.

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.

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 adjusted effective income tax rate came in at 25, 5%.

Our consolidated sales were $9 3 billion up 17% from the third quarter of 2021.

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.

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.

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.

These were partially offset by the negative impact of foreign currency translation lower sales in Russia and customer price concessions.

Diluted EPS was $1 seven compared to 56 last year.

Adjusted EBIT was $441 million and adjusted EBIT margin increased 190 basis points to four 8%, which compares to two 9% in Q3 2021.

Foreign exchange reduced our EPS by about 8%, sorry, <unk> <unk> per share.

I will now review, our cash flows and investment activities during.

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.

<unk> hundred $25 million increase in investments other assets and intangibles and $25 million for our investment in <unk> mobility.

These are partially offset by higher net input costs.

Operating inefficiencies at a facility in Europe .

Higher launch and net warranty costs and reduced earnings on lower sales at facilities in Russia.

Overall, we used $210 million of free cash flow in Q3.

We also repurchased 100 any million of our common shares and paid $125 million in dividends.

Equity income was down $7 million year over year at $27 million in the quarter.

The decline reflects higher net input costs at certain equity accounted entities.

At the end of the third quarter, our adjusted debt to adjusted EBITDA was 139, and our liquidity remains strong at $4 6 billion, including $1 billion in cash.

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%.

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.

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.

We assume exchange rates in our outlook will approximate recent rates.

Net income attributable to Magna was $308 million up $138 million compared to Q3 2021.

Given recent currency moves we now expect a weaker euro Canadian dollar and RMB for 2022 relative to our previous outlook.

Reflecting higher EBIT and lower interest expense, partially offset by the higher income tax rate.

We have reduced and narrowed our expected ranges for segment and consolidated sales largely reflecting lower volumes and the strengthening of the U S. Dollar in particular relative to the euro.

Diluted EPS was $1 seven compared to 56 last year.

Foreign exchange reduced our EPS by about 8%, sorry, <unk> <unk> per share.

Has swampy indicated earlier, we've reduced and narrowed our EBIT.

I will now review, our cash flows and investment activities.

Margin expectations.

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.

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.

Investment activities in the quarter included $364 million for fixed assets.

Our expectation for net income attributable to Magna has been reduced and narrowed largely to reflect lower sales and lower adjusted EBIT margin.

<unk> hundred $25 million increase in investments other assets and intangibles and $25 million for our investment in new mobility.

And we lowered our expectations for capital spending this year.

Overall, we used $210 million of free cash flow in Q3.

Lastly, we reduced our free cash flow protections to the range of $400 million to $600 million.

We also repurchased $180 million of our common shares and paid $125 million in dividends.

This mainly reflects expected lower earnings and higher working capital, partially offset by lower capital spending.

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.

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.

Next I will cover our outlook.

We are now assuming remain above normal levels through the end of 2022.

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.

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 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 anticipate further sequential earnings improvement in the fourth quarter.

We continue to focus on making improvements in our underperforming operations, managing our costs and obtaining customer recoveries to help address the current challenges.

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.

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.

As Swamy indicated earlier, we've reduced and narrowed our EBIT.

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Margin expectations.

We now expect a margin range of four 8% to 5% compared to 5%.

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To five 4% previously.

We slightly raised and narrowed our equity income expectations.

One moment please for our first question.

Our expectation for net income attributable to Magna has been reduced and narrowed largely to reflect lower sales and lower adjusted EBIT margin.

The first question comes from John Murphy Bank of America. Please go ahead.

Good morning, Good morning, guys. Just a first question on the implied guidance for the fourth quarter I think it would be the midpoint of the range and the revenue is like $9 6 billion in the.

We lowered our expectations for capital spending this year.

Lastly, we reduced our free cash flow projections to the range of $400 million to $600 million.

Adjusted EBIT is about $5 50 so.

This mainly reflects expected lower earnings and higher working capital, partially offset by lower capital spending.

Our March improvement sequentially from the third quarter.

And a pretty significant improvement in profitability I, just wonder what the key factors are sequentially.

With respect to higher working capital, we have been carrying increased levels of safety stock given ongoing supply chain volatility we.

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 revenues at the mid point. So it implies sort of some big incrementals as well.

We had expected that declined 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.

Good morning, John .

Thanks, Thanks for the question so looking from Q3 to Q4.

In summary, our third quarter results were improved over both last year and last quarter, Although we had expected a little bit better.

We provide a range if you will.

Look at the midpoint, I think roughly where youre looking.

That math makes sense Big picture when we look at sales, we're seeing an increased volumes from Q3 into Q4, but we're also expecting higher recoveries as we progress through the year.

We anticipate further sequential earnings improvement in the fourth quarter.

We continue to focus on making improvements in our underperforming operations, managing our costs and obtaining customer recoveries to help address the current challenges.

A good portion of that is booked through revenues as well and then the offset against that would be foreign exchange headwinds on translation.

And we are making ongoing progress in our go forward strategy.

On the margin side.

As you look at our progression of customer recoveries in our input costs on a net basis, we're expecting improvements in Q4 relative to Q3 and then there are 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 <unk>.

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<unk> John .

Okay. That's helpful. And then just a second question.

One moment please for our first question.

Commercial sediment seem like they are.

Yes.

The first question comes from John Murphy Bank of America. Please go ahead.

<unk> materials, certainly in the third quarter and in the fourth quarter.

Good morning, Good morning, guys. Just a first question on the implied guidance for the fourth quarter I think it would be.

Can you kind of alluded to we're really detail, whether they are relative to cost inflation or relative to.

The midpoint of the range in the revenue was $9 6 billion and the.

Some of the cost that youre incurring from volatility and schedules of the automakers seem to be playing ball with and.

Adjusted EBIT is about $5 50 so.

And how we should think about those go forward. So maybe third quarter actual what youre 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.

Our March improvement.

From the third quarter.

And a pretty significant improvement in profitability I was wondering what the key factors are sequentially.

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 midpoint. So it implies sort of some big incrementals as well.

Yeah.

We are breaking out our commercial recoveries John .

Speaking specific lead not a boat customer recoveries related to input costs or production volatility that's reflected in our R. R $5 65, or $5 70 number that we've been guiding previously.

Good morning, John .

Thanks, Thanks for the question.

So looking from Q3 to Q4.

When we talk about commercial recoveries. This is normal course recoveries that we would have every month I would say so there is ups and downs that just happened this quarter.

We provide a range if you look at the midpoint I think roughly where youre looking.

Yes.

That makes sense Big picture when we look at sales, we're seeing increased volumes from Q3 into Q4, but we're also expecting higher recoveries as we progress through the year.

They tended to go in our favor, but it covers areas such as tooling launch.

Our production schedules.

Program cancellations. So there is a whole list laundry list of issues that go into that category and they bounce around from quarter to quarter.

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.

Like we said in the discussions that they just went in our favor this quarter, but.

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 there are 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 dry.

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 this 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.

John .

Okay. That's helpful. And then just a second question.

Sediment seem like they are reasonably material certainly in the third quarter and in the fourth quarter.

I mean, how consequential do you think this will be a 2023 or is it something that will get worked out early in 2023, and you'll be back to pretty lean just in time.

Can you kind of alluded to we're really detail, whether theyre relative to cost inflation or relative to you.

Inventory levels.

Some of the cost that youre incurring from volatility and schedules of the automakers seem to be playing ball with us.

Good morning, John Great question, I think one of the.

Big impacts that we have is due to a bad start stop and.

Because of trying to keep their continuity to the customers, obviously extreme 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.

Yeah.

When we're breaking out our commercial recoveries John .

Speaking specific lead not about customer recoveries related to input costs their production volatility that's reflected in our R. R 565, or 570 number that we have been guided previously.

Hum.

Appropriate dose 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.

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.

Down to the tier and I think is going to decline.

How stable can production releases be and not just a relief, but being able to stick to the release I think is going to make a difference I believe it's going to start improving but to.

They tended to go in our favor, but it covers areas such as tooling launch.

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.

Production schedules.

Program cancellation, so there's a whole list laundry list of issues that go into that category and they bounce around from quarter to quarter.

I'm sorry, just finally, 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.

Like we said in the discussions that they just went in our favor this quarter, but.

Guidepost you could look to.

We don't forecast those in our numbers.

So John I think typically if you would ask me that question I am not giving you a hard hard question, Yes, no no no it's fine.

Okay and then just lastly, just wondering philosophically there used to be buffer stocks in the automotive value chain that used to sit on <unk> as finished goods. That's now been worked down pretty dramatically.

If you had asked a question about two or three years ago, you would have said.

<unk> had a decent view into 13 to 15 breaks out right we get released.

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.

<unk> from the customer, 30% to 15 weeks out but.

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.

The issue has been the releases don't materialize when you come through it right. The parts are not picked up or something changes and so on and so forth that has been the issue so get the relief and hopefully there'll be it fixed I think is what we are hoping for starting next year.

Inventory levels.

Good morning, John Great question, I think one of the <unk>.

Big impacts that we have is due to a big start stop.

Okay. Thank you very much guys.

And because of trying to keep the continuity to the customers.

Thank you. The next question comes from Adam Jonas Morgan Stanley . Please go ahead.

Given the extreme metrics within our plants and having this buffer stocks.

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 the system. Just something you kind of have an idea of whats.

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.

Just look at it.

Whats in the bathtub and what could come out over time my.

The production versus the slack timber value stream.

My first question.

Down to the tier and I think has garnered Victor mine.

Okay.

How stable can production releases be and not just for <unk>, but being able to stick to the release I think it's going to make a difference I believe it's going to start improving but to.

Can you.

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 and little bit in part of it is due to the.

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.

Buffers that we have been talking about.

Hi.

I think it's difficult to quantify exactly maybe we can look at.

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.

Year to year.

At this point.

I mean youre not a guidepost you can look to.

I would.

I won't be very accurate item to quantify exactly how much of that working capital is due to buffer versus other things.

So John I think typically if you had asked me a question I am not going to be.

Our question, Yes, no no no it's fine.

I would attribute most of the change to the normal average working capital that we have versus what we are seeing now definitely to the to the buffers and the safety stock.

If you had asked a question about two or three years ago right for you what I've said.

<unk> had a decent view into 13% to 15 breaks out right we get it released.

And Adam if I could just sorry, just getting some data and we didn't hear your question but.

Releases from the customer turning 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 changes 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.

<unk>.

When we look at the that the working capital Swamy talked and there's a couple of buckets to it. So the safety stock that swamy was referring to specifically and when we look at that quarter. If we look.

You look at our average inventory turns where we expect things to be that number's, probably in the 200 million type range.

Year.

Okay. Thank you very much guys.

When you, but the other piece.

Thank you. The next question comes from Adam Jonas Morgan Stanley . Please go ahead.

It's driving working capital higher than expectations, when we get to year end is really when you look at the <unk>.

The industry works, our working capital our receivables are pretty automatic once they get into the system. If they get paid per per the oem's tncs. The one area, where we can get slippage, where we're realizing it is the timing of <unk> approval and your collections on tooling. So that's also driving some of the the higher receivables we see at year.

What's in the bathtub and what could come out over time.

The first question.

And 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.

Can you.

Yes, Adam I think.

When you look at the working capital, it's a bunch of things obviously right.

That's really helpful color just as a follow up.

And it changes from quarter to quarter, and mitigate and part of it is.

Heading into a global downturn, where in some form of global downturn already in <unk>.

This buffers that we have been talking about.

As a supplier you felt it on the production scheduled for four years, you've already been in a downturn them anyway. So.

Hi.

I think it's difficult to quantify exactly maybe we can look at.

Are you seeing any signs right now that your OEM customers might.

Year to year.

It might be cutting back on some of the science projects focusing on more of the proven moneymakers like internal combustion.

At this point.

I would.

I won't be very accurate item to quantify exactly how much of that working capital is due to buffers versus other things.

Argument can be made that when everyone's generating all time high margins and moneys free that you can kind of launch on this the big ESG campaigns in the expensive stuff and sell lossmaking, Evs avs and all that and maybe that posture changes into a downturn I don't know if youre seeing any indication of that yet.

I would attribute most of the change to the normal average working capital that we have versus what we are seeing now definitely to the to the buffers and the safety stock.

On a forward look for customers.

And Adam if I could just sorry, just getting some data we didn't hear your question but.

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.

<unk>.

When we look at the working capital Swamy talked and there's a couple of buckets to it. So the safety stock that swamy was referring to specifically and when we look at that quarter, we look.

And we've always talked about what is the sustainable plan when I say that long term plan.

If you look at our average inventory turns where we expect things to be that number's, probably in the 200 million type range.

Taking into account.

The transition of the product from where we are for the next 10 years we.

When you, but the other piece.

We haven't significantly changed our CMA change.

That is driving working capital higher than expectations, when we get to year end as well.

In terms of their portfolio or program management.

I think when you look at that.

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 oem's tncs. The one area, where we can get slippage, where we're realizing it is the timing of your Pee Pap approval and your collections on tooling. So that's also driving some of the the higher receivables.

And obviously be.

Have an internal view also as we work on different call it platform or product lines.

NSS rental.

Rethink right for the next 510 years.

But I Wouldnt say there has been a drastic shift on any of the.

At year end so.

If you think about the inventory $200 million up safety stock in that range and then the balance would be primarily related to timing of toolkit collections.

Customer viewpoints.

<unk>.

Have various discussions today.

Thanks Rami.

Thank you.

That's really helpful color just as a follow up.

The next question comes from Peter Sklar of BMO capital markets. Please go ahead.

We're heading into a global downturn, where in some former global downturn already in <unk>.

Hi, good morning, Pat.

As a supplier you felt it on the production scheduled for four years, you've already been in a downturn them anyway. So.

Pat.

Hum.

I'm just a little confused on what the net impact is.

Are you seeing any signs right now that your OEM customers.

Not normal course commercial recoveries, but all of these extraordinary infer.

Might be cutting back on some of the science projects focusing on more of the proven moneymakers like internal combustion I mean argument can be made that when everyone's generating all time high margins and moneys free that you can kind of launch on this the big ESG campaigns in the expense stuff and sell lossmaking, Evs avs and all that.

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.

Our posture changes into a downturn I don't know if youre seeing any indication of that yet.

Commercial recoveries that you benefited from in Q3 as you negotiated reimbursement for those extraordinary costs. So net net a positive or negative I'm, just trying to figure out where youre at.

On a forward look.

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.

Good morning, Peter let.

Let me try.

Cleared up so when you're thinking about.

And we've always talked about what is the sustainable plan when I say that long term plan.

So forget about the commercial piece, if we're talking specifically about our 565, we've talked about historically.

Taking into account.

We would have guided in the range of about 200 basis points in Q1 in 200 basis points in Q2.

The transition of the product from where we are for the next 10 years, we haven't significantly changed are seeing a change.

When we got into Q3, the number is coming down and the impact the headwind year over year would be in the range of about 180 basis points and that's primarily as we.

In terms of their portfolio or program management.

And obviously we.

Our launch year from last year was a little bit elevated but we're also our recoveries were back ended so when you when you work through the math basically we're looking as we move into Q4 with a minimal amount of.

We have an internal view also as we work on different.

Platform, so our product lines.

NSS for inter quarter rethink right for the next 510 years.

Put cost headwinds on a year over year basis Peter.

But I Wouldnt say there has been a drastic shift on any of the <unk>.

Okay and then just.

Customer viewpoints as we.

The 180 basis points since Youre talking about the 565.

Previous discussions today.

Number that's elevated costs less recoveries correct.

Thanks Rami.

Everything on a net basis Thats correct Peter.

Thank you.

Okay.

The next question comes from Peter Sklar of BMO capital markets. Please go ahead.

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.

Hi, good morning.

Pat.

I'm just a little confused on what.

The net impact is.

If the German government was required to ration industry.

Not normal course commercial.

Commercial recoveries, but all of these extraordinary inflate.

Sure.

How do you think that would play out do you think that they would curtail production of the auto industry in Germany.

Inflationary impacts youre feeling on.

Energy rents et cetera. So.

Yes, I think.

What is the impact in Q3, and what is the impact in Q4, when you look at that elevated level versus the.

As you can imagine Peter this is a little bit more societal even just the industry in <unk>.

<unk>.

At least from the information that we see the match against stocks seem to be ahead.

The commercial recoveries that you benefited from in Q3 as you negotiated reimbursement for those extraordinary costs is it net net a positive or negative I'm, just trying to figure out where youre at.

To that normal years.

But do you have to see the harshness of the winter.

The rest of the staff.

Good morning, Peter.

Brady.

Let me try.

From our conversation.

Cleared up so when you're thinking about.

The industry in general is talking to the policymakers too.

So forget about the commercial piece, if we're talking specifically about our 565, we've talked about historically.

Safeguard as much as possible, but that is something to be seen.

We would have guided in the range of about 200 basis points in Q1 in 200 basis points in Q2.

It's no different than any supply shortage. It only takes one component right and the entire supply chain to stop record production.

When we got into Q3, the number is coming down and the impact the headwind year over year would be in the range of about 180 basis points and that's primarily as we.

I think we are a part of all of these conversations with Oems and comments makers to stay at the table to understand it.

Our launch year from last year is a little bit elevated but we're also our recoveries were back ended so when you when you work through the math basically we're looking as we move into Q4 with a minimal amount of.

Yeah.

Other than being better.

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 to vixen possible.

Input cost headwinds on a year over year basis Peter.

Okay. Thanks, and just my last question.

Okay and then just.

The 180 basis points since you talked about the $5 65.

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.

Number that's elevated costs less recoveries correct.

Everything on a net basis Thats correct Peter.

Okay.

Next question.

The loss of $27 million in the quarter.

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.

I think you touched on it last quarter, but do you mind reviewing.

<unk> plants in Europe , that's occurring most of the loss what it does and what the issue is there.

If the German government was required to ration industry.

Yes, Peter I think.

Sure.

Correction patent I think it's 15 basis points right.

How do you think that would play out do you think that they would curtail production of the auto industry in Germany.

And Youre right Peter most part of it is in one facility as we mentioned in Europe .

Yes, I think.

As you can imagine Peter this is a little bit more societal even just the industry in.

If you just.

<unk>.

To step back and look at it.

At least from the information that we see the matched against stocks seem to be ahead.

We had a capacity constrained there was a.

Does it change any bit of a change in the program kind of great group.

To that normal gears.

But do you have to see the harshness of the winter.

Put the facility over the cliff.

In terms of the capacity constraints and therefore have to do some outsourcing of parts both through internal Magna divisions and external as you can imagine when you're shipping parts.

The rest of the staff.

Great.

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.

There is premium associated with it and that is what.

It's no different than any supply shortage. It only takes one component and the entire supply chain to stop break in production.

Of course, the issue that we're talking about.

The issues have definitely been identified and there is action plan in place.

I think we are part of all of these conversations with Oems and policy makers to stay at the table to understand it.

Clearly.

As you can imagine to rebalance that capacity.

Sure.

Other than being <unk>.

We'll reduce the premium costs it takes time.

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 to VIX and possible.

So the plan is in place we understand the issue now is just a matter of executing to that end.

Bringing back capacity in an orderly way and reduce premium costs I think that's that's.

Okay. Thanks, and just my last question.

That's what I meant when I talked about <unk>.

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.

Reducing losses, and improving run rates going forward.

Okay. Thank you for your comments.

Yes.

The loss of $27 million in the quarter.

Thank you. The next question comes from Chris Mcnally Evercore. Please go ahead.

I think you touched on it last quarter, but do you mind reviewing.

Thanks, So much team. So just a quick one because I think the comments around Q4 were pretty important so.

<unk> plants in Europe .

Most of the loss what it does and what the issue is there.

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.

Yes, Peter I think.

Just a correction I think it's 15 basis points right.

And Youre right Peter most part of it is in one facility as we mentioned in Europe .

The comments.

Where that Q4 would almost be be neutral.

If you just.

Does that mean that theres, a chance that maybe by the first half of the year given the normal pace of that the conversation that we could have a tailwind.

Set back and look at it.

We had a capacity constrained there was a.

It change any bit of a change in the program kind of great group.

From this noncommercial recovery inflationary bucket.

Put the facility over the cliff.

In terms of the capacity constraints and therefore had to do some outsourcing of parts both through internal Magna divisions and external as you can imagine when you're shipping parts.

Good morning, Chris.

So your math is bang on when.

When you look at 200 200.

160 brings us to two.

There is premium associated with it and that is what.

The 560, all in so there's a little bit of leakage year over year, when we get into Q4.

<unk> cost the issue that we are talking about.

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.

The issues have definitely been identified and there is action plan in place.

Clearly.

As you can imagine to rebalance the capacity.

Each will reduce the premium costs it takes time.

So the plan is in place we understand the issue.

If you 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.

It's a matter of executing to that end.

Bringing back capacity in an orderly way and reduce premium costs I think thats.

What I meant when I talked about.

Reducing losses, and improving run rates going forward.

When I don't think we're going to have a tailwind on labor pressure I think labor is a sticky type of scenario and we're going to work on automation projects and bringing efficiencies into the plants to team to negate those cost headwinds when you think about the other bucket primarily energy where it is.

Okay. Thank you for your comments.

Okay.

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.

Really going to be dependent on what swamy talked about earlier, whether it's rationing or one off thats 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 how 'twenty three shakes out and then on top of all that what we can recover as far as.

In the old framework I think of the $560 million. It was 400 on an absolute basis in first half 160 implied in the second half I think.

The comments.

Where that Q4 would almost be be neutral.

Customer expectations.

Does that mean that there is a chance that maybe by the first half of the year given the normal pace of that the conversation that we could have a tailwind.

Sorry for the long haul.

No.

That's very helpful and then maybe.

Second on.

On fire and a lot of interesting things going on in and obviously auto tackling in 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 to this.

This noncommercial recovery inflationary bucket.

Good morning, Chris.

So your math is bang on.

When you look at 200 200.

160 brings us.

To the 560, all in so there's 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.

<unk> take a little bit of a margin hit as as you.

Launched the program with them just remind us how costs are shared and then a bigger picture Swamy, sorry, I always ask this but it sounds like there.

The potential for a bigger move inspiring in North America. It makes even more sense with with everything domestic for IRA. So just any updates that you can share there on fire.

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.

So I think from my perspective, the North American footprint.

We've always said that I think the answers Tim domains.

If there is a appropriate business case, we have radio com.

The footprint in North America.

We're going to have a tailwind on labor for sure I think labor is a sticky type of scenario and we're going to work.

<unk>, obviously various discussions on that topic can that continue as we have always said we remained very disciplined to say it has to make sense in the long run.

Automation projects and bringing efficiencies into the plants to team to negate those cost headwinds when you think about the other bucket primarily energy.

On the other part honestly I don't think it's right on our part to talk about cadence of.

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 how 'twenty three shakes out and then on top of all that what we can recover as far as.

Launches and so on we would leave that to the customer.

Let them talk to it.

We have some new launches that we do with various customers, we don't comment on it and we would.

It would be not in the right place for us to talk about.

Customer expectations.

Sorry for the long term.

Customer cadence and launch here.

No.

That's very helpful and then maybe second on.

And it's one we forget about this specific case.

On fire and a lot of interesting things going on in and obviously auto tech and 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.

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.

Stier take a little bit of a margin hit as as you.

<unk> launched the program with them just remind us how costs are shared and then a bigger picture Swamy, sorry, I always ask this but it sounds like there is.

<unk>.

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.

The potential for a bigger move inspiring in North America. It makes even more sense with with everything domestic for IRA. So just any update that you can share there on fire.

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.

Yeah.

So I think from my perspective, the North American footprint.

Now the launch various puts and takes.

From one quarter to other depending on customers and programs.

We've always said that and I think the answer is to implement.

It's very 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.

If there is a appropriate business case, we are ready to open.

For the footprint in North America.

There is obviously previous discussions on that topic can be continue as we've always said, we remained very disciplined to say.

To make sense in the long run.

No much appreciate it thanks, so much team.

On the other part honestly I don't think it's right on our part to talk about cadence of.

Thank you.

The next question comes from Joseph Spak RBC Cm. Please go ahead.

<unk> launches and so on we would leave that to the customer.

Thanks, Good morning, everyone.

Let them talk to it.

Maybe.

Just I know I think to John's first question, you talked a little bit about some of the.

We have so many launches that we do with various customers. We don't comment on it then we would.

The factors here for the first quarter, if we single and specifically on NBS in power and vision, where it seems like there is some some.

It would be not in the right place for us to talk about.

Customer cadence and launch here.

Larger quarter over quarter margin assumptions into 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.

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 if I can.

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.

Think about BMW, historically, where aspire margins would get.

I would say that obviously the it depends very much on the <unk>.

Robert.

Joe.

Ramp curve and the launch and it differs from customer to customer.

I'll have to look at that sequentially. It don't have a good handle on what looking at it by by segment I think.

How they get their milestones.

He is going to drive that but usually we.

Okay. Thank you.

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.

Excuse me sorry, Joe when you look at a couple of the big items. If you are focusing on Q3. There is we did have the unusual warranty charge and the <unk> group, which will.

The maturity and so on and so forth.

It's obviously, it's a onetime in nature.

That is what Pat talked about.

One of 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.

How the launch biggest puts and takes.

From one quarter to other depending on customers and programs.

It's very difficult to say it is a one particular cadence every time during our launch.

They're heavy industrial groups.

We see in some cases.

Another piece of it.

<unk>.

More some cases I think it just speaks to the plant 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.

So those are the two big off top my head.

Okay issues, but as Lewis said, we have the detail, which is tough to put it into.

Tight package for us.

Yes.

No much appreciate it thanks, so much team.

Follow up on.

We could take a follow up I guess.

You know.

Thank you.

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.

The next question comes from Joseph Spak RBC Cm. Please go ahead.

Okay.

Thanks, Good morning, everyone.

Maybe.

Current spot that could be like.

Just I know I think to John's first question, you talked a little bit about some of the.

Maybe like a 1 billion 3 billion four 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.

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 we ask you sort of talked about right some of the.

And my recollection Joe.

From past about a one cent change in euro.

S dollar is about $150 million annually. So it is pretty significant.

$10 less significant but its probably $60 million per one cent change so depending what assumptions, you're making there that I am going to be pretty big yes.

Robert.

Okay.

Joe.

I'll have to look at that sequentially.

And then Joel.

Sequentially I don't have a good handle on what looking at it by segment I think.

Yeah, sorry, John the second part of your question Youre correct is primarily translation impact.

Hum.

We do have a mature foreign exchange hedging process.

Okay.

Excuse me sorry, Joe when you look at a couple of the big items. If you focus in on Q3. There is that we did have the unusual warranty charge and the <unk> group, which will.

<unk>, which negates the majority of the transactional impacts.

Okay, and Swamy I guess, just very big picture I know you don't update the 'twenty four targets you have but.

It's obviously, it's a onetime in nature. So that's one of 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.

At a very high level and no one has a crystal ball on production I just wanted 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 sort of the key driver to sort of sensitize, what we should assume for.

They're heavy industrial groups.

That's another piece of it and.

So those are the two big off top my head.

Issues, but as Lewis said, we have the detail, which is tough to put it into.

24 margin targets.

Tight package for us.

So.

Yes, we can get a follow up on.

Joe I think it's a good question I think if you just fundamentally look at our operations and our plan I would say, it's really strong.

We could take a follow up I guess.

You know.

Maybe just one quick one you pointed to.

<unk>, obviously, we could all sort of see that on our screens I mean, it seems like.

Like you said the key things one is volume and in my previous comments I did mention is also.

Current spot that could be like.

Equally important is the inefficiencies that are cost due to this tax stop in production.

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.

I wish that those from an operational perspective.

<unk>.

To be very transparent we have to address the underperformance that I talked about.

Other than that if you look at the foundational type thing.

And my recollection Joe.

From past about a one cent change in Euro U S. Dollar is about $150 million annually. So it is pretty significant.

Feel pretty pretty good.

Their 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.

<unk> use less significant but its probably $60 million for onetime change so depending what assumptions youre, making there can be a pretty big yes.

In short I think if the extraneous events are.

Okay.

And then Joel.

Not volatile.

Yes, sorry, John the second part of your question you are correct its primarily translation impact.

And I'm not changing significantly then I would say.

The margins that we have talked about.

We do have a mature foreign exchange hedging process.

Our very reachable.

<unk>, which negates the majority of the transactional impacts.

So there is not an underlying that put a question mark.

Okay, and Swamy I guess, just very big picture I know you don't update the 'twenty four targets you have but.

We feel pretty confident but we got to address all this market condition that we are going through right now.

At a very high level and no one has a crystal ball on production I just want to really understand.

Thanks for that I appreciate it.

Thank you.

The next question comes from Colin Langan of Wells Fargo. Please go ahead.

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.

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, it's I talked about 4%.

24 margin targets.

And you're talking about global Singapore.

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 strong.

Yes, just overall global Q4, what your 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.

Like you said the key things here, one is volume and in my previous comments I did mention is also.

It's I think it's pretty much in line with maybe even a little conservative at IHS that's.

Equally important is the inefficiencies that are cost due to this tax stop in production.

That's where we are.

Full year globally.

Okay Alright.

And if I look at the Q4 sort of implied rate margins sort of jumped to like a $5 seven ish at the midpoint.

I would say those from an operational perspective.

<unk>.

To be very transparent we have to address the underperformance that I talked about.

Should we think about is that the right launch sort of rate as we look into 2023.

Other than that if you look at the foundational part type thing.

Or are there some seasonality or any maybe retroactive recoveries.

Still 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.

Are impacting that sort of exit range.

Yes, I think all of the above apply column like I said earlier, we're really in the middle of.

In short I think if the extraneous events are.

Our budget cycle here that we're kicking off.

<unk>.

Not volatile.

We are going to come to the market in February with our Q4 results given that guidance.

And I'm not changing significantly then I would say.

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.

The margins that we have talked about.

Very reachable.

So there is not an underlying that put a question mark.

Okay, and just lastly, any retroactive recoveries in the Q3 and Q4 results that we should be thinking about.

We feel pretty confident.

You've got to address all this market condition that we are going through right now.

Thanks for that I appreciate it.

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.

Thank you.

The next question comes from Colin Langan of Wells Fargo. Please go ahead.

Oh, great. Thanks for taking my questions.

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 have that detail.

I mean, you talked about a 4%.

Can you talk about global Singapore.

Yes, just overall global Q4, what youre kind of baseline of.

Okay, alright, thanks for taking my questions.

Well I can tell you what it is so our assumption for the full year so year over year is about plus two.

Thank you.

As a reminder, via the phone lines you May press Star one.

Which I think it's pretty much in line with maybe even a little conservative LTE Hs.

That's where we are.

Full year globally.

Our next question comes from Michael Glen with Raymond James. Please go ahead.

Okay Alright.

Hey, Thanks for taking my question I, just wanted to dig into the Europe energy.

And if I look at the Q4 sort of implied rate margins sort of jumped to like a $5 seven ish at the midpoint.

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.

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.

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.

Are impacting that sort of exit rate.

Yes, I think all of the above apply collyn 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.

At the spot market.

For natural gas, how we should think about that translating are impacting our results.

Would it be fair for us to give a number at this point because we're really trying to zero in on where we're going to land.

Maybe I'll start then 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.

Okay, and just lastly, any retroactive recoveries in the Q3 and Q4 results, we should be thinking about.

Obviously, we can.

The discussions with the OEM are.

I think they understand the issue.

As we have some of these discussions.

Benefit in the second half of the year part of it was just.

You can get into the details obviously.

The year over year impact on the cost side of it but the other piece of it is.

The granularity of the discussions in each case.

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 got that detail.

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.

Lochinvar secure supply related to that so it's not.

Okay, alright, thanks for taking my questions.

Not looking at the 30 day forward curve in our numbers and moving up and down the majority of what Swamy talked to both 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.

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.

And it spiked in Q3 for a short period of time and if you look at the curves today, they're they're back down to March levels. So I think the market's really bouncing around but we're tracking it and managing it with the customers.

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.

So at this point would you say then that energy is now largely on pass through with customers is that now been embedded into it.

In Europe .

Youre arrangements.

I think when.

So part of this.

I think we are in a situation where in our main markets. We've operated in a virtually zero inflation environment some of our other markets.

At the spot market.

For natural gas, how we should think about that translating are impacting our results.

Whether it's in Brazil, or Turkey, or some of these evolving markets. We've had success in <unk>.

And maybe I'll set that you can add.

Pass 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 year 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.

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 or I.

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 facts with data fully transparent and have any discussion with them.

I think they understand the issue.

As we have some of these discussions.

We can get into the details obviously, but.

The granularity of the discussions in each case.

I would say that's the key point that.

And I think the other thing.

And Mike if you remember when 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.

Mike you have to think through as well as we do have hedging on energy to protect.

Lochinvar 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 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.

Okay. That's good.

That information and then finally, just in terms of what Youre thinking about it from a technology.

Acknowledged.

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 technology I know Youre you produced the battery trays, but.

It spiked in Q3 for a short period of time and if you look at the curves today, they're they're back down to March levels. So I think the market's really bouncing around but we're tracking it and managing it with the customers.

Is there any appetite for you to step in and get involved in the battery in any significant way.

So at this point would you say then that energy is now largely on pass through with customers does that now been embedded into.

So I think the.

I guess, the appetite or our direction and investing in some other technologies.

Your your arrangements.

I think when.

So part of this.

<unk> been very.

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.

Thoughtful we have a roadmap in terms of where our technology.

Sit today, and how we see them evolving given.

Whether it's in Brazil, or Turkey, or some of these evolving markets we've had success.

The vehicle of the future it is evolving.

So it's really around the talk through how we're doing what we do.

Passing 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 year 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.

And we are following that process on the specific topic from 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 pack rich give.

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 empty 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.

And Mike if you remember when we spoke earlier, it's an industry issue, it's not a magnesia and we've had more success when it's more of a broad industry issue.

Focused on figuring out.

Dave can really play a role in the ecosystem.

But I would say.

Sales at the same level is not something that we are currently looking at.

Okay.

That's that 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 overtime I'm. Just wondering is there anything on the battery side, a battery materials battery.

Okay. Thanks for taking the questions.

Thank you that was our final question I will turn the call back over to <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 peer.

<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.

<unk> focused on addressing our underperforming operations. Thank you enjoy the rest of your day.

So I think the.

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.

I guess, the appetite or our direction and investing in some other technologies.

<unk> always been very.

Thoughtful we have a roadmap in terms of where our technology.

Sit today, and how we see them evolving given how the 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 give.

Gives us.

They're a 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.

It can really play a role in the ecosystem.

But I would say.

Sal said the talent level is not something that we are currently looking at.

Okay.

For taking the questions.

Thank you that was our final question and I'll turn the call back over to <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 peer.

<unk> 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.

Tom.

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Q3 2022 Magna International Inc Earnings Call

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