Q3 2023 Magna International Inc Earnings Call
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Greetings and welcome to the Q3 2023 results.
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My name is call is being recorded today Friday November 3rd.
23.
I don't know electrochromic costs over now to Louis Tonelli, Vice President Investor Relations. Please go right ahead.
Thanks, Tommy Hello, everyone and welcome to our conference call covering our third quarter of 2023 joining.
Joining me today are Swabbing, Gary and Pat Mccann.
Yesterday, our board of directors met and approved our financial results for the third quarter of 2023 as well as our updated '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 presentations go along with the call and our updated quarterly financial review all of the Investor Relations section of our website at Bagdad 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 than those expressed or implied in these statements. Please refer to today's press release for a complete description of our safe Harbor disclaimer.
Please also refer to the reminder, slides included in our presentation that relates to our commentary today and with that I'll pass it over to Swamy.
Thank you Louis good morning to everyone.
I appreciate you all joining our call today as we share our third quarter earnings results.
Before I share some of the details I want to thank my team for their continued progress and solid results. So let's get started.
Some key highlights to mention before I dive into the details.
Our organic sales grew by 10% year over year, surpassing weighted production by 4% excluding complete vehicles.
And 2%, including complete vehicles.
Our third quarter showcased strong operating performance with higher organic sales once again contributing to robust earnings that represented a significant improvement year over year.
We continue to benefit from our activities and operational excellence and cost containment leading to improved margins.
We have raised our 2023 adjusted EBIT margin and adjusted net income outlook ranges for 2023, demonstrating solid operating performance, even with the negative impact of the UAW strike in the third and fourth quarters.
And we recently announced our commitment to achieving net zero across Magna by 2050.
Our industry continues to experience incremental improvements, including reduced supply constraints stronger and more stable production schedules and resilient auto sales in a number of markets.
However, in the global economy continues to face some interlocking challenges, including continuing elevated labor inflation higher interest rates geopolitical risks and slowing economic growth. These challenges are impacting our entire industry.
In North America, the Detroit, three experienced UAW labor stoppages for about six weeks, which cost the industry approximately 220000 units.
The UAW has now reached tentative agreement with all three Oems, which need to be ratified.
Our outlook reflects the full extent of the strike.
We remain highly focused on containing costs and improving our margins.
This is being achieved through ongoing operational improvement and cost recovery initiatives as well as executing flawless launches across magna.
At our virtual Investor event in September we provided an update on the progress of our go forward strategy.
Our ongoing Investor Medicine, megatrend areas are driving significant growth for the coming years, including 35 plus percent in powertrain electrification 75, plus percent in battery enclosures and 45% in active safety.
Most importantly, our portfolio substantially aligned with the car of the future.
Which we expect to drive sales growth, regardless of the pace of powertrain electrification.
Where possible we are working to mitigate risks, including by installing capital in tranches and employing different cost sharing models with our customers.
At the same time, we have been accelerating our activities around operational excellence to ensure we remain at the forefront of manufacturing and exceeding our customers expectations in all areas.
We expect about 150 basis points of margin expansion from our collective efforts here.
Including about half that amount this year.
And we're leveraging capabilities that already exist within magna to unlock opportunities with new models and markets as they develop.
It is early days for us in this area, but we have already had some traction.
We have experienced <unk> growth in batteries swaps in our battery as a service venture and are experiencing about 1000 deliveries to date utilizing magna produced box <unk>.
We expect about $300 million and new mobility sales by 2027.
We have a significant runway for additional profitable growth beyond that.
We expect our strategy to deliver continued growth above market improved margin center tones and further shift in our portfolio towards megatrend areas.
This should drive increased shareholder value in the Easter comp.
We also took a significant step forward in our commitment to sustainability and environmental stewardship by submitting net zero emission targets for validation by the science based targets initiative.
With a goal to achieve net zero by 2050, together with meeting our near term scope, one two and three targets by 2030.
Among the steps involved in meeting this target is transitioning to a 100% renewable electricity use.
European operations by 2025 and globally by 2030.
We have already made progress towards previously established sustainability actions. This year, we are on track to achieve our commitment to reduce global energy intensity by 10% and all manufacturing facilities with a target of 20% reduction by 2027.
And more than 30 Magna divisions.
<unk> carbon neutrality over the last two years with that I'll pass the call over to Pat.
Swamy and good morning, everyone.
As Swamy indicated once again, we delivered strong earnings this past quarter. Despite the onset of the UAW strike in September.
Comparing the third quarter of 2023 to 22 <unk>.
Consolidated sales were $10 7 billion up 15% compared to a 4% increase in global light vehicle production.
Adjusted EBIT was $615 million and adjusted EBIT margin increased 90 basis points to five 8%.
Adjusted EPS came in at $1 46 up 33% year over year and free cash flow generated in the quarter was $23 million compared to a 210 million use in the third quarter of 'twenty two.
Despite our higher capital spend this quarter to support record program Awards in 'twenty two.
During the quarter, we paid dividends of $128 million and we increased our adjusted EBIT margin and earnings outlook. Despite the negative impact of the UAW strike.
Let me take you through some of the details.
North American and European Light vehicle production were up 7% and 14% respectively, while Chinese production declined 2% netting to a 4% increase in global production.
Our consolidated sales were $10 7 billion up 15% over the third quarter of 'twenty two.
On an organic basis, our sales also increased 10% year over year for a 2% growth over market or 4% growth over market excluding complete vehicles.
The sales increase was primarily due to higher global vehicle production the launch of new programs adjust.
Adjustments to recover certain higher input costs the acquisition of <unk> active safety net of the divestiture of our manual transmissions plant in Europe and to the net strengthening of currencies against the U S. Dollar.
These are partially offset by lower complete vehicle sales, mainly due to a program changeover and an estimated $55 million impact from the UAW strike.
Adjusted EBIT was $615 million and adjusted EBIT margin was five 8% compared to $4 nine in the third quarter of 'twenty two.
Our continued focus on operational excellence and performance on cost initiatives is driving strong earnings on higher sales.
This was despite the negative impacts of a program changeover in complete vehicles.
The UAW strike, which we estimated cost us about 10 basis points.
And acquisitions net of divestitures.
Combined we generated 40 basis points of net improvements.
Adjusted EBIT margin was also positively impacted by <unk>.
About 60 basis points of net operational items, which include productivity and efficiency improvements at certain facilities and lower net engineering costs.
About 50 basis points related to lower net input costs.
And higher equity income, which benefited margin by about 15 basis points.
EBIT margin was negatively impacted by commercial items that had a net unfavorable impact in the quarter, which subtracted about 75 basis points year over year.
Interest expense increased primarily reflecting senior notes issued in borrowings in the first half of the year as well as higher interest rates.
Our adjusted effective income tax rate came in at 21, 9% largely in line with our 23 expectations, but lower than Q3 of last year.
Adjusted net income attributable to Magna was $419 million up 32% over the third quarter of 'twenty two.
Reflecting higher EBIT and a lower tax rate, partially offset by higher interest expense and minority interest.
Adjusted diluted EPS was $1 46 up 33% compared to Q3 last year.
This increase is the result of higher net income and fewer shares outstanding.
The reduced number of shares outstanding substantially reflect the impact of share repurchases in 2022.
Excuse me.
Turning to a review of our cash flows and investment activities.
In the third quarter of 'twenty, three we generated $821 million in cash from operations before changes in working capital up $230 million or 39% from 22.
And we invested $24 million and working capital.
Investment activities in the quarter included $630 million for fixed assets and $176 million for investments other assets and intangibles.
As expected Capex was higher than the $364 million in Q3 last year to support our record program Awards in 2022.
Overall, we generated free cash flow of $23 million in the third quarter.
We also paid $128 million in dividends.
Our balance sheet continues to be strong with invest investment grade ratings from major credit agencies.
At the end of Q3, we had over $4 5 billion in liquidity, including about $1 billion of cash.
Currently our adjusted debt to adjusted EBITDA ratio is 2.0 to.
Excluding cash we're holding to help pay down our $550 million Euro senior notes coming due in the fourth quarter, our ratio would be $1 98.
This ratio continues to decline and is tracking better than we expected at the end of last quarter 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 decline through 2024.
Next I will cover our updated outlook, which incorporates higher than previously expected vehicle production in both Europe, and China, including as a result of better production in Q3.
Our assumption for production in North America is unchanged from our previous outlook as stronger than expected production was offset by the impact of the UAW strike.
We have not assumed any loss <unk> production is made up in the fourth quarter.
We also assume exchange rates in our outlook will approximate current rates.
We now expect a slightly weaker euro Canadian dollar and RMB for 2023 relative to our previous outlook.
We have narrowed our expected sales range with essentially the same midpoint as our last outlook. This mainly reflects higher European and Chinese vehicle production in the second half of 'twenty three offset by the net stronger U S dollar relative to our last outlook and the estimated 310.
$10 million impact of the UAW strike.
We communicated last quarter that beginning in Q3 Magnus adjusted EBIT would exclude the amortization amortization of all acquired intangibles.
Our August outlook excluded our estimate of the amortization of intangibles associated with the acquisition of <unk> active safety above $30 million for half of 'twenty three.
Our final analysis of all other acquisitions, resulting in about $50 million of additional annual amortization to be excluded from our adjusted EBIT calculation.
This additional adjustment amounts to approximately 10 basis points in EBIT margin.
We have updated our historical presentation of adjusted EBIT to reflect these revised calculations.
As a result of our strong performance so far in 'twenty three our expectations for continued operational execution and despite the negative impact of the UAW strike, which we estimate to be between 10, and 15 basis points, we have narrowed and raised our adjusted EBIT margin.
We now expect our EBIT margin for 'twenty three to be in the range of $5 one to five four which compares to $4 nine to $5. Three previously adjusted by the 10 basis points.
To reflect the amortization of all acquired intangibles.
We're increasing our equity income range, mainly reflecting our better than forecasted performance in Q3.
As a result are increasing our adjusted EBIT margin range. We are also raising our range for adjusted net income attributable to Magna.
Our interest expense tax rate capital spending and free cash flow expectations are unchanged from our last outlook.
In submarines.
We are pleased with our strong operating performance in the third quarter.
Once again, we outgrew our end markets by 2% on a consolidated basis and 4% excluding complete vehicles.
We've raised our outlook for 2023, and we have continued confidence in our plans for margin expansion to come.
For your attention, we will be happy to answer your questions.
Thank you.
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One moment please for our first question.
And we'll proceed with our first question Im a line from Chris Mcnally with Evercore. Please go right ahead.
Okay.
Thanks, so much team.
I appreciate all that all of the detail, maybe we could start with obviously the big topic.
The week is around EV demand and maybe you could just kind of.
Just level set just remind us your exposure, particularly in powertrain you have 800 million on last year growing to I think it's about $1 billion.
This year you have targets.
I think 4 billion out in the out years.
What percentages may be pure EV for 48 volt and hybrid that would be helpful. And then just a pace on battery.
Enclosures, which is obviously a new growth area.
Sort of anything around 'twenty three 'twenty four again, you've given longer term target and just remind us maybe some of the programs or geographic exposure. Those are the big questions I think that you'll probably get several times in the coupon from there from the rest of the analysts and maybe we can start there.
Hi, Chris Good morning.
We will try to address the different aspects of our questions.
I think from an EV perspective, just generally to address macro.
Always said electrification is secular irreversible trend and it's here to stay but the question was going to be.
The predictability of the.
Take rates right.
Soon is it going to come.
So it's basically the very long tail and it's very early days of electrification.
Also if you look at the last three or four years as we talked about electrification.
We have generally said at a global penetration will be somewhere in the mid thirty's.
Percentage by 2030.
<unk>.
Given those circumstances, our policy our climate strategy has been to.
They look at their volumes by program by customer.
Look at external sources IHS and.
And our own internal.
The volume predictions.
And have been using that to come up with it.
The numbers that you talked about.
In the past not just related to EV right. The volume uncertainty as has been the air on every program should correct for decades, and we have a mechanism to go through that in our own planning process and how we.
Perfect half go forward.
Planned scaling of mid tier modularity, but beyond that even have the discussions with the customers.
There is a significant change in volumes, but all that said hey, a few questions specifically that you asked about.
And the electrification of powertrain specifically.
We've talked about about $3 billion.
In 2025 manage sales.
And about 4 billion during our Investor day in 2027.
And when we talk about those numbers. So we are always taken into account the.
Mechanism that I talked about coming up with our own volumes looking at.
Multiple sources.
Looking at the take rates, which I would say it a little bit more conservative then.
Or are the customers and the markets have been talking right. So thats one piece.
On the vaccine closure side I think Luis we are in the three or $400 million. This year and we were talking about one 6 billion by 2025.
And then we talked about the product line, where we are using existing assets, whether it's castings our extrusion stampings.
Praxis and so on.
They are dedicated.
Assembly lines are considered pooling, which are paid by the customer.
Thanks.
So that continues and that is also a strategic product in the sense that when you look at the frames and the underbody and so on receipt.
Going forward and we talked about the analogy to the frames in the past, where we did in the mid nineties and we continue to do the third and fourth generation of the same product today. So this is a long term play and we feel pretty good about that.
I know I tried to address different aspects of your question did I Miss anything there in the 48 volt.
Just under just under a quarter of our sales in 2007 of that managed sales ever.
And then what about plug in.
Well, because obviously there is definitely more of a concern around pure evs and plug in is it sort of continued.
There is a decent amount of PAA television right and your high voltage for.
Powertrain as well.
Yes, I think most of our if you look at the general sales.
Overall powertrain significant pace I think is in the 48 volt.
Substantially in the hybrid.
There is a product line that we've talked about in the ph UBS, but it's predominantly in 48 volts, which could be applied to the appear to be part of it and pure Evs, which is in the <unk>.
And then the only last bit of detail within battery enclosures.
It's new and obviously there is one large platform that you've discussed a win on how diversified if I look through 2025 is that sort of a $1 6 billion, while we're talking a handful of Oems or is it.
Or five to eight.
So I think we're talking about eight Oems Chris.
But we are talking about for years.
Included in the projections that we mentioned in the figures that's eight Oems and it's global and it's global.
Yeah.
That's great and if I could just squeeze one last one on pricing recoveries. Obviously, we talk so much about either the last week to week kind of forgot about the older issue. We call you to talk about on Q2.
Could you talk about the pace of recovery.
It is going.
Maybe just whats lapses in terms of could this be an extended.
Tailwind into 'twenty four because obviously you get the annual nation of any price recovery, you've gotten in that in the second half. Thanks, so much.
Thanks, Chris we've been disclosing I would say the net impact rather than specific amounts right.
If you look at the certain cost in energy have decline.
There is a.
Improving trend in commodities and in certain cases.
And I would say we are on track to obtain the recoveries necessary to meet our outlook.
Maybe a little bit of color, we talked about the $100 million at the beginning of the year as headwinds.
In our last call, we talked about that being reduced to 50.
And as we stand here today.
Zero.
The $100 million has been brought down to zero.
But we continue our discussions.
The focus still remains right on all the things whether it is operational excellence, whether it is looking at every program and continuing discussions with customers.
Specific only through 'twenty three we've always talked about looking at it holistically from 'twenty, two and beyond going forward planning into 2004.
Thank you very much.
Our next question on the line.
It is from Mark Delaney with Goldman Sachs. Please go right ahead.
Yes. Good morning, Thanks, very much for taking my questions. First thing is you guys are thinking about your prior target to reach profitability in megatrend areas in 2025, and as Youre seeing some of the traditional Oems revisit the rate of their ramps around evs and including some in North America, where you've disclosed wins do you still think you can reach that profitability.
Target in 2025.
And if so are you contemplating in having to make some changes in order to still get there.
Good morning, Mark.
Yes, when we talked about the megatrend areas, it's not surely electrification part of it.
Also and other products that are included in there.
We have to go through.
The customer changes in their roadmap if any as we are going through the plan right now.
But I would say we have.
In some cases had to call it different business models, which are kind of tied not.
Completely tied to volumes, but.
Ill give you. An example, this year on one program.
There was a change in volume we had a commercial settlement right and in some cases, we are looking at models spare.
Capital Inlay is put forward by the customer.
Related to Airbnb program. So there are multiple ways, we're looking at it to mitigate or minimize risks obviously cannot take all the risk.
We have been doing this but I think this is a little bit more deliberate and more proactive when we talked about the idea of your platforms, but I think we'd be able to give more color. When we come back in February for the outlook.
And I think Mark you have that when we talked about the Mega trends there is a big improvement in the Adas business, specifically as we start launching these programs and thats, regardless, whether it's on were distributed across ice in evs in that space.
So youre expecting significant engineering today and as those revenues launch we should have a lot of contribution margin dropping to the bottom line. So it's really not just in EV.
Explanation into 'twenty five.
Very helpful. Thanks.
In terms of the updated EBIT margin guide you are taking up your margin guidance on pretty similar revenue and despite the UAW strike headwind that you are now having to to overcome it.
You gave us a number.
Metrics around various puts and takes but maybe just level set us and summarize a bit what's driving the better EBIT margin. Despite some of these headwinds.
Is there any.
Or anything unusual that you would say that's more comfortable hoping that the margins in the second half of this year or do you think this is illustrative of the profit potential and gives you guys. Some good momentum towards the at least 230 bps of margin expansion by 2025 that you had previously talked about thanks.
I can start and swamy jump it.
I think guidance guide to guide, we're really just executing where we expect it to be volumes have come in a little bit stronger.
If you look on an annual basis, we have said from since the beginning of February that we're going to improve our margins as we go through the year and that was driven by launches. Some changeovers, but also just the timing of recovery of our commercial settlements I think we're tracking on that plan. The one change I would say some separating really has been.
The execution on the operational front that we are exceeding our targets for whether it's.
Cost recoveries, our cost containment and our.
Our acceleration of our improvement plans I think thats, the big driver and Thats whats given us confidence.
We are reiterating what we said in September that we have confidence in our 25 numbers and we're taking our input costs down you said that was going to be a headwind of 50 last time around we're saying, it's basically neutral now so that's another contributor to the outlook.
Ill look outlook, improving yeah in summary, I would say.
There is not any temporal.
Topic that is added to the expansion records just operational excellence.
The trend of the materials and energy correct.
Thank you.
Thank you very much.
We'll proceed with our next question on the line from Tom Narayan with RBC. Please go right ahead.
Hi, guys. Thanks for taking the question.
The first one.
Sorry, I missed this in the prepared comments could you review the.
UAW impact.
Just the absolute revenue and an EBIT impact that you are EBITDA or EBIT impact that you've that you've had thus far or you expect in 2021.
Yes, so just for.
Just to level set so our Q3 impact.
It was $55 million in sales about 10 basis points on margin Q4, we're estimating an additional 255 million. So a full year basis $310 million of sales with an impact of 10 to 15 basis points on our guide.
Okay. Thank you.
I mean, obviously the next questions.
On the on the EV side so.
I guess the question has to deal with.
Sure.
How orders work in your order book works and we saw some commentary yesterday from a couple of suppliers.
Suggesting maybe some caution on the order book just curious in terms of how susceptible or how would how would how concerning cancelations b.
This downturn get more sameer or quote unquote, even slowdown in seven years.
I mean do you have a lot of visibility on the orders.
It's a situation of like 50% growth going to 30% growth. So you have enough inertia to help you.
Just trying to get a sense of the visibility on on the order book around electrification.
Good morning, Tom.
As we look at it.
We haven't really seen any cancellations.
As I mentioned to one of the previous question.
If there is one.
Volume change.
Term sort of timing it is a discussion that we have with the customer.
Okay.
I wouldn't say, we've seen anything significant maybe.
I'll take that Brian.
One point that might help if.
If you look at just not electrification, but all content.
On EV platforms.
We are in single digits as a percent of sales right.
In 2023.
Going out through 2025, maybe one fifth of our business roughly is connected to EV platforms, but again.
I want to reiterate we always look at volume planning from our perspective based on customer based on platform based on segment of the vehicle looking at IHS data and other sources. So.
David David.
Clearly the Magnum volume.
You have to have a judgment on.
That's one aspect of it the other one like I said look even on ice.
There are several programs rich don't hit the volumes that we have predicted and we have mechanisms to have those discussions with their customers.
This is besides.
<unk>.
Having capital outlay in tranches.
<unk> flexible manufacturing so that we can flex the volume change obviously within reason.
There are some cases, where the volumes are up.
So it's a complex.
Really really accretion here, but we've had this with customers.
There is a little bit of uncertainty and that's where as I said in some cases the models.
Sure Amit.
<unk> platform to their customer.
Has come forward with the capital.
Some we already had settlements on.
Rather volumes changed significantly in some cases, we're looking at the same product.
<unk> created a platform has both ice and EV, so depending on which the better there is a little bit of a net hedge. So there is a lot of these things that we look at it from a planning perspective to again mitigate risk not completely but.
It gives us enough comfort.
Okay.
Another thing that we heard yesterday was that.
And it seems to be this.
Kind of a divergence of opinion on this EV.
The client story geographically with <unk>.
Head of Americas, let's say thinking that we're in.
<unk>.
Armageddon scenario and then over in Europe, it's in kind of opposite view.
Just curious in terms of.
Your OEM exposure.
<unk>.
<unk> EV, specifically investment does that is that something thats pretty geographically balanced or how would you characterize that.
<unk> kind of exposure.
Geographically.
On Oems.
Yeah.
Generally if you look at it our overall sales we are about 60% of store in North America.
35% in Europe, and the rest in.
Other spread predominantly China.
And we have said.
From a regional perspective, the electrification take rates are higher in China.
Followed by Europe, followed by North America.
Tom This is very specific on platforms, we have to not just look overall.
<unk> segment.
It'll benefit judgments to say, where do we have relationships with the customer.
We're already having reasonable conversations in terms of their business models, which platform a lot of that comes in rather than generic view on.
Region by region.
Got it my last one is just.
On that other topic the price mix topic.
Obviously.
The Oems benefited on the way up in the past three years.
And if we do get a normalization in price mix.
One of the fears is that potentially in the Oems can go to the suppliers and.
And ask for price Downs.
How does that happen historically.
Historically in the past that.
You guys typically benefit on volume recovery, regardless, if price mix is coming down for your OEM customers or do they have the ability to squeeze you guys.
As price mix comes down.
Yes, those conversations have never been easy and like you said the one remember we're doing well in the last three years I would say that conversation still retinopathy.
But I can say that we've talked about.
Various things in recoveries looking at.
Underperforming programs programs coming to an end.
Input cost inflation, whether it grows semiconductors or others.
David a tough conversations and I've talked about.
Getting the headwinds to be neutralized this year.
All I can say is they will continue to be data at <unk> that we have been living in this tough environment of inflation.
Chip shortages and supply constraints over the last three years.
So we already have been living in that right. So I think we're not going to change our thinking process to be speaking of Jessica Li with data we have.
Tough conversations, but I would say they were fair and car deal.
Yeah.
Okay, great. Thank you so much.
Thank you.
Next question on the line from.
From Dan Levy with Barclays. Please go right ahead.
Okay.
Hi, Good morning, Thank you for taking the questions.
Wanted to just follow up on the last.
Uh huh.
On the last question.
Specifically the commercial recoveries in the quarter, just any color was that.
At all with it retroactive.
Piece price.
Any color on.
What the recoveries were in the quarter the T cell <unk>.
Magnus here as well.
So.
I think we had.
<unk> talked about it again.
Net impact of of them growth and I talked about the 100 million right.
Due to the complexity of talking productivity versus.
In place of the companies.
Put a bunch of other things.
I would say.
About two thirds of the recovery in general are more.
And related to flow through purchase orders indexing and so on that will continue going forward.
About roughly one third or one time right.
So the ones that are more.
Mechanism based where they're getting on an index or purchase orders and so on and so forth will flow through into the following years.
And the conversation of the onetime depends on for example energy.
They are versus what the recovery needs to be so it's kind of a mix.
And Dan if I can just add.
When you compare to our expectations, we didn't have a wind on recoveries are commercial.
And our guidance really when we're talking about are our increase in net inflation to pick up it's related to last year on the commercial side and we've been guiding all year that we had.
A 45 basis point headwind related to commercial issues and Thats whats coming through.
Thank you and then just the second if you could maybe give us a.
Our sense of what what's happening within the segment.
And specifically.
Seating.
I know it doesn't get a lot of air time, but the best margin we posted in a while so just any voiceover on seating and then.
Complete vehicles, we know that you've said that there would be.
A changeover and that would drag it.
The negative margins I don't think anybody expected, maybe you could just give us a sense of.
When you get past, the changeover and where those margins in complete vehicles should normalize too.
So good morning, I think again as we've talked a little bit about seating I think we've been saying over the last few photos. Some funds that we had really favorable mix in 'twenty two.
With the chip supply getting better we are.
Seeing.
Normalized.
Volume on some of the big platforms that we have and therefore, we see there.
Flow through.
<unk> lighting.
It needs to be said about the team continuing to focus on executing as we had talked about various initiatives. So thats.
Uh huh.
I'm glad that <unk> been talking about seeding that further make fisher and it is really showing up right.
I think youre right on the complete vehicles, where we have said.
The change or in the launch cycle.
Is the royalty impacting and it's still.
In line with the expectation that we have in that segment and I think as we get past this year into the next year.
We'd be able to give more color.
February.
But as we stand here today I think it's tracking towards we expect.
Great. Thank you.
Thank you very much.
Our next question on the line from Colin Langan with Wells Fargo. Please go right ahead.
Oh, great. Thanks for taking my questions.
If I look at the implied second half margin, it's around five 6%, which is clearly above your full year guidance. Following your outlook should we be thinking of that as the right sort of jumping off point as we go into 'twenty four.
Or you kind of mentioned that there's sort of a cadence of recoveries. So is there any sort of help from the recoveries in the first half that's helping that second half margin, making it sort of maybe not a good place to be thinking about.
Okay.
Yes.
Good morning.
I think when you look at the second half to correct. This.
This is what we had been expecting that as we get through the back half of the year the recovery is going to be.
More back half loaded.
As we move into and Thats why we said earlier, we're still comfortable with where we're going and our R 25 projections and we're in the middle of our VP process, but we do have to get through volumes in assumptions and whatnot.
But coming in do we expect to have a reduction in margins into 'twenty four no do we think we can launch from.
Some from the mid fives upwards I agree with that plant.
Okay got it and then.
You mentioned before you have so how should we think about the cadence as we go into next year because it sounds like you still have a third of.
Your recoveries might need to get renegotiated in some form so does that mean, there's going to be the sort of continued sort of tougher Q1 until you get those recoveries or is this becoming more of an automatic formula because if certain conditions are met you could kind of just got them January 1st of all I think it's way too early to comment on cadence in 2020.
Four we need to get through our planning process.
We'll have a better sense for that.
I guess I was trying to get out maybe like how it normally works does do you have to start those negotiations at the beginning of next year again or is it more of a.
So I'm trying to understand the triggers that would help you get those recoveries for that whatever it is not locked into piece price.
So things like I said.
One that is in our mechanism.
Races that kind of flows through but the other way.
B data based on greater setup assumptions side in terms of energy and commodities and so on right. So that could be very fact based so some conversations for 24 are already on the table to the extent there's been no other information and if you remember in the last two calls I said, when we talked 20 threes.
Not just only 23 some of it is 'twenty two.
Some of these forward looking.
Thanks Deborah.
What 'twenty four would look like but like Louis said.
That can become more definitive once we finish our setup redemptions and have the plan in front of us.
Got it alright, thanks for taking my question.
Thank you very much. We'll proceed with our next question on the line from Joseph Spak with UBS Securities. Please go right ahead.
Good morning, everyone.
Maybe a little bit of <unk>.
<unk>, keeping just a sorry, because I'm a little bit confused on the amortization color you provided like you adjusted your prior guidance by about 10 basis points, which suggests about $40 million, but then when I look in the quarter. It looks like you added back $32 million in the quarter. So.
How do how do we square that because it doesn't seem like that was the amortization like abnormally high in this quarter like why would it step down.
Maybe you could just give us a better sense of sort of what you think.
What the full year amortization.
Last year, this year and what sort of <unk>.
<unk> run rate is going forward. So we can properly adjust our models.
Yes, so good morning, Jos on the amortization.
So.
We're trying to get an apples and apples comparison, so what we've done when you look at our financial reporting that will come out today, it's very clearly listed on our analysts reporting our financials, but just specifically to the numbers.
When we guided in August, we said $30 million for half of the year for being here so be in years about $60 million of an impact annually. When we get our final scrub of all the other acquisitions that we had out there on an annual basis. There is approximately another 50 that is going to flow through so on an annual basis for the next couple of years, it's going to ebb and.
So as stuff rolls off but you are in that $110 million range.
Okay.
And last year last year would have been about 50 50.
Yes.
So, it's 50 and going forward.
It's one time.
Correct and this year would be <unk>.
<unk>, yes.
Right. So then.
I know youre thinking cynosure, you sort of restate the prior years.
This isn't the documents and trying to get a chance to look through but.
The other thing about fourth quarter is what's sort of the right.
Jumping off point for the new measure of adjusted EBIT, and the like that seem like $11 million $11 million or so that we are.
We need to add back to the fourth quarter.
$11 million relative to what we said last quarter, because we basically would have implied 15.
Yes.
So about 11 is what we would have incremental to what we said last quarter.
Okay.
The second question is.
I think if we look at.
<unk>.
Yes margins are implied in the fourth quarter.
<unk>.
And you look at your full year guidance for second one there was a step down I know that segment has been performing better.
Year to date in part I think with some better performance at that at some of those underperforming facilities.
But how much of that step down is.
<unk> related because I know there is some big customers there.
How much of it is maybe a little bit of a push out from the batter enclosures business.
And I guess related to sort of.
Batter and colors of I know you've mentioned a big Capex investment.
Is there any thinking to sort of maybe slow or re time some of that spend or is there something either sneak in.
In Basra.
Yeah.
Yes, So I think there's two parts of the question. So I'll start with the first one so from Q3 into Q4 you are correct.
The impact of the strike at the UAW is higher in the fourth quarter relative to the third so that's a drag on margins.
The other issue or not issue is just factors. We continue to launch business, we tend to launch business more in the fourth quarter relative to the third such dragging margins.
But that would have been as expected this isn't really a change from guidance to guidance and that's reflected in our our increased guidance range for BS for the full year on the second part of the question related to battery trays.
Battery trays really arent draggy.
The margin in the sense that mostly spend and a battery tray spaces related to capital and it gets put onto the balance sheet as far as timing of spend.
<unk>.
We're sequencing our capital as required.
Just to be clear, we're not in a situation of building something in waiting for business to happen. We have facilities and we are scaling the build related to the customer's production plants. So we're scaling our capitalized needed as Swamy said earlier those plans change we're going to adopt adapt as well so that we can.
Delay our spent to the amount needed or as necessary, but.
We have to push forward.
<unk>.
In this space, but it's not really a margin impact related to this year, Joe I would just add in terms of the UAW strike. It is a little more weighted now.
Not only Q4 versus Q3, but a little more weighted to <unk> at the other segments. So I think thats dragging that if you look at our our implied fourth.
Fourth quarter, it really didn't change that much. So it isn't really sales has an impact and it really in any one segment OLED meaningfully it's really just the or waiting on the UAW strike I think in BFS.
So is it like something.
Something with an eight handle a better a better underlying rate for that business at this point, if we if we sort of back out some elevated.
Launch activity in the fourth quarter on the strike.
Well I mean, we're implying.
Kind of a range of 5% to six five for the fourth quarter right.
Right, but what I thought you guys mentioned there is some unusual.
For the fourth quarter right at least the strike.
Yes, well, we're not going to.
Comment on where we're expecting to go beyond this we'll give more color in February.
Thank you.
Thank you very much we'll get our next question on the line is from James <unk>.
Hello from BNP Paribas. Please go right ahead.
Hi, good morning, everyone.
Just back on the on the seating business so.
I know you guys don't provide a backlog but of course you have one.
One of your competitors and also back on the EV topic, one of your competitor.
They stated that their new business backlog of about 80% of it for next year was tied to.
The EV programs and they went ahead and cut that that backlog contribution for next year by 20% just based on their perceived visibility or real visibility and what those either build schedules look like so just curious what your.
The program mix and the new business draw for the coming years, what that could look like in the seating business in.
Any other major product categories that are of course powertrain agnostic.
And in terms of the.
This EDI exposure.
Good morning, Jim I think.
One of the things I mentioned overall, if you look at management this year right.
All content or total sales related to EV platform investments, 10% right.
And if you look at the specific question I think youre talking about in seating.
I think Louis Big content for us on EV platforms today in seating is.
Not material no.
So we won't see that impact obviously going forward into the outer years.
Which as you know.
<unk>.
Too premature to comment in terms of volumes because given jet type.
Our operations and so on and the outer years as we monitor can bring have to recalibrate with the customers. If there is a significant change again going back to my previous comments, we will work with them to see how we need to recalibrate and what needs to be really put in place.
If there is a substantial change.
Okay understood and then just one.
One quick one on on the LG powertrain JV.
As we think about the <unk>.
Targeted revenue ramp to one and a half for $1 6 billion whatever the number is and.
In the coming years, just in terms of the customer regional mix of that joint venture what that looks like.
Yes.
We have a roughly talking about $1 billion this year moving strike.
And if you look at it the customer mix.
As between North America, and we are.
We're getting into Europe right.
And it is on programs that have been already there and obviously some will be going forward and launching.
And this is what I would call a building block, which is like the <unk> machine in the water.
Richard.
And we think not specific only to a program.
There is a certain amount of specificity to a program, but there is also.
A generalized asset rich products two <unk> machines in general So I think there is a certain amount of flexibility as we talk about the manufacturing and the engineering related to this and it's not tied to one program. So again going back to this is where we talked about flexibility. There again, we'll have to look at the numbers.
We get.
Romney customers. If there is a substantial change, but as we sit here today and look at what's out there we.
We haven't seen a big.
Drop for change, but we'll be able to update based on our plans coming back into February again.
Thanks.
Thank you and we'll proceed with our next question on the line from Jonathan.
Jonathan Goldman from Scotiabank go right ahead.
Good morning, and thanks for taking my question.
So just a quick one on the macro I believe the previous North American production outlook did not factor in the impact from strikes.
If we strip out the impact that you are projecting your underlying production outlook would be up from previous expectations.
Can you just discuss what youre seeing in the macro environment that supports a relatively better outlook.
Yes.
Good morning.
Exactly so when we guided in August we guided X, we didn't assume any UAW or uniform issues at $15 2 million units.
Our estimate is that we lost 220000 units as a result of the UAW labor disruptions, which would imply 15 four of the $15 for the 200 increase that primarily came through in the third quarter.
Okay.
And of that more projects or product launches or market growth, but are there any puts and takes there.
Can you repeat the question you just broke up a bit.
Yes, so the incrementally positive market outlook could you just discuss any puts and takes that you're seeing.
So just higher volumes, but draws from our customers relative to what we were anticipating.
Okay Fair enough and then another housekeeping one you raised the margin guidance, but it looks like below the line items are flat can you maintain the free cash flow guidance for the year could you just help me bridge the Delta there.
Yes.
Got it.
The simple answer is that it's just a movement within the range.
When you work through the math, we're comfortable holding the range where it was at.
And there is nothing particularly going on with working cap or anything else.
Yes exactly.
Okay. Thanks for taking my questions.
Thank you.
Next question on the line from Michael Glen with Raymond James Go right ahead.
Hey, Thanks for getting me in can.
Can you just talk a little bit of a power envision margins.
Just trying to understand is the sequential uptick from Q2 into Q3, even excluding the amortization of intangible dynamic like youre showing a pretty notable lift from.
Q2 into Q3 was <unk> <unk> accretive to power innovation margin in the quarter I'm just trying to.
Figure out exactly whats behind the lift.
Hi, Michael Good morning, I think.
If you look at the first half we added warranty item.
And there will be a net negative commercialized in the Q2.
And there was higher engineering costs. So that's kind of some in the first half if you look at the second half.
And obviously, we also had net input costs, which were a headwind in the first half.
If you look at the higher sales in the second half.
And you take out all the one timers in the warranty item.
Hi, Thanks for taking cost out.
Hi.
<unk> added to the bottom line and equity income was higher.
Okay, and if <unk> any comments on the contribution of <unk> in the quarter, two EBIT power envision EBIT.
I would say the the comments that we gave in the last call that we are in line with the expectations that we had during closing.
With me in here and we continue to have good traction.
We realize the synergies that we talked about.
Okay.
And.
And then just.
In terms of North America, I know that this quarter, there is a strike and everything like that but would you say performance. This quarter was consistent like I'm trying to assess at the platform level and you identify your larger platforms each year in the Aif would you say there was a pick up in the quarter across some of the smaller.
Programs that you have in North America or was it generally consistent with prior periods or is it are the larger and more profitable programs at the level you expected in the period.
Yeah.
To be completely honest I don't have that in front of me. So it's really hard but we don't.
Look at it by regions.
With that I'd have to look at it and see how it compares to what we've seen what we've seen historically I think there was anything notable.
So that I can see in the quarter, but also looked at it a little more closely.
Got it thanks a lot.
Thank you very much.
And Mr. <unk> there are no further questions at this time I will now turn the call back to you for any closing remarks.
Thanks, everyone for listening in today.
Happy with our continued progress in 2023.
We have a relentless focus on execution up on Saturday and meeting our mid and long term targets and become ongoing confidence in our ability to meet our plan. Thank you and have a great day.
And that does conclude the conference call for today, we thank you for your participation and ask you disconnect your lines.
Have a great day everyone.
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