Q2 2023 Magna International Inc Earnings Call

August 4, 2023

Please standby the conference will begin momentarily we thank you for your patience and I say you. Please remain on the line.

[music].

Okay.

Greetings and welcome to the Q2 2023 results conference call.

During the presentation, all participants will be in a listen only mode.

Afterwards, we will conduct a question and answer session.

At that time, if you have a question. Please press the one followed by the four on your telephone.

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

As a reminder, this conference is being recorded Friday August 4th 2023.

I would now like to turn the conference over to Louis Tonelli, Vice President Investor Relations. Please go ahead.

Thanks, Rita Hello, everyone and welcome to our conference call covering our second quarter 2023, joining.

Joining me today are swamy quota, Gary and Pat Mccann.

Yesterday, our board of directors met and approved our financial results for the second quarter of 'twenty, three as well as our 'twenty three outlook, our updated to 'twenty three outlook, 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 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 a reminder, slide included in the presentation deck.

Rates to our commentary today and with that I'll pass it over to swamp.

Thank you Louis good morning to everyone. I appreciate you joining our call today and I'm happy to kick off today's call with an update on our progress and following your financial update from Pat I look forward to answering your questions.

Before diving into the details let me walk you through some key highlights.

We successfully completed the acquisition of <unk> active.

Active safety during the second quarter solidifying our position as a global leader in active safety.

It is a lot of excitement and energy around Magna as a result of this acquisition.

Our organic sales grew by 17% year over year, surpassing weighted production by 5%, excluding complete vehicles and 3% including complete vehicles.

Our second quarter showcased strong Q2 operating performance with high organic sales contributing to robust earnings.

These results represented significant improvement, both year or year and compared to the first quarter of this year.

We have raised our 2023 sales.

Adjusted EBIT margin and adjusted net income outlook ranges for 2023.

This upward revision in our EBIT margin bridge demonstrates solid operating performance, even with the inclusion of <unk> active.

Active safety, which is launching significant new business over the next 18 months.

We are highly committed to executing our strategy and remain confident in our ability to achieve our long term growth and margin outlook.

And we continue to win business across all product data, which supports our go forward strategy.

It is important to note that the industry has seen some positive developments, including reduced supply constraints stronger and more stable production schedules and resilient auto sales and a number of markets.

The global economy continues to face some interlocking challenges, including continued elevated inflation higher interest rates geopolitical risks and slowing economic growth.

These challenges are impacting our entire industry.

In North America, there are concerns about upcoming OEM labor negotiations.

Contract expired in September , which may have short term impacts on production.

Rest assured efforts to contain costs and improve our margins remains a top priority for us.

This is being achieved through ongoing operational improvement initiatives.

Covering costs from our customers and executing flawless launches across magna.

Earlier this year, we estimated about $100 million.

Mental input costs net of recoveries for 2022.

Based on our initiatives together with improvements in market prices for energy and certain commodities, we now expect to mitigate about half of the incremental net input costs.

We also continued to take proactive measures in various other areas, we have executed already initiated consolidation restructuring and cost containment activities at different levels across the company.

We are engaged in ongoing commercial negotiations with our customers to recover cost transitioning to radius index programs.

And address pricing on challenging programs.

At the same time, we continued to intensify our efforts in areas that are core to our daily business <unk>.

Including hedging activities and our enterprise wide global purchasing initiative.

Automation installations, and smart factory initiatives with the digital ecosystem implementation are also well underway.

Lastly, I am pleased to report that our underperforming European <unk> facility is tracking to our expectations supported by a number of these initiatives.

All of these efforts are yielding positive results and enabling us to generate strong earnings on our sales growth and reinforcing our confidence in delivering on our expectations for margin expansion in the coming years.

In early June we successfully completed the <unk> active safety transaction and I would like to thank all of those involved for their efforts.

This transaction has expanded our active safety portfolio by incorporating complementary products customers and geographies engineering and software resources.

The response from both the acquired business and our existing active safety unit has been overwhelmingly positive.

There is a great deal of excitement surrounding the immense potential of the combined business.

The business is on track with the expectations as outlined when we announced the acquisition, including being neutral to earnings before purchase price amortization in 2024.

We hit the ground running and are fully dedicated to ensuring a smooth integration and realizing the $70 million in synergies identified at the outset.

We are excited to share more insights about our combined active safety business and to update our 2025 outlook to reflect the acquisition during the upcoming virtual investor event in early September .

We continue to execute our strategy aimed at accelerating our growth and megatrend areas.

<unk> recently.

The battery enclosure for Forbes next generation F 150, Lightning EV pickup truck to support this exciting new program, we are adding capacity in Tennessee.

This award further strengthens our competitive position in the rapidly growing market for Bachelor enclosures.

In powertrain electrification.

Actively supporting our customers with a combination of components and systems. We are proud to have recently won an award for our first to market modular stand alone decoupling unit for electric vehicles.

Unit contributes to an increase in electric drive range by up to 9%.

We have already begun launching this product on multiple vehicles of a German based premium OEM.

We recently announced a long term supply agreement with on semi.

This agreement allows magna to integrate silicon carbide based technology into our future E drive systems.

The advanced technology will enhance our ability to deliver better cleaning performance as well as faster acceleration and charging grades which contribute to improved efficiency and increased EV range.

These activities highlight our commitment to driving innovation and positioning ourselves as the leader in the rapidly evolving field of electric mobility.

Our success in winning business across all product lines continues to drive growth.

In addition to securing the contract for the battery enclosure. We were pleased to announce that we have also recently been awarded the frame and seats for the next generation F 150 lightning.

The seating awards represents yet another seat complete program for pickup trucks in North America. Following the previous seat awards for Gms pickup trucks to be produced at La Korea.

We were also recently awarded the replacement vehicle Assembly business for the iconic Mercedes Benz G Class. This award allows us to maintain our 40 plus year history ethics cruising producer of this off road vehicle.

We produced over 40 45000 G class vehicles in our Graz, Austria facility in 2022, bringing our lifetime total to over half a million.

The next generation G class is expected to launch in 2024 and continued to run towards the end of the decade.

And we've been awarded significant new face your business on multiple programs from a Europe based global OEM.

We will supply the Oems Assembly plant in North America from an existing exteriors facility beginning in 2026.

With that I'll pass the call over to Pat.

Thanks, Swamy and good morning, everyone.

As Swamy indicated we delivered strong second quarter earnings and free cash flow both above our expectations.

Now comparing the second quarter of 2023 to 2022 consolidated sales were $11 billion.

Up 17% compared to a 15% increase in global light vehicle production.

EBIT was $603 million and EBIT margin increased 170 basis points to five 5%.

It was also up 140 basis points from the first quarter of 2023.

Adjusted EPS came in at $1 50.

Up 81% year over year.

And free cash flow used in the quarter was $7 million.

Compared to $52 million generated in the second quarter of 2022 and.

In part, reflecting our higher capital spend to support record program Awards in 2022.

During the quarter, we paid dividends of $129 million and in addition to raising our sales outlook, we increased our adjusted EBIT margin and earnings outlook.

Let me take you through some of the details.

North American European and Chinese light vehicle production were up 14%, 13% and 21%, respectively, netting to a 15% increase in global production.

Our consolidated sales were 11 billion up 17% over the second quarter of 2022.

On an organic basis, our sales also increased 17% year over year for a 3% growth over market or 5% growth over market excluding complete vehicles.

The sales increase was primarily due to higher global vehicle production and complete vehicle Assembly sales the launch of new programs.

Price increases to recover certain higher input costs and the acquisition of DNA or active safety on June 1st net of divestitures.

These are partially offset by the impact of foreign currency translation and contractual customer price give backs.

<unk> EBIT was $603 million and adjusted EBIT margin was five 5% compared to three 8% in Q2 2022.

Our focus on operational excellence and performance on cost initiatives helped drive strong earnings on higher sales.

This was partially offset by the impact of the acquisition of <unk> active safety.

Adjusted EBIT margin was also possibly impacted by about 25 basis points of net operational items, including productivity and efficiency improvements at certain facilities and higher totally contribution partially offset by.

A higher program related engineering spending and launch costs and higher equity income, which benefited margins by about 10 basis points.

EBIT margin was negatively impacted by higher net input costs, primarily lower scrap prices and higher labor costs, partially offset by lower costs for energy commodities and freight.

Combined to about 45 basis points.

And non recurring items, which subtracted about five basis points.

Okay.

Interest expense increased primarily reflecting the senior notes issued in the first quarter increased borrowings and higher interest rates, partially offset by higher interest income.

Our adjusted effective income tax rate came in at 21, 8%.

Largely in line with our 2023 expectations, but lower than Q2 of last year.

And adjusted net income attributable to Magna was $430 million up 77% over the second quarter of 2022, reflecting the higher EBIT and lower tax rate, partially offset by higher interest expense and minority interest.

Adjusted diluted EPS was $1 50 up 81% compared to Q2 of last year.

The increase is the result of higher net income and fewer shares outstanding.

The reduced number of shares outstanding primarily reflects the impact of share repurchases during and subsequent to the second quarter of 2022.

Yeah.

Turning to a review of our cash flows and investment activities.

In the second quarter of 2023, we generated $879 million in cash from operations before changes in working capital.

We invested $332 million in working capital, primarily reflecting the higher sales in the second quarter of 2023.

Investment activities in the quarter included 502 billion for fixed assets and $96 million for investments other assets and intangibles.

The $502 million Capex is higher than the 329 billion in Q2 of last year to support our record program Awards in 2022.

Overall, we used free cash flow of $7 million in Q2, better than we had anticipated.

We also acquired <unk> active safety for $148 billion and paid 129 million in dividends in the quarter.

Okay.

Our balance sheet continues to be strong with major credit rating agencies recently reaffirmed our ratings.

At the end of the second quarter, we had over $4 6 billion in liquidity, including about $1 3 billion in cash.

Currently our adjusted EBIT adjusted debt to adjusted EBITDA ratio is 219 times excluding.

Approximately $400 million in cash, we're holding to pay down our euro debt set to mature later this year our ratio would be 2.08.

These ratios are tracking better than our previous expectations as a result of our improved operating results.

We anticipate a reduction of our leverage ratio by the end of this year and a further declined through 2024.

Okay.

Next I will cover our updated outlook, which incorporates slightly higher than expected vehicle production in both North America and Europe .

Mainly as a result of better production in Q2.

Our assumption for production in China is unchanged from our previous outlook.

We also assume exchange rates in our outlook will approximate current rates.

We now expect a slightly stronger euro and slightly lower Canadian dollar and RMB for 2023 relative to our previous outlook.

Yeah.

Okay.

We have increased our expected sales range, largely reflecting the acquisition of <unk> active safety higher North American and European production in Q2, as well as the higher euro.

As a result of our strong performance so far in 2023.

And expectations for continued operational execution, partially offset by higher cost to launch new programs. We have also increased our adjusted EBIT margin range.

This is despite the short term 2020 basis point impact from the <unk> safety acquisition.

We are increasing our equity income range, mainly reflecting lower spend and expected commercial items.

As a result of increasing the ranges for our sales and adjusted EBIT margin. We're also raising our range for adjusted net income attributable to Magna.

Our capital spending outlook has increased to reflect the <unk> acquisition in line with our previous expectations.

Our interest expense and tax rate are unchanged from our previous outlook.

In addition, free cash flow expectations are unchanged, even after incorporating D&A or active safety for the last seven months of 2023.

Note that beginning in Q3 Magnus adjusted EBIT will exclude the amortization of acquired intangibles. The most significant of which is associated with the <unk> active safety acquisition.

<unk>.

In summary, we are pleased with our strong operating performance in the second quarter.

Once again, we outgrew our end markets by 3% on a consolidated basis and 5% excluding complete vehicles.

We continue to win new business across our portfolio supporting our go forward strategy.

And largely as a result of our continued strong execution, we are raising our earnings outlook for.

For the year. Thanks for your attention we'd be happy to answer your questions.

Thank you.

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One moment please for the first question.

Okay.

Our first question comes from the line of John Murphy with Bank of America. Please proceed with your question.

Good morning, guys and thanks for the time.

At first question as you look at what went on in the quarter.

Obviously volumes were up.

Big time on a year over year basis, but there was also a stabilization.

In schedules right. So you knew what you were doing and how to plan for it just wondering which do you think I mean, obviously the rise environment is important but how important was the stabilization in schedules and how should we think about that going forward in the business.

Good morning, John .

For sure both of them, but I think if they have to prioritize if you look at all the initiatives that we've been talking about.

Play a bigger role.

And getting the flow through that you would expect.

But definitely the stabilization of production schedules is what helps those airports in a big way right to get to the bottom line and get the intended effect of all the activities that we're going through the big variable would be the stable production obviously the baked.

Into higher volumes helped but the important thing is once you get the higher volumes can I get the.

The flow through that may be expect right. So definitely helped both of them at this time.

Okay, and then just a second question on the battery business for the F 150 lightening.

The fact that you're getting the frame as well seats as well as good but I mean, the frame and the battery enclosure.

Seemed like they might be interrelated swamy.

Interrelated was that sort of bidding process, how much of part of the structure of that truck is that battery enclosure business and does that set you up well for future wins on other trucks, but maybe other unit body, that's not unit body been on unit body structures as well.

John I'll answer the question from a magnet perspective, and we talked about highly integrated systems in there.

Value that Magnum brings when we look at not individual component, but more how we can bring things together and I think this plays at all I won't comment specifically on the architecture of bis ratio because I am I don't think it would be right for me at this point.

But that expertise of knowing the frame knowing their back body enclosures in the whole vehicle definitely comes into play and as we look forward we see.

In some cases like you talked about a framed waco.

With a separate thing closer today, but as you go to the next generation. There is definitely a thought process of how we can get the synergies or structural performance for safety and efficiency and so on so us being in the programme now on actually multiple truck programs I think definitely it gives us a I think a bit.

Advantage.

Not only addressing what's needed today, but taking this product line and evolving into the future.

And then if I could sneak just one last one in commercial discussions with your automaker customers seem to be a.

A little bit more amicable and conciliatory than they have been in the past is that a correct interpretation and has something changed here, where they're partnering a lot more on sort of cost sharing particularly as costs are inflating or is it more just more of the same and you guys are just doing a better job with these discussions.

Okay.

It's a difficult question, John but I definitely think.

I think <unk> had a good six months.

How I would put it.

Uh huh.

The reactions in their interactions are somewhat mixed.

But I can tell you we are laser focused on it it's just not a person, but it teams and cross functional across finance and sales in commercial and operations. The entire organization is.

On this topic.

I cannot I think I won't be explaining able to explain and fuel center assist the effort that goes into this but I would say there is a.

Openness to have the discussion in different forums.

Like I said, some are going to be tougher than the other but it is.

We cannot afford not to do this it's a must for US right and I think the conversations are tough, but I would say they are fair.

Okay. Thank you very much guys.

Thank you.

Our next question comes from the line of Tami Chen with BMO capital markets. Please proceed with your question.

Hi, Good morning. Thanks for the question first wanted to talk about <unk>.

So you've given the impact.

The impact that had on your on your guidance could you just talk a little bit more about how you got to trend through the year.

You're expecting it to breakeven before the incremental amortization.

Would you just remind us that that's in the path for the business to get to that next tier.

Good morning, Tommy I'll give you a few key points and Pat you can jump in.

As we said we closed the transaction happy to say that <unk> hit the ground running on the integration efforts.

I think I could summarize by saying that we are comfortable with what we talked about when we did the acquisition announcement.

So some of the facts that we talked about at that time.

2023 sales about $1 billion, and we said it would have a 20 basis points impact on consolidated EBIT margin.

Capex was roughly around $100 million.

EBITDA positive in 2023.

We expect the $70 million in synergies by 2025, I think we are.

Tracking very well and there could be a tailwind going forward.

EBIT neutral in 2020 poll ex PPA.

And a little bit more color on 2025 impact we should be able to do that in our virtual investor.

De update that's coming up in September .

Okay can you talk specifically about next year, the business going to EBIT neutral for now being a drag can you just remind us of some of the steps to get there.

So.

Good morning, Tammy and congratulations on your new role.

When you think about the <unk> business is quite similar to our existing electron.

<unk> electronics business and they're experiencing rapid growth. So really the driver of what's happening is a combination of two things. One is there a lot of their launch costs are being incurred this year and likely to continue through next year, but what's happening is as that business launches, it's driving a lot of contribution margin that's going to benefit.

As the volumes ramp.

To be honest with you. That's that's really the inflection point, we're seeing in their business and it's similar to what we're seeing in our business and that's what's going to drive.

The dollar growth in the margin improvement.

Yeah.

Got it okay. Thanks, and then my other question is you.

You know, it's quite a strong performance in Europe .

Cognizant business that I don't think we've seen.

The 8%, 8% or above EBIT watching really since early 2021, I know you called out to the call and all.

All of the positive factors that happened this quarter, but could you just specifically on the Cosmo business talk a bit about what really drove quite a strong performance. It was strong sequentially as well.

Can you also talk a little bit about within that business there had been that underperforming plants.

You touched on it earlier in your comments that a little bit more detail on that or are you largely through.

That headwind as well thank you.

Yes.

From a Cosmo perspective, like you said, we have seen those type of.

The numbers speak for.

As we discussed the production stability.

Having the volumes coming back up ticking back up and all the initiatives that are combination.

So really good execution on higher sales is one.

And kind of operational improvement and a couple of facilities you touched on the <unk> that we had issues with.

And it's tracking.

The predominant factor as I discussed previously was.

The efficiency hit that we were having and therefore had to outsource capacity. So I'm happy to say now that.

We improved our efficiency.

The capacity opens up and we are able to bring back work.

Which obviously helps and that's a I would say, it's on track and continuing to make.

Make progress.

As we have discussed towards the end of 2024.

And one other thing would be comparing to 2022 Q2, it would be Russia losses be thrown out there.

Hey.

Some of it is also commercial resolutions in the quarter.

Including breakthrough from that goes back into the.

Previous parts of the year, but also want to mention that there is some benefit.

Benefit going forward in a run rate perspective, so I would say those are the combination of things that led to the expected strong performance in just in BS, but specifically in Kosovo and Tammy you mentioned Cosmo, but yes.

It's all of the biggest chunk of that is causing them, but we have <unk> the center as well.

And there was some commercial items.

Jamie when you think about where we're pushing for recoveries were pushing.

For commercial recoveries as well and when we talk commercials.

Cancellation claims low volume claims so some of that benefit come through in the quarter and part of it was retro as Swamy mentioned.

Yeah.

Okay got it thank you.

Thank you. Our next question comes from the line of Chris Mcnally with Evercore. Please proceed with your question.

Yeah.

Thanks, so much team.

Just wanted to follow up on on the last set of questions on <unk>.

On body.

If we look at the implied second half there.

We're sort of Q2, we put a impressive margins.

Was there any was there any.

Particular sort of price and that was taken in Q2 that was retroactive some of the suppliers talking about looking at sort of first half margins for example for divisions because of the timing of some of the E SAP a price recovery.

And then you guys have.

<unk>, how do we think about pros and cons.

Headwinds tailwind for body in second half.

Yes.

Good morning, Chris I guess afternoon to you.

I think Youre correct Youre absolutely correct. When you when you think about these commercial items and the inflation recoveries a portion of them.

These are being negotiated throughout the year a portion by default becomes retro.

So there are some retro recoveries in the second quarter related to Q1, and a little bit from 2022, but it's primarily a Q1 issue as we push forward. So it's fair to say that our margin in the Es segment is going to peak in Q2 and normalize to those guidance range.

In the second half of the year.

But it does.

I don't want.

There is a commercial portion, but the real driver here is volumes and execution on that volume increase that is.

That's really what's driving the performance improvement and keep them out for and keep in mind.

HP versus H, one when you do see volumes down so that's just regular seasonality, but volumes in sales would be expected to be down.

No.

That makes sense I mean.

One of the things we're in the analyst community, we are dealing with it.

The suppliers are being appropriately conservative, but basically by your implied production you had second half down versus first half.

<unk> forecast.

Slightly up so.

That makes sense.

If we stick on margin feeding it looks like it's starting to turn a corner and seeding has been.

Sort of persistent low margin you had some of the BMW business that came on that at different margin characteristics.

Are we turning a volume turning at a corner and.

The European volumes that are turning actually start to really help here, which has been a drag for for several years.

Hi, Good morning, Chris our production with less pass that.

I think.

We talked about the <unk>.

Mix issue that <unk> had in seating right.

That was <unk>.

Disproportionately impacting us and as the volumes are coming back and the mixes.

Becoming more normalized than lopsided, we are starting to see those effects come through but I also have to give a lot of credit to the seating team on how there.

Being part of this overall initiative that we're looking at and starting to see the impact of that.

Whether it's some of the Digitization effort some of just block and tackle type things that were going through and we also talked about some of the.

Wins.

In the truck segment in North America, and some actual discussions on existing nonperforming.

Programs.

It's a combination of all of this that we are seeing the effect just not today, but I think we are very.

Very optimistic about what we could see in the coming years in seating.

Okay, great and I'll hold back on the Adas and the radar questions look forward to the event in September thanks, So much.

Great. Thank you.

Thank you.

Our next question comes from the line of Mark Delaney with Goldman Sachs. Please proceed with your question.

Good morning. Thank you very much for taking my questions I believe last year Magna's Megatrend revenue was about 1 billion and I think you guided it to approximately double this year and then to reach about $4 billion in 2025, excluding venier active safety given some of the volatility that's been happening with some of the EV plan.

From certain Oems I'm.

If you could give us an update about how youre tracking and those megatrend areas relative to the prior targets.

Hi, good morning, Mark.

Hi.

I would say to answer your question looking at what we know today, obviously in terms of take rates and so on and so forth. We are tracking to what we had talked about.

You mentioned the numbers, it's roughly about 4 billion in 2025 right.

But as you said, it's very early days of electrification I think.

I'll note that it's a secular trend for short and it's here to stay.

But the real trick is in <unk>.

<unk> trajectory.

That's something that we all have to vacancy and we are taking you know all of the tools in the toolbox to look at how.

How can we have that flexibility and how can we pivot.

Can we look at different programs and so on and so forth, but overall, whether it's electrification. Okay. That's I think we're tracking to the numbers that we talked about.

That's that's helpful and then in terms of the.

Margin improvement opportunities you spoke a little bit around commercial negotiations already slide nine I mentioned repricing underperforming programs. There's one on the margin opportunity. So I was hoping to understand that dynamic specifically if possible to have a better sense of how broad based studies that they are performing programs or I mean is it isolated to a few.

Or is that a wider initiative and any any color you can share on your on your progress and how.

How likely you think it is that youll be able to restructure some of those programs. Thanks.

Okay markets colleague wider it's actually a very quality granular loan book, which is a normal process, it's very targeted very granular very deliberate.

We are looking at programs that may come towards the end of the program right.

Production cycle.

There are some great replacement coming through there is some elaboration on extensions that come through.

All of these opportunities and sometimes it changes.

Change of scope on the project.

Looking at everything out there to see how can we be effective me.

Reprice.

Get the economics to rapidly meet too which meets our financial hurdles.

<unk> and I can definitely say, we have had success in some of these cases.

And some are still an ongoing discussion.

Thank you I'll turn it over.

Okay.

Thank you. Our next question comes from the line of Tom Narayan with RBC. Please proceed with your question.

Hi, guys. Thanks for taking the questions.

The first one is could you remind us what your I guess your <unk> III.

U S exposure is.

Just asking just me it may help us understand maybe how.

How we should think about potential strike applications.

Yeah, I think I'm going to say, we're probably 75% in North America, we're about 75% of our business in that area.

We do disclose that I haven't got that handy, but its in that range.

Okay, and it always feels like splitting.

The North American business.

Any breakout of the three Oems are.

Get that for you Tal I don't have it at my fingertips, Okay. Okay no worries.

And then the.

The other the other one is we've been hearing about some.

Some of the slowdown.

<unk>, specifically with legacy North American Oems.

It's coming up in a lot of the supplier calls.

Just curious if you're seeing this if this is impacting kind of.

Your <unk> business.

More near term.

Or if youre seeing anything there.

Yeah, Tom Good morning. This is swamy I think if you look at it I mean.

Really that business is.

<unk> talked a quite a bit early days is just launching and just taking a look at the numbers right. We have like one 2 million or so.

<unk> it.

It's more about having a position yourself on the right programs and you know looking at each of this how we go about and what type of.

Thinking you'll have in processing. These programs I think that's the important part.

I don't know if you go back two or three years.

We talked with a different tone and today, it's with a different tone.

I think we need to take a more a common approach and as I said I believe and we believe that magna that it's a trend here to stay.

We have to figure out how to manage that transition and that's where our focus is.

Okay. Thanks, and then lastly, if I look at the two segments I think we are pretty interesting in Q2.

BNS very strong and then <unk>, maybe a little bit lighter than maybe some folks expected, but then you've raised sales forecast for both.

Things can be kind of lumpy from quarter to quarter, just curious about Q2 sustainability and these two chegg.

Segments in each to clearly I guess, you're expecting an improvement in <unk> and how should we think about these two segments Q2 versus HD.

Yes, I think we've touched on some of the factors that contributed to the strong.

<unk> contribution right and we kind of see that going forward. There is no reason for us to think any different.

Given there is no other major disruption or some industry wide thing.

We are starting to see like I said, they have heard some of the initiatives that we have in place and stability in production and increasing volumes.

<unk> as you mentioned really.

The net input costs were a headwind year over year in the first half the acquisition of <unk>.

<unk> safety negatively impacted the Q2.

And we've talked about a few things in the first quarter, which was a warranty item. There was a net negative commercial items in Q2, and some hiring training costs that were associated with the launch of the program.

So operationally it's good all of this.

Call It one timers.

And we're locked in the first half of the year so be it.

Do you see going forward, if you exclude those things a better run rate and if.

If you kind of.

Excluding those items the pull through was actually quite good in PV in the court.

Got it okay. Thanks a lot.

Yes.

Yeah.

Thank you. Our next question comes from the line of Colin Langan with Wells Fargo. Please proceed with your question.

Oh, great. Thanks for taking my questions.

Just at a high level, if I look at the guidance first half to second half you have sales down six hunters and Thats whats being here, which I assume that means that's over $1 billion in first half second half, but EBIT up so what are the major puts and takes that get that up.

Assume also that the guidance doesn't include any sort of factor for you light up here.

Uh huh.

So your so called morning Collyn so.

H one versus age two I think was your question just the <unk>.

The consolidated variance so the second part of your question was you're correct, we haven't modeled in or factored in our UAW disruption if any.

When you think about I think <unk> touched on a lot of the points, but big picture when you take a step back and look at our <unk> to this a couple of factors.

<unk>.

We expect.

On the on the recoveries, we expect those to be more back half versus first half and that's what we've projected from beginning of the year and that's what we're continuing to see so that's number one.

Number two there were some discrete items that happened in the first half of the year.

Not unexpected recover swamy touched on the warranty issue that we had in Q1 there was.

A few commercial settlements that had happened that positively impacted us that we are.

In the second quarter that were retro back into <unk>.

Q1, and a portion back into Q2.

And then as we move forward.

We're still seeing stabilization of the of the production schedules, which is benefiting us, but I think again I just want to reinforce.

When you come in with a lot of these operational improvements that we talk about as they take time to gain traction. So you implement a strategy and then you start.

Permutating them across the various divisions and you gained acceleration.

As you go through so for example, swamy touched on our ability to make improvements at our underperforming division in Germany. That's what we're seeing so those are sequential improvements that we're seeing from each one of <unk>.

And then obviously the acquisition of <unk> near comes in.

In the second half of the year with about $1 billion of sales.

Coming in which which does strike in margin as we pointed out by about 20 basis points, which goes the other way.

Got it.

And any color on the change and adjust.

Adjusted EBIT now excluding amortization.

How big of a factor will that be and then I wasn't really sure. I think you didn't include it as an adjustment in Q1 Q2, but for the rest of the year it'll be adjustments or does Q on Q to eventually get restated to exclude amortization too and well that'd be driving some of the comparisons we're looking at.

Yes, we're still working through the.

The impacts from taking a little bit of time to refine that calculation, but our estimate on an annual basis is about $60 million. So up 30 in the back half of the year.

And Collyn that's preliminary that's part of the reason, we're excluding that as well at this point, but just the basis for why we've done. It. So you are correct on a go forward basis, we're going to exclude it.

Excluding specifically is acquired purchased intangibles.

So the amortization of such amounts so its not regular increments and the reason we're doing it is.

Actively we're trying to improve how we manage our businesses. So we have an existing <unk>.

Electronics business roughly the same size as the acquired entity and we want to manage it.

Evaluate them for their performance and their execution on an apples to apples basis. So that's why we've made the decision to exclude it. The other factor was when you from from an investor's perspective.

When we're thinking.

But that was sitting in your seat is I want to be able to evaluate.

Evaluate held magna's electronics business is performing versus our peers and we did an analysis.

Just to make sure we're consistent with our peer group in that regard.

And just one quick follow up the 60 million estimate is that just being here because I think theres about 10-K said there'd be around $90 million.

Amortization.

Just going into the year. So that also gets pulled out I'm comparing apples to apples.

So you're talking.

Talking specifically.

Amortization of acquired intangibles I don't know what the 19, you're referring to is.

Theres other if you referred back to the cash flow statement.

They're a bounce in that 90%.

But the approximately 60% will be in there.

In active safety.

Okay. So that that would be the full year charge going forward 60 million will be pulled out of the special items kind of them.

Once we finalize the purchase accounting to that correct.

Okay, all right. Thanks for taking my questions.

Yeah.

Thank you. Our next question comes from the line of Dan Levy with Barclays. Please proceed with your question.

Hi, good morning, Thanks for taking the questions.

Just wanted to go back to this.

The first half the second happened specifically wanted to focus on the complete vehicle.

Where I think your guidance is implying.

On the business to be.

Almost breakeven.

Slightly positive.

Significant deceleration versus the first half and maybe you can just talk about some of the puts and takes on what's happening in the complete vehicles and so that can happen.

And does this change the way, we should think about the out year forecast.

Oh.

Yes.

Morning, Dan.

Im pausing here to answer.

When you think about our complete vehicles business you really have to consider a bunch of factors. One is what products are in that facility at that point in time. So in the first half of the year, we were still producing the BMW five series and that's rolled off and now we're going into with them.

Middle of launching the Fisker program, but what you see more broadly when you think about a European business like Shire is there is.

Yes.

There is.

Quite a difference in profitability in the first half of the year in the second half year just.

More broadly.

I don't think we haven't changed our <unk>.

Our expectations for our I keep saying, there, but our complete vehicles business for the full year.

We had a few.

We had some positive engineering outcomes in the first half of the year.

But those were factored in and we get into the second half.

Still pushing towards that gross margin expectations, So long answer, but I don't see anything unusual in the second half of the year.

That we should be reflecting just its launch.

And as it but its planned downtime.

Starting here at 1% to 1% to 2% we're at one six to 201, so all in we're actually increasing our outlook and that complete vehicles.

Yeah.

Right and I know that generally we shouldn't look at a quarter as you know there is seasonality and whatnot, but.

Is that second half I think you can talk about it.

Specifically being dragged by launching.

New programs or there was something just timing of input costs.

No.

The teams are firmer das. So if you take a boat would have but its primarily the launch.

Planned downtime that you have through the summer and then you have another downtime through the.

The December period, when we would expect that that throughout the year, which is every single year.

Okay, Alright, so that's not something we should extrapolate going forward.

No absolutely.

Okay. Okay, great. Thank you.

And then second.

Swamy just a question on your vertical integration efforts in Evs historically an.

EV setting aside LG you were mostly focused on the drive unit you to outsource motors and Inverters.

Can you just talk about the supply agreement with on semi.

Is this a foray into making your own inventories or was this just a pause.

Partnership to get converted.

From a third party.

Yeah, I think Dan we talked about making more time right.

In terms of the building blocks and what are some of the key pieces to get to the E drive system.

Even before the LNG JV that you mentioned be made it workers and we have the capacity to do that between Magna powertrain and Magna Electronics group.

So we are just taking one step forward when we talk about on semi you just looking at whether it is you know.

Silicon carbide are gone or something just think overall power electronics strategy.

Howard what should we be doing.

So it is just part of that overall strategy. So we always have the ability to do in water smart, we're just doing it collectively.

And our <unk> JV. So this is just further vertical integration to bring value added into the system.

Yes.

Great. Thank you.

Thank you.

Our next question comes from the line of James Picariello with BNP Paribas. Please proceed with your question.

Okay.

Hi, everyone.

Just to clarify more of a housekeeping item on the intangibles amortization.

Can you just quantify for legacy Magna, what the intangibles amortization amount was for last year just to have some bearing as to I mean, I know, it's immaterial, but.

What was that number.

We will have to get back to you James because it is immaterial it wouldn't be a big number.

If you think funding funding.

Fundamentally we haven't done an acquisition of a technology company. So we haven't experienced a situation where he has such a significant amount of <unk>.

Acquired technology intangibles, and that's really what's driving the $60 million Louis was referring to.

So we can get back to you with the exact number.

But it's not material.

Understood.

And then just on veneer it looks like the guide shows $1 billion in revenue and based on the 20 basis points margin dilution impact about $30 million to $35 million operating loss.

For the seven months seven months, if we annualize that right for being here, we'd be looking at $1 7 billion in revenue and an approximate $60 million operating loss.

Just curious if you could kind of bless that.

Thinking on.

The annualized run rate for being here.

Yeah, I think maybe there is two things to consider perhaps you can add to it.

I think when we bring all of this talk together maybe synergies in terms of a positive look at platts.

Problems, how do we look at you know coordinated efforts on some core projects.

Some purchasing initiatives. So I think it's better maybe my opinion to look at run rates going forward from the combined entities rather than look at each one separately.

And hopefully we'll be able to give some color.

When we talk in September but.

All of this will be included when we come back as we're doing all.

Bottoms up you know the business planning process and will be included when we come out and talk in 2024.

Yeah.

Okay, Alright, that's helpful.

Sorry, James as I keep in mind, what we said earlier about a neutral in 2024 right. So it tells us something about the run rate relative to the back half of the year.

Yes neutral on EBIT.

In the second quarter, just a quick one was there any retroactive material recovery tied to the first quarter in this in the second quarter numbers, particularly in.

In the body exteriors <unk> structures segment.

Thanks.

And so I think we've talked about this earlier.

So I am not going to.

Repeat everything but the short answer is yes.

Okay.

You just can't quantify it.

No.

Okay. Thanks.

Thank you. Our next question comes from the line of Brian Morrison with TD Securities. Please proceed with your question.

Hello, Good morning, I had a housekeeping question as well so powder swamy in the prepared comments on net inflationary costs and you said something to the tune of an incremental $100 million for 2023, and you would recover half of that can you just clarify what the net exposure is now I know you started the year at $680 million you need progressing key like Q1, you Didnt update on scrap.

In energy, but start with the 680, an update what's baked into your new guidance and maybe break down what is labor and what's commodity. Please I think labor was about $200 million of your previous forecast.

So I think that's it.

<unk> hundred 80, let me break it down was the 530 coming from 2022 incremental 100, plus the 15th Crap. That's how we came to the 680.

So what he is looking at the moment and some of the commodities.

Energy and all the other initiatives that you are working through just hit that 100 is not 50.

This crap, which was 50 is not 25.

Yeah.

I don't know if he can get into the details.

Oh, how much is labor and how much is the breakdown.

It gets combined in terms of all the efforts that I talked about so it's really difficult to exactly quantify how much in there.

We can say that labor is best to keep park and we continue to look at optimizing that going towards not just you know from a restructuring perspective, but as we are launching.

Launching this business into 'twenty four 'twenty five.

You know.

How do we manage it we have to have so much hiring. So the question is how do you level more normalized.

What we have now and you know look at optimizing the hiring but at the same time protect the programs and the launches.

It's a little bit of a complex.

Set up variables that we're going through I don't know Pat if you want to add any color because I know.

Thank you.

<unk>.

That's helpful. So I just wanted to just 30 basis points.

Improvement ex me in here how.

How much of that is related to <unk>.

Inflationary impact it looks like it could be about 10 of the basis points that correct.

Sorry, I can do the matching her calculator.

Okay.

Oh yeah.

75 million Bucks right.

Yeah.

Yes, it's probably 10 to 13 basis points Brian .

Okay. Thanks, Thanks, Pat and then last housekeeping question I'm, not underperforming facility, where we're making great progress I think you said youre going to youre tracking to about half of the 35 basis points I think was $140 million drag last year, how much how much of that do you expect to recover this year is it still tracking happen and then eliminated in 2024.

That's correct.

Right. Thanks, very much for your time.

Okay. Thanks, Brian .

Thank you if there are no further questions I will now turn the call back to Swamy could I gave me for closing remarks.

Thanks, everyone for listening in today.

As you heard from US we are happy with the continued progress in the second quarter, but.

We are already looking ahead to keep our focus into the remaining part of the year and monitoring not just 'twenty, three but 24 and 25 and keep that progress going.

Look forward to providing an update on the progress of our strategy during our investor event next month.

Hoping to see you all there have a great day. Thank you.

Thank you that does conclude the conference call for today, we thank you for your participation and I say you. Please disconnect your lines.

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Greetings and welcome to the Q2 2023 results conference call.

During the presentation, all participants will be in a listen only mode.

We will conduct a question and answer session.

At that time, if you have a question. Please press the one followed by the four on your telephone.

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

As a reminder, this conference is being recorded Friday August 4th 2023.

I would now like to turn the conference over to Louis Tonelli, Vice President Investor Relations. Please go ahead.

Thanks, Rita Hello, everyone and welcome to our conference call covering our second quarter of 2023. Joining me today are so let me go to Gary and Pat Mccann.

Before we get started just as a reminder, the discussion today may contain forward looking information or forward looking statements within the meaning of the applicable securities legislation.

Please also refer to a reminder, slide included in the presentation that relates to our commentary today and with that I'll pass it over to swamp.

Thank you Louis Good morning, everyone. I appreciate you joining our call today and I'm happy to kick off today's call with an update on our progress and following your financial update from pack I look forward to answering your questions.

Before diving into the details let me walk you through some key highlights.

We successfully completed the acquisition of the EMEA active safety during the second quarter solidifying our position as a global leader in active safety.

There is a lot of excitement and energy around Magna as a result of this acquisition.

Our organic sales grew by 17% year over year.

Passing weighted production by 5%, excluding complete vehicles, and 3% including complete vehicles.

Our second quarter showcased strong Q2 operating performance with high organic sales contributing to robust earnings.

These results represented significant improvement, both year or year and compared to the first quarter of this year.

We have raised our 2023 sales.

Adjusted EBIT margin.

Adjusted net income outlook ranges for 2023.

This upward revision in our EBIT margin range demonstrate solid operating performance, even with the inclusion of DNA in active.

Active safety, which is launching significant new business over the next 18 months.

We are highly committed to executing our strategy and remain confident in our ability to achieve our long term growth and margin outlook.

And we continue to win business across all product areas, which supports our go forward strategy.

Okay.

However, the global economy continues to face some interlocking challenges, including continued elevated inflation higher interest rates geopolitical risks and slowing economic growth.

These challenges are impacting our entire industry.

In North America, there are concerns about upcoming OEM labor negotiations.

<unk> contract expired in September , which may have short term impacts on production.

Rest assured efforts to contain costs and improve our margins remains a top priority for us.

This is being achieved through ongoing operational improvement initiatives.

Covering costs from our customers and executing flawless launches across magna.

Okay.

Earlier this year, we estimated about $100 million of incremental input costs net of recoveries over 2022.

Based on our initiatives together with improvements in market prices for energy and certain commodities, we now expect to mitigate about half of the incremental net input costs.

We also continue to take proactive measures in various other areas. We have executed our initiated consolidation restructuring and cost containment activities had different levels across the company.

We are engaged in ongoing commercial negotiations with our customers to recover costs transitioning to radius index programs.

And address pricing on challenging programs.

At the same time, we continued to intensify our efforts in areas that are core to our daily business.

Including hedging activities and our enterprise wide global purchasing initiative.

Automation installations, and smart factory initiatives with a digital ecosystem implementation are also well underway.

Lastly, I am pleased to report that our underperforming European <unk> facility is tracking to our expectations supported by a number of these initiatives.

In early June we successfully completed the <unk> active safety transaction and I would like to thank all of those involved for their efforts.

This transaction has expanded our active safety portfolio by incorporating complementary products customers geographies engineering and software resources.

The response from both the acquired business and our existing active safety unit has been overwhelmingly positive.

There is a great deal of excitement surrounding the immense potential of the combined business.

The business is on track with the expectations as outlined when we announced the acquisition, including being neutral to earnings before purchase price amortization in 2024.

Hit the ground running and are fully dedicated to ensuring a smooth integration and realizing the $70 million in synergies identified at the outset.

We continue to execute our strategy aimed at accelerating our growth and megatrend areas.

Recently.

The battery enclosure for Forbes next generation F 150, lightening EV pickup truck to support this exciting new program, we are adding capacity in Tennessee.

This award further strengthens our competitive position in the rapidly growing market for Bachelor enclosures.

In powertrain electrification.

<unk> unit contributes to an increase in electric drive range by up to 9%.

We have already begun launching this product on multiple vehicles of a German based premium OEM.

We recently announced a long term supply agreement with on semi.

This agreement allows magna to integrate silicon carbide based technology into our future E drive systems.

These activities highlight our commitment to driving innovation and positioning ourselves as the leader in the rapidly evolving field of electric mobility.

Our success in winning business across all product lines continues to drive growth.

In addition to securing the contract for the battery enclosure. We were pleased to announce that we have also recently been awarded the frame and seats for the next generation F 150 lightning.

The seating awards represents yet another seed complete program for pickup trucks in North America. Following our previous seat award for Gm's pickup trucks to be produced at La Korea.

We were also recently awarded the replacement vehicle Assembly business or the iconic Mercedes Benz G. Class. This award allows us to maintain our 40 plus year history ethics Clusium producer of this off road ratable.

We produced over $40 45000, G class vehicles in our Graz, Austria facility in 2022, bringing our lifetime total to over half a million.

The next generation G class is expected to launch in 2024 and continue to run towards the end of the decade.

And we've been awarded significant new face your business on multiple programs from a Europe based global OEM.

We will supply the Oems Assembly plant in North America from an existing exteriors facility beginning in 2026.

With that I'll pass the call over to Pat.

Thanks, Swamy and good morning, everyone.

As Swamy indicated we delivered strong second quarter earnings and free cash flow both above our expectations.

Now comparing the second quarter of 2023 to 2022 consolidated sales were $11 billion.

Up 17% compared to a 15% increase in global light vehicle production.

EBIT was $603 million and EBIT margin increased 170 basis points to five 5%.

It was also up 140 basis points from the first quarter of 2023.

Adjusted EPS came in at $1 50.

Up 81% year over year.

And free cash flow used in the quarter was $7 million compared.

Compared to $52 million generated in the second quarter of 2022 and.

In part, reflecting our higher capital spend to support record program Awards in 2022.

During the quarter, we paid dividends of $129 million and in addition to raising our sales outlook, we increased our adjusted EBIT margin and earnings outlook.

Let me take you through some of the details.

Yeah.

North American European and Chinese light vehicle production were up 14%, 13% and 21%, respectively, netting to a 15% increase in global production.

Our consolidated sales were 11 billion up 17% over the second quarter of 2022.

On an organic basis, our sales also increased 17% year over year for a 3% growth over market or 5% growth over market excluding complete vehicles.

The sales increase was primarily due to higher global vehicle production and complete vehicle Assembly sales the launch of new programs.

Price increases to recover certain higher input costs and the acquisition of D&A or active safety on June <unk> net of divestitures.

These are partially offset by the impact of foreign currency translation and contractual customer price give backs.

Yeah.

<unk> EBIT was $603 million and adjusted EBIT margin was five 5% compared to three 8% in Q2 2022.

Our focus on operational excellence and performance on cost initiatives helped drive strong earnings on higher sales.

This was partially offset by the impact of the acquisition of <unk> active safety.

By higher program related engineering, spending and launch costs and higher equity income, which benefited margins by about 10 basis points.

EBIT margin was negatively impacted by higher net input costs, primarily lower scrap prices and higher labor costs, partially offset by lower costs for energy commodities and freight.

Which combined to about 45 basis points.

And nonrecurring items, which subtracted about five basis points.