Q1 2023 Magna International Inc Earnings Call
And then jumping standby your conference call began shortly we thank you for your patience with me on a lot of your call will begin soon.
[music].
Yeah.
Greetings and welcome to the Q1 'twenty two 'twenty three results call.
The presentation all participants are in a listen only mode. Afterwards, we'll conduct a question and answer session.
At that time, if you have a question. Please press the one with a four on your telephone.
The conference you need to reach an operator, you may press the star, but as you know.
I was reminded today's call is being recorded Friday may six.
2023.
Electric trip cost over now to Louis Tonelli VP Investor Relations. Please go right ahead.
Thanks, Tommy Hello, everyone and welcome to our conference call covering our first quarter 2023.
With me today are swamy coding, Gary and Pat Mccann.
Just yesterday, our board of directors met and approved our financial results for the first quarter of 'twenty three we issued a press release this morning outlining our results.
You'll find the press release today's conference call webcast. The slide presentation to go along with the call and our updated quarterly financial review all of the Investor Relations section of our website at Magna Dot com.
Before we get started just as a reminder, the discussion today may contain forward looking information or forward looking statements within the meaning of applicable securities legislation.
Such statements involve certain risks assumptions and uncertainties, which may cause the company's actual or future results and performance to be materially different from those expressed or implied in these statements.
Please refer to today's press release for a complete description of our safe Harbor disclaimer.
Please also refer to as a reminder, slide included in our presentation that relates to our commentary today and with that I'll pass the call over to Swamy.
Thank you Louis and good morning to everyone.
I appreciate you joining our call today, and let me jump right yet.
There are some notable takeaways to highlight before getting into some of the details.
Organic sales grew by 15% outperforming weighted production by 8% driven by growth across our portfolio.
Our strong Q1 operating performance reflects strong earnings on higher organic sales.
We are raising the lower end or adjust.
Adjusted EBIT outlook by 60 basis points based on the strength of these results and targeted actions to reduce expenses and optimize our cost structure.
We have highly focused on executing our strategy and remain confident in our ability to meet our long term growth and margin outlook.
Given our sales growth I'll say about $8 billion in the next three years.
Particularly on new program launches, we are investing in the business and expect capex to sales ratio to normalize by 2025.
Our capex outlook is unchanged for 2023.
In the quarter, we issued $1 6 billion of debt to finance, our pending acquisition of.
Active safety and we plan to be back in our target leverage range by the end of 2024.
And our successful debt offering was done while maintaining our investment grade rating and strong investor interest despite a challenging market environment for debt issuance in Q1.
As you all know our global economy continued to experience some interlocking challenges.
Clothing higher inflation rising interest rates geopolitical risks and slowing economic growth, which continued to have an impact on our industry.
We have remained focused on driving operational improvements working with our customers to recover inflationary costs and executing on our strategy to deliver long term value.
Yeah.
Let me share some.
Some of these specific operational improvements and where we have intensified our actions, giving us confidence in achieving not only this year's outlook, but our plans beyond 2023.
We have undertaken a number of actions to mitigate the short and midterm macroeconomic pressure we are facing include.
Including the consolidation and restructuring of some corporate functions manufacturing footprint optimization and repricing of some programs that are underperforming our expectations.
At the same time, we have and continue to intensify actions that are core to our daily business, including automation activities.
In fact about 15% additional productivity has been identified including a possible 120 automation installations over and above the planned 70.
All to be completed within the year.
Additionally, our corporate enterprise wide global purchasing initiative that started last year is helping grid use direct component pricing freight optimization and overall supplier management among others.
We are starting to see traction here.
And finally smart factory initiatives with a digital ecosystem implementation, which include leading indicators analytics and higher levels of automation all aimed at achieving higher productivity levels are all well underway.
We expect these initiatives to help us achieve our 'twenty to 'twenty three outlook and will be key to expanding long term margins.
Now looking at our sales and megatrend areas that are increasing part of our plan.
For these product areas were just under $1 billion combined last year.
And I would expect it to roughly double to just under $2 billion. This year.
Double again by 2025 and be up to $7 billion by 2027.
These products have a sales CAGR of 50% in the period from 2022 through 2027.
The pending acquisition of <unk> is expected to add meaningful growth on top of that.
As the sales growth continues a roughly $900 million engineering spending in these areas is expected to be relatively flat over our outlook period.
Given that these product areas are reaching an inflection point and we are beginning to leverage our engineering spend to the point, where we expect these businesses to be profitable by 2025.
We recently announced a few key product wins contributing to our growth in these areas, including clear view vision systems on the Ram 2500, 3500 heavy duty models.
Battery enclosures business on General Motors, EV pickups, and Suvs and E drive systems for our Europe based global premium OEM just to name a few.
Yes.
We are expecting overall growth for magna off around $8 billion from 'twenty to 'twenty, two 'twenty to 'twenty five.
This is partially driven by the record business awards, we achieved in 'twenty twos, which were at 30% about our five year average.
This high growth cycle is driving the near term capital investment.
Capex to sales ratio is expected to decline to historical levels of low to mid fours by 2025.
Just as a reference point, we exceeded a 5% threshold during other periods of growth in 2016 and 17.
More than a $1 billion off our expected capital investment over the next three years, including about $500 million. This year alone is to build on our strong position in battery enclosures and market position that we believe we can maintain over the long term and generate strong growth.
Loans from investments across multiple program life cycles.
And it's important to point out that we continue to win business across our core product areas as well, including seed complete assemblies on Gm's EV pickup trucks at Orient Assembly.
Engineering and complete vehicle Assembly for El Ninos, Automotives off road, EV and smart access power door systems on a periodic program.
Lastly, before I pass the call over to Pat reflected and our ongoing commitment to operational excellence is the recognition we received from our customers.
<unk> Magna received more than 100 launch and quality awards from various global automakers around the world each year.
Most recently general Motors recognized Magna with a total of eight awards seven supplier of the year Awards and one Overdrive Award we were one of only two suppliers to win both awards and the only supplier to win six or more in a given year and we have done it for three.
Consecutive years with that I'll pass the call over to Pat.
Thanks, Swamy and good morning, everyone.
As Swamy indicated we delivered strong first quarter results coming in ahead of our expectations.
Now comparing the first quarter of 2023 to the first quarter of 2022.
Consolidated sales were $10 7 billion up 11% compared to a 3% increase in global light vehicle production.
EBIT was $437 million.
While EBIT declined 120 basis points to four 1%. It was up 40 basis points from the fourth quarter of 2022.
Adjusted EPS came in at $1 11 down 13% year over year in part due to a lower tax rate last year.
And free cash flow used in the quarter was $279 million compared to 99 million in the first quarter of 2022.
In part, reflecting higher capital spending to support our strong growth.
During the quarter, we paid dividends of $132 million.
And we are raising our sales outlook as well as the low end of our EBIT margin range. Let me take you through some of the detail.
North American light vehicle production was up 8% Europe was up 7% while production in China declined 5%, netting a 3% increase in global production.
Our consolidated sales were $10 7 billion up 11% over the first quarter of 2022 on.
On an organic basis, our sales increased 15% year over year from an 8% growth over market in the first quarter.
Or 5% growth over market, excluding complete vehicles.
The increase was primarily due to higher global vehicle production and complete vehicle Assembly volumes, the launch of new programs and price increases to recover certain higher input costs.
These were partially offset by the impact of foreign currency translation lower sales due to the substantial idling of our operations in Russia.
Net divestitures and normal course customer price give backs.
Adjusted EBIT was $437 million and adjusted EBIT margin was four 1% compared to five 3% in Q1 2022.
The lower EBIT percent in the quarter reflects.
About 80 basis points of nonrecurring items.
Most significant of which relates to lower net favorable commercial items and a warranty accrual.
About 70 basis points of operational items, including inefficiencies at our <unk> facility in Europe , which we highlight at the beginning of Q2 of last year, which impacted us by about 40 basis points in Q1.
And higher program related engineering spend and launch costs.
Partially offset by productivity and efficiency improvements at certain facilities.
In addition, higher net input cost impacted us by about 60 basis points.
These items were partially offset by earnings on higher sales and higher equity income.
Interest expense declined slightly reflecting a make whole payment made last year to early redeem debt as well as increased interest income earned due to higher current rates.
Our adjusted income tax rate came in at 21, 6% largely in line with our 2023 expectations, but higher than Q1 of last year.
Net income attributable to Magna was $319 million compared to $383 million in Q1 2020 to.
Reflecting lower EBIT and higher tax rate, partially offset by lower interest expense and minority interest.
Adjusted diluted EPS was $1 11, compared to $1 28 last year.
The decrease was the result of lower net income partially offset by fewer shares outstanding.
The reduced number of shares outstanding primarily reflects the impact of share repurchases during or subsequent to Q1 of 2022.
Okay.
Turning to a review of our cash flows and investment activities.
In the first quarter of 2023, we generated 568 million in cash from operations before changes in working capital, while we invested $341 million and working capital.
Investment activities in the quarter included $424 million for fixed assets and a $101 million increase in investments other assets and intangibles.
The 424 million and Capex was higher than $238 million in Q1 of last year due to additional investments we are making in our business to support growth.
Overall, we used free cash flow of $279 million in Q1.
We also paid 132 million in dividends in the quarter.
Our balance sheet continues to be strong at the end of Q1, we had $5 9 billion in liquidity, including over $2 4 billion in cash.
We completed several debt transactions. This past quarter. This debt will be used primarily to fund the acquisition of pioneer active safety, our capital spending program, including an megatrend areas and to refinance our euro debt set to mature this year.
Currently our adjusted debt to adjusted EBITDA is 219 times.
Excluding cash we're holding to pay down our euro debt our ratio is two times.
As Swamy said earlier, we anticipate a return to our target leverage ratio of one to one five times by the end of next year.
Next I will cover our updated outlook, which incorporates slightly higher than expected vehicle production in both North America and Europe .
As a result of better production in Q1.
Our assumption for production in China is unchanged from our previous outlook.
We also assume exchange rates in our outlook will approximate recent rates.
We now expect a stronger euro and slightly lower Canadian dollar for 2023 relative to our previous outlook.
Yeah.
We are increasing our expected sales range, largely reflecting the higher north American and European production in Q1, as well as the higher euro.
We are increasing the bottom end of our adjusted EBIT margin range. We are now at four 7% to five 1%.
Swamy indicated the increase reflects our better than expected Q1 and actions undertaken to reduce expenses and optimize our cost structure.
Partially offset by an increase in launch related spending for 2023.
As a result of increasing the ranges for our sales and the low end of adjusted EBIT margin. We're also raising our range for net income attributable to Magna.
And our interest expense equity income tax rate capital spending and free cash flow expectations are all unchanged from our last outlook.
Yeah.
Okay.
In summary, we had a strong operating performance in the first quarter.
Once again, we outgrew our end markets by 8% on a consolidated basis and 5% excluding complete vehicles.
We're taking additional steps to reduce our expenses optimize our cost structure and improved margins.
As a result of our strong Q1 and incremental cost optimization actions, we are raising the low end of our EBIT margin outlook expectations for the year.
We are determined to deliver on our outlook, but recognize there is plenty of work ahead, particularly with respect to input cost recoveries from our customers.
We're laser focused on execution.
Finally, we expect to close to be in your active safety transaction in the second quarter and remained highly focused on the integration of this business.
Thank you for your attention and we'll be happy to answer your questions.
Thank you very much.
Once again, if you'd like to register your question. Please press the one by the four on your telephone.
Tom proud technology request. If a question has been asked I like to draw your registration and that's the one for battery.
One moment please for our first question.
Okay.
And we'll get to our first question on the life from John Murphy with Bank of America right ahead.
Good morning, guys.
I just wanted to touch on on slide 10, and battery enclosures specifically.
As we look at this you were talking about having a battering closers for all Gm's EV EV trucks I'm, just curious could that go beyond trucks to the to the Altium platform more broadly and then also should we be thinking about this battery enclosure business on the truck specifically or maybe even more widely similar to what you did on the <unk>.
Reform frames for GM back in.
90, 899, changeover and that may be somewhat of a similar opportunity to be sole source and have a very large bill.
<unk> business with great returns.
Yes.
Swamy.
I think you kind of hit on some of the key points.
Our closures business is a product line that is not restricted to Suvs and trucks.
That's where we have a lot of the attraction right now but should be after cable product.
B B.
That has a different versions of the battery in Tokyo strike and any material.
The key is that we are excited about in this product line is the existing product process and asset base that we have and the capabilities. So.
Different bills, a different processing technology that we're able to bring and do what's right for the product. So we actually see proliferation of <unk>.
This product line.
Across a N.
And to your second point.
If you just look at the investment that we are making breakthrough data can be frame business in the mid to late nineties.
We see this as multiple program lives.
Once we have the investment in place.
Mental rig tons in margins, because we actually see this as a multi lifecycle.
It works going forward.
With the expertise that we have.
That's helpful. And then second question on the short term here on schedules it sounds like things normalize quite a bit in the first quarter and continue to do so in the second quarter and hopefully for the remainder of the year how much of an impact did that have in the quarter.
And you're improving the margin sequentially because it seemed like a lot changed year from the fourth quarter and the fourth quarter was still plagued with a lot of uncertainty and volatility and schedules.
How big a deal to that play in the quarter sequentially and how should we think about that going forward.
Good morning, John It's part when you look at the schedule of volatility.
We've been guiding that.
We expect improvements as we progress throughout the year, we did still we're still experiencing some volatility as we come through from Q4 to Q1, the improvements worked where we hope they would be so we're still seeing some volatility in our schedules.
But what we've seen more recently in April we are starting to see some some subtly.
So I think maybe to add.
You said, we continue to see that while they're collecting because you've taken a lot of initiatives internally.
And also some collaborative discussions with the customers to have a little bit more visibility.
Beyond the normal time, even looking into February and March we saw a lot of stock stops.
But better communication as an example, with some customers we did not run on <unk> are working together.
And figuring out how to minimize some of the inefficiency that could cost based on stops, but moving from March to April we have seen.
Writing to see a little bit of improvement, but you know looking forward to that stability Jonathan.
Okay, and then just lastly, higher input costs on the raw side, but then labor energy and logistics I'm just curious Pat as you think about the <unk> as we work through the year, you're talking about recoveries in commercial settlements take to get some of these costs back.
Should we think about the buckets of raws, particularly on steel labor energy and logistics and how successful do you think youre going to be on a sort of a net or gross and maybe net basis.
What we've seen right now what we're projecting for the year Jon related to the various buckets.
From when we started the year, we've seen energy curves on a go forward basis come off.
We've had strong success honeck sheet recovery so.
The pull through into our margin improvement.
100% just on the reductions we've also we've talked in the past as well as we do have some hedging programs related to energy to secure supply and partial hedges. When you look at the steel piece steel is up relative to our expectations in February .
A lot of the steel when you get to this point of the year, John has already purchased and locked in for Paul.
Full year, so a lot of the benefit.
They hit on that's not flowing through at the flip side is we actually see a benefit on scrap steel, which is repriced most of the month. So we do have when you look at our outlook, we do have a benefit of about $20 million.
From our previous 50 of scrap headwinds. So we're down to 30 and then on the labor we haven't really seen much of a change on labor assumptions because those rates are locked in at the beginning of the year.
But the ability to get recovery on labor.
At this point I mean with me with the automaker customers I mean, how are you seeing there are you able to go to them and say, hey, listen we're getting more labor inflation potentially logistics inflation and can you get recoveries or do you feel like youre at the level of steel right now where it's locked in for the year and into 2020 for a discussion.
It's not locked and John the discussions continue not just even for 'twenty three 'twenty four but back into 'twenty. Two as you know, we always offset normal.
Normal inflation with productivity improvements and so on but.
They call it they have normal inflation that we had either in Mexico or in Europe , where based on that particular contract shows we were looking at seven 5% to 9% in some areas wage inflation. So we are in discussions with many customers on call it above normal.
But it's not as discrete as to say this is labor. This is commodity we are.
Holistically and looking at it to say.
You know this has been on long haul. This is where we are including some of the inefficiencies that are caused by the customers on these stocks stop so a lot of.
Tough discussions, but I would say constructive making.
Making progress in the first quarter and hope to make more.
I caught some of the ongoing recoveries in beyond the first quarter.
Okay. That's helpful. Thank you guys.
Thanks Tommy.
Thank you Christie with our next question on the line.
Adam Jonas with Morgan Stanley go right ahead.
Hey, Swamy, Hey, Pat So I just wanted you to comment.
On the changing environment. It just seems like from the last name.
End of last year to now there's been a really pretty sharp change in supply and demand in evs like really narrative changing I mean, you've got Tesla, who seem to be willing to run the business at a loss potentially and kind of a really signs of an over saturated market in.
In China I'm, just wondering from your lens do you think that.
Business as usual.
And expected or or do you think that the narrative shift is significant enough for something to change.
And in your strategy over the next two or three years, how nimble are you staying and I have a follow up.
Okay.
Hum.
To stay nimble or we don't survive in this industry.
We always tapped into our product strategy of how do you get as Marty Levine as capable as possible.
Even in the perspective of manufacturing processes. The same thing applies right. How do you have a scalable modules. How do you planned lines in such a way that you can have some amount of flex. It obviously does not have a finite amount of flexibility to volumes and some of it is the terms that you have with the customers and told them. So.
Volume take rates than what you put in fixed assets in dedicated assets sports as you know being able to move from one to the other.
Just generally in terms of the products. We were very focused on what we think we can address and how do we address you on TV or not.
You know EV drive platform, we look at let's say here is the low the mid tiers plus do we address the entire.
Market in all segments not really.
We are looking at the platform before we take the business and risk adjusted to the volumes that are being assumed and in some cases there are platform sphere.
Have both origins right as an example in our transformation and DCD is we have the <unk> and the hybrid and they can drive.
So there is some amount of hedge there doesn't work through an all platform. So all the products.
Yes, it's a lot of moving pieces, but.
We continue to look at that I wouldn't say, we are perfect and there is no risk.
Okay and then my follow up is just specifically on the on the Chinese Oems, particularly the more aggressive ones in the export market [noise] BYD and Gili.
It seems there's a director from Beijing for the Chinese Domestics to go forth right.
I believe you.
Senior member you recommended up a book of about 12013th century.
Events that also kind of maybe.
He seems seemed relevant in terms of just how the industry is evolving swamy.
Tell us what your exposure is are you adequately proportionately contents on those.
More aggressively expanding EV Chinese names does that or does that represent a potential.
See global C. P V atrophy for you. Thanks.
I don't think there is an atrophy at this point as I looked at the business. We have I would say it'd be more indexed in North America and Europe is the primary market, Adam, but we do have presence with.
With the global Oems in China, but also.
You know the Chinese Oems in China as examples of big ones that you mentioned and BYD Julianne others.
Aye.
Could not comment with full conviction, whether its I would say it's a.
At normal content growing with them I don't know whether it would be equal to the average that we have in Europe or North America.
<unk>.
But I think we're there with Postbank right, we are very focused on.
Manufacturing for the Oems locally and not just moving things from one region to the other producing and one going to be either second one I think we just look at the region.
The platform at the OEM and the program itself in terms of risk adjustment too.
Put hurdles on our financials before we go through it.
That framework is pretty.
Pretty much applies to all programs equity okay.
Yeah.
Thanks Swamy.
Thank you very much.
Well go to our next question on the line from Peter Sklar with BMO capital markets go right ahead.
Good morning.
Looking at the vehicle Assembly segments dire.
It seem to perform well during the quarter both in terms of revenues.
And margins in the profits you generated there.
Can you just talk a little bit about the context of what's going on because I believe the BMW X five was ramping down and the Fisker Ocean was ramping up.
And there was the possibility you might have had quite a bit of.
Disruption at the facility during the quarter, which was negatively impacted results. So can you just talk a little bit how things are unfolding at steier.
Okay.
Yeah, Good morning, Peter.
So.
I think.
We were really satisfied with our star performance in Q1, what we did see was volumes come in above expectations for the quarter and the mix on that as volume increases were positive.
Just one point of clarification that vehicle that is ending and Shire is the BMW five series not the X five and that's OK ramping down and then Q3 Q4 of this year. So it's still running at this point in time, we did have sales outperformance and Shire.
In the quarter, but also we're still seeing some strength in the back half of the year.
They did have some engineering margins come through as they settled some contracts related to the accounting.
But those are the big factors driving that and then there is still focused on on turning over the plant and ramping hard as they come up in the back half of the year.
And what is the Fisker ocean ramping up.
Correct.
Sorry.
When Pat in the second half as the five series ramps down.
Correct.
When you go to the launch.
See a heavy ramp as we as we move on forward from this point, but it'll it'll be the timing.
Okay.
Pat on another question on as I recall on the fourth quarter Conference call management indicated that you expected Q1 results to be weaker than Q4, but we got the opposite where Q1 results were actually stronger than Q4. So can you talk about.
What what changed in the business since you know since since you initially provided that viewpoint for a weaker Q1.
Yes, I think.
First and foremost it was volume so if you look at volume expectations or our.
Patients were relatively in line with IHS and when you look at that.
Approximately 300 330000 units up from from those expectations. So our sales were higher.
Than we had expected to be up strongly at strong pull through on those sales and we say strong pull through it's a lot of things that it's it's easy to say, you're just helped pull through but there's a whole bunch of operational excellence you need to have those pollsters come in at a strong margin and we really execute it that in the first quarter.
That was really the big driver.
And.
When you look at it.
Drop from Q4 to Q1, the expectation was and it didnt exist was the customer recoveries are going to be back half of the year.
<unk> incurred so if you look last year Q4, we had strong recoveries in Q1, we're tracking we're pushing hard we've had really good traction in agreements already but its definitely below the Q4 level.
But in long term expectations.
Formed.
Okay, and then just lastly on the.
The body exteriors plants in Europe , where you've been having the difficulties.
Okay.
I believe its financial performance has gotten worse quarter over quarter. I think you said on this call negatively impacted margins by 40 basis points in.
Correct me, if I'm wrong, but I think you said for Q4 had a negative impact of 25 basis points. So can you just kind of summarize.
What's going on at that plant and what the outlook is for improvement.
Alright, good morning, Peter asked Swamy.
The last time I communicated the planned performance is going to be eliminating all losses by end of 2024.
We are on track for that just a little bit of a clarification when we talked about.
The performance of what Pat was doing is comparing to.
Q1 'twenty two.
This quarter 23 comparison.
And as I said the real.
Issue started in the second quarter of 'twenty two so therefore, it looks worse in comparison to that Carter, but if you look at the.
Progress as we have indicated there is a little bit of puts and takes here and there, but we are on track.
For 2023, and getting to eliminating losses by 2024, So I would say we are in good shape.
Yeah.
Okay. Good good to hear that's all I have thank you.
Thanks Peter.
Thank you very much we'll get to your next question on the line is from Tom Narayan with RBC go right ahead.
Hi, Yeah. Thanks, guys I had a follow up actually on the last question on complete vehicle.
Yes, I understand the strength in the quarter, but curious I guess why you are guiding for the margins to come down I guess for the for the remainder of the year, where there were there specific things or maybe even in that segment that benefited that are isolated in Q1.
Well.
Yeah.
When we look at the guide from as we exited 22 coming into three Peter touched on a couple of them number one what we are expecting a big changeover that facility. So what youre seeing is the X parts and I'm seeing the five series is coming to an end and then we're in the middle of.
<unk> are ramping up the.
The the Fisker and so a couple of things what's happening as you get closer to a launch of a vehicle.
Youre launch costs and your cost incurred increased significantly.
Disproportionately I would say as you get closer to Sop. That's one two is you're just missing contribution margin. While that's five series and there was a gap in production three when you had 2022 we had.
Some licensing income related to them.
Platform sales or licensees on certain technology, we had that amortization is an accounting issues coming to an end.
And then finally, we had strong.
Engineering.
Margins in 2022, and then finally, we have energy headwinds and labor headwinds in the business for 23. So those are the five or six big buckets driving the guide down for 'twenty three.
Okay. Thanks, and then maybe a kind of similar to that power and vision.
Youre guiding for that too.
To up shift in the and then the remainder of the year just curious as to maybe what's what's behind that.
Yes.
Yeah. So when you look at the.
Really what what's happening that is we're seeing some sales growth in the back back half of the year related to.
Year over year, we're seeing sorry, not back half of the year year over year, we're seeing strength in what we're seeing in this product, particularly as we up ticket.
Is some of the.
So sorry lost my train of thought there, we're seeing strong pull through on some of the sales.
Flipside to that is it.
The down as we came into 'twenty three once we do have engineering spend in that product area related to those some new technologies that we're launching that to drive but this group is really benefiting from a lot of the operational excellence activities that Swamy was talking about previously and we expect to execute those as we go into.
Therein.
During planned now they're being executed we're going to benefit from those.
Tom to be aware of we did have the warranty item in Q1 of this two.
2023, and those tend to be lumpy.
And when you look at our history, we're gonna run warranty between 125.
<unk>, it's probably going to normalize for the full year and that the traditional historical range. So that warranty drops off operational execution drives margins for the rest of the year.
I see Okay, and then lastly on the on the disclosures on <unk> just curious.
What kind of information, we'll get on on that you know profitability.
Profitability et cetera, or are we going to get that at a an earnings or how should we think about that that's something that a lot of folks are eagerly anticipating.
Alright, good morning.
B S.
<unk> mentioned.
We are in track to be able to close.
Mid year.
So it was our intent is to be able to give a revised 2023 outlook, including via an ear when we come to our next earnings call in August .
We are even contemplating a couple of weeks out.
After the earnings call.
To have a investor update where we can give you a little bit more color.
So that's where I think we can talk to you.
We've been talking about our Adas growth and programs and so on and so forth. They can give some more color on that once the closing is done.
In the earnings call followed you know a.
A couple of weeks later, when we can talk in Trimble.
Overall.
That's great I think that'll be really appreciate it. Thank you.
Okay.
Thank you very much we'll proceed with our next question on the line.
He told.
Kelly from Citi. Please go right ahead.
Great. Thank you. Good morning, everyone. Just two questions for me first for patent maybe you could just talk through how we should think about the cadence of total company margins the rest of the year as well as.
Fleet vehicle segment.
Swamy, maybe back to <unk> I was hoping you could just provide an update on kind of the overall booking environment the competitive environment and then any progress both on the imaging radar side and dropped the monitoring as well. Thank you.
Yes.
Morning, Eli.
Just as far as the.
The margin profile as we go through the year, but we're.
Our expectation from our outlook from February really hasn't changed our expectations is that as we progressed through the year, we expect to have margin expansion driven by.
We have sales we have launches getting behind us and then the customer recoveries and then as well what we have as you start to get scale on a lot of these automation and other optimization projects. So our view, we don't give quarterly guidance, but we expect.
Positive margin improvement as we go quarter to quarter.
In the case of Shire.
Youre going to have a lull and I don't want to get into too much detail, but just as we go through the quarter you have a lull again because of missing the contribution on sales and then launch costs as we as we get closer to fully ramping that vehicle.
And on the question of paid Us I think.
We talk about the CAGR over the business plan period, we continue to track that as we go through.
You know from a portfolio perspective, you know that digital radar, that's being launched or is launching in one of the programs. We continue to have conversations with.
Other customers towards trade activity going toward that.
That technology coming into production into more programs.
Yeah as I sit here and look at it we continue to track to plan that we put.
Put in place.
The planned period, so it would be.
B B retractor market, we continue to make.
<unk> made progress.
To hit the plan that they have in place.
Terrific that's very helpful. Thank you.
Thank you.
Next question on the line.
From Colin Langan with Wells Fargo go right ahead.
Oh, great. Thanks for taking my questions.
But I cant recall the original guidance I think it had about 150 of input headwinds it sounds like that's modestly improved to about 130.
You have the $70 million and the non recurrence of some warranty and provisions.
And I believe there was like a $170 million of sorts of non recurrence of favorable commercial settlements in the initial guide.
Can you just try to provide color on what are those settlements with sort of normal how are they trending in Q1 and are you still expecting sort of that year over year.
Track this year.
So I think.
Just to hit one by one to $1 50 that you're talking of course be inflation headwind that we talked about 50 of that was trapped related and as Pat mentioned.
We're looking at 15 to be 30, so it's a pickup of 'twenty.
Are the other 100 of course related to the incremental inflation had been say in 'twenty to 'twenty three.
And you know as I've talked we are looking at offsetting that or.
Turning to look at ways to mitigate that phase of operational improvements customer recoveries and hopefully the.
The trend of the energy and commodities and other things if they go in the right direction.
It helps us.
Reduce the risk of recovery.
And that's the reason for our increase in the lower end of margin.
You talked about the commercial settlements, they're really not information related for example, when an OEM changes to programs scope or shut down a plant those are the type of discussions and we have to get those recoveries and they cannot be.
Linearly predicted as you can imagine right. So we had some of those in the last year.
And.
Obviously cannot plan for such things this year and for the visibility that we had we said we don't see the same magnitude of commercial settlements this year.
Therefore, the variance is going to be.
The last year to this year the segments will be lesser and therefore, it has a negative impact overall.
Kind of I mean, this is sort of 170 of the right range of up to help last year that you're not expected to reoccur at the same kind of large when I was looking at the numbers.
Yes.
Doesn't change that much.
But versus Nielsen versus our outlook.
Okay got it.
Wanted to follow up and the disclosures. It says there's 450 of balance sheet explode exposure related to EV startups like this occur in Q1, it's actually up from about 400 in the annual report.
How should we think about this exposure over time and how are you thinking about counterparty risk with your sort of newer EV startups took millions I believe youre exploring adding capacity in North America.
Yeah.
Hum.
Good morning, Collyn, when we think about that.
We're tracking new entrants right. So that that exposure you talked about I should call it exposure our balance sheet amounts related to.
Two programs that we're launching with new entrants, it's it's a combination of working capital.
<unk> assets other assets that number grew in the first quarter and it's primarily us.
As you're investing for program launches that number will increase.
It's for tooling and engineering and a big portion of that is paid prior to launch so that number is going to bounce up and down just as we go throughout the year.
As far as when we think about Evs and doing work with them.
Swamy spoke earlier on Adam's question regarding Chinese new entrants when we look at them.
We think of the appropriate risk return investment returns for these programs, where obviously we have to have a business case, we have to have the appropriate commercial terms and at that point, we make a decision whether we invest or not but we're always cautious more so than with our true.
Additional customers that being said, we have a 450 on our balance sheet at about 20 billion asset base rates. So we're still close to 90% with eight customers. So that just for a little perspective as well.
And just to clarify even further Pat on the topic of our plans for North America, It's not trading plans. It is.
You know from a roadmap to say that we are open to look at footprint in North America, but we always said it has to be a multi life programs and risk adjusted and so on but just more openness rather than a save that we have a different plan.
Got it alright, thanks for taking my questions.
Thank you.
Okay.
And we'll proceed with our next question on the line from Dan Levy with Barclays Go right ahead.
Yes.
Hi, good.
Good morning, Thank you for taking questions.
I know you discussed that.
Some of the piece of disruptions.
As lightning.
Maybe you can give us a sense of what type of incremental margins, we should be expecting as the pace of disruption continues to.
Dissipate.
Then maybe you said disruptions in watch sorry, I didn't get catch toward production disruptions.
Okay, Yeah, the production disruptions.
Stop stop where we are.
The release and then it changes even better volume strike or the dates and so on and as you can imagine that.
It leads to a lot of inefficiency of planning craft labor and so on and so forth. So we've been working with the customers very collaboratively and they come back in.
Starting to give us longer visibility.
<unk> are finding a way to redo the production schedules as an example of it run them for our customers to be figured out a way not to work on weekends. So that there is no premium costs.
So a lot of that is internal initiatives for us to figure out how great. The best decade next shanties and we've been able to do that but still the customers are coming to the table to figure it out like I said give us better visibility and figure out a way to hit the volume. So we can do it without too much cost.
With that said.
We looked at the downtime hours in.
In February was not a whole lot better than what we saw in Q4.
But if you're going from March to April we are starting to see a little bit of it.
And our improvement and that's cost due to the semiconductors are you know some of it are a supply chain constraints.
And customers managing.
Their product lines and so on.
And in the type of incremental margins, we might accept or we might expect.
These pressures dissipate.
Good morning, Dan when you think about the margins, it's obviously going to vary by segments. So we usually give up more of a bottoms up type margin analysis I think when you go through those.
Historical pull throughs, our incrementals should be.
What we've seen historically the one caveat I would help those when you look at a lot of this growth is coming in where you do require new facilities youre not getting a pull pull through when you're going from two shifts to three in Europe soybean fixed costs. So you do have on.
Some of the new facilities or lower or.
Yeah.
Not necessarily contribution margin more of an EBIT margin pull through.
But again, thank you and then.
Look.
Okay.
Okay. Thank you and then just wanted to follow up on the prior commentary you gave on cost action.
And may be repricing in the contract what type of visibility you have you know what the magnitude of the benefit.
Might be.
And and just general tone and tenor.
How much low hanging fruit there is to improve.
Yeah.
And I wouldn't be able to categorize how much specifically how long the program very pricing. This is.
A hygiene issue is I would say going through operations and looking at everything with detail you know, we kind of looked at the management SG&A engineering consolidation restructuring plans we looked at.
Excellent ratings some of the restructuring activities that we already had in the plan and the outlook and how do we pull forward some of those things and as part of this process we have the terms.
Had there been looked at some of the or not some pretty much across to <unk>.
We see each other programs, where we had contractually a raise.
Ways to look at doing pricing right are programs that were not meeting our expectations in terms of profitability margin centered times.
We looked at that automation and a whole bunch of productivity improvements that are going through and that was the reason for us to talk about incremental margins going from 23 to 25 have you been able to pull forward some of those things.
Talked about the purchasing initiatives, we are looking at freight optimization.
<unk> looked at some analytics data working with our tier two suppliers. So it's a whole bunch of activities that are adding it's bits and bytes, but that's how you chip away.
There is not one.
Magic Wand that you know is contemplating a to a lump sum here, it's just grinding away at every detail.
And it's not a footprint issue correct, it's not an issue I would say in a place like Europe , where that will be lower.
Lower than capacity, you're not we're not talking about footprint actions necessarily correct.
No it's not a foundational footprint issue. It's just you know optimizing every anything that may have a rebalancing, but it's not a.
Foundational footprint issue at all.
Thank you.
Thank you very much. Our next question on the line is from Michael Glen with Raymond James Go right ahead.
Hey, good morning.
I wanted to circle back to something <unk> talked about earlier and as we think about these Oems launching these evs and they seem to be fairly aggressively targeting a path to breakeven.
These EV programs like to what degree and you're putting up capital to participate on these programs like to what degree are they going to be able to come back on you and.
Put additional pressure on you to help them in their in their motivations to reach breakeven is there any pricing risk.
Like how do you characterize the pricing risk in the leap program.
It's a normal course of action Michael we have already you know pricing discussions on productivity and give backs and so on and so forth.
Yes.
You can have the product and you know being able to bring value to them. That's how we get the products I mean, there's always going to make conversations.
But we are looking for what we have in our framework to meet the outer margin Andrew tons profile, just just like they are but we have all our stakeholders.
So I think it's going to be an ongoing discussion we have to look at bringing value with the product and process and the innovations that we have.
We don't see anything beyond that and we wouldn't know how to entertain that I mean, we have to do the business we have to right.
And Michael just for perspective. These are long term contracts, they're not subject annual repricing. It cuts both ways. So these are we're entering two with significant investments under long term contracts and most of our customers we have strategic relationships, it's not just a.
Tactical discussion.
A discussion, it's a long term and it spreads across so many product areas. So I think we do have an advantage there.
Okay, and then on the other side of this you have all of these legacy platforms.
That are facing.
Some some degree of volume decline structural volume decline over time, so how do you view what happens with margins in those programs.
We as we think out beyond 2025.
I think they have to look overall right. Some when you talk about programs there is a certain aspect which is.
The asset that is not dedicated to the program like a press or in extrusion and so on and so forth.
Are they machine center are in water, but if you look at the assembly lines that might be dedicated to a specific program and that's where we have to think.
And make judgments on how do you put the flexibility and so that we can use certain parts of assets and one horses together, we've always talked about as an example.
A large part of the assets and capital that we have in our transformation and all of them into a program to drive business.
So it applies to do the product and the E drive business not all of it but a significant partner. So we have to have the discipline to figure out when we put capital and how relevant is it going forward for the products for the car of the future.
Very thorough exercise that we go through.
Okay, and then just one more for me can you just.
Empowered vision there wasn't there was the.
<unk> of the the other charges were in that segment can you provide a better description of what the action was taken there on the restructuring.
I think the two charges that you might've seen one must be warranty reserve that Pat talked about and the other one will be.
Engineering spend that we had a couple of programs.
Right.
Yes.
And I think and Michael if you refer to the the actions taken regarding restructurings those were in the email space and it's really I would call. It. The two buckets. One is protein. So if you look at the restructuring we took in the.
The quarter some of it was you know.
We have some consolidations and we are adopting we're not.
Static we're looking at our our portfolio, we're looking out at par.
We further than our outlook period, and we're taking actions to consolidate our footprint become more efficient and then the other piece that came through was we did have internal restructuring that drove.
Costs related to our management rework and that's driving.
Further cost optimization that swamy had talked about earlier and the payback is with a strong payback.
Okay. Thank you.
Yeah.
Thank you very much Mr. Quite agree there are no further questions at this time I'm not trying to cut back to you for any closing remarks.
Thanks, Tom and thanks, everyone for listening in today.
Happy with our progress in the first quarter, but.
A lot of work ahead of US. This is just the beginning and we feel confident with our progress and in our long term strategy. Thanks have a great day.
Yes.
Thank you very much and that does conclude the conference call for today. We thank you for your participation and I say disconnect your lines Heska downwind.
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