Q4 2023 Magna International Inc Earnings Call
Operator: The Bulletproof Executive 2013 Please stand by; the conference will begin momentarily. We thank you for your patience and ask that you please remain on the line. PAGE PAGE PAGE 1 2 3 4 5 2 3 2 4 5 2 3 4 5 4 5 4 5 2 1 1 1 1 1 1 1 1 1 1, Greetings and welcome to the Magna International Q4 and year-end 2023 results and 2024 Outlook conference call. During the presentation, all participants will be in a listen-only mode.
Please standby the conference will begin momentarily we thank you for your patience and ask that you. Please remain on the line.
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Speaker Change: Greetings and welcome to the Magna International Q4, and year end 2023 results and 2024 outlook conference call. During the presentation, all participants will be in a listen only mode.
Operator: Afterward, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. Should you require operator assistance at any time, please press star 0.
Speaker Change: Afterwards, we will conduct a question answer session at that time. If you have a question. Please press the one followed by the four on your telephone should you require operator assistance at any time. Please press Star Zero as a reminder, this conference is being recorded today Friday February 19, 2024, I would now like to turn the call over to.
Operator: As a reminder, this conference is being recorded today, Friday, February 9, 2024. I would now like to turn the call over to Louis Tonelli, Vice President, Investor Relations. Thanks. Hello, everyone.
Speaker Change: Louis Tonelli, Vice President Investor Relations.
Louis Tonelli: Thanks, Hello, everyone and welcome to our conference call covering our 2023 results and our 2024 outlook.
Louis Tonelli: And welcome to our conference call covering our 2023 results and our 2024 financial outlook. Joining me today are Swami Kotagiri and Pat McCann. Yesterday, our board of directors met and approved our financial results for the fourth quarter of 2023, as well as our 2024 financial outlook. We issued a press release this morning outlining both of these. 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 magna.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.
Louis Tonelli: Joining me today are so let me quit at Gary and Pat Mccann.
Louis Tonelli: Yesterday, our board of directors met and approved our financial results for the fourth quarter of 2023, as well as our 2024 financial outlook.
Louis Tonelli: We issued a press release this morning outlining both of these.
Louis Tonelli: 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 Magnum Dot com.
Louis Tonelli: 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.
Statements involve certain risks assumptions and uncertainties, which may cause the company's actual or future results and performance to be.
Louis Tonelli: Totally different from those expressed or implied in these statements.
Louis Tonelli: Refer to todays press release for a complete description of our safe Harbor disclaimer.
Louis Tonelli: Please also refer to the reminder slide included in our presentation that relates to our commentary today. This morning, we will cover our 2023 highlights, as well as our Q4 results. We will then provide our 24 outlook, and lastly, run through our financial strategy. And with that, I'll pass it over to Swami. Thank you, Louis. Good morning, everyone.
Louis Tonelli: Please also refer to the reminder, slides included in our presentation that relates to our commentary today.
Speaker Change: This morning, we will cover our 2023 highlights as well as our Q4 results.
Speaker Change: We will then provide our 24 outlook and lastly run through our financial strategy and with that I'll pass it over to Swamy.
Swamy: Thank you Louis good morning to everyone.
Seetarama Kotagiri: I appreciate you joining our call today, and we'll jump right in. Overall, I was pleased with our 2023 operating performance, including good launch execution, that helped us to continue to drive organic sales growth over the market and record sales of $42.8 billion. Great efforts at all levels to offset inflationary pressures and significant traction in removing costs and improving efficiencies across the company. We ended the year with solid Q4 results, considering we were slightly hampered by a couple of discrete items relative to our expectations. Pat will cover those.
Swamy: I appreciate you joining our call today, and let's jump right in.
Swamy: Overall I was pleased with our 2023 operating performance, including good launch execution that helped us to continue to drive organic sales growth or market.
Swamy: Record sales of $42 8 billion.
Great efforts at all levels to offset inflationary pressures and significant traction and removing costs and improving efficiencies across the company.
Swamy: We ended the year with solid Q4 results.
Swamy: <unk>, we were slightly hampered by a couple of discrete items relative to our expectations path will cover those.
Swamy: Our sales of $10 5 billion in the fourth quarter of 2023 were up 9% year over year. Despite the UAW strikes that reduced sales by 275 million in the quarter and contributed to a negative vehicle production mix for us.
Seetarama Kotagiri: Our sales of $10.5 billion in the fourth quarter of 2023 were up 9% year-over-year, despite the UAW strikes that reduced sales by $275 million in the quarter and contributed to a negative vehicle production mix for us relative to the comparable period in 2022. Adjusted EBIT increased 52% to $558 million in Q4, and EBIT margin increased 150 basis points to 5.3%. Adjusted EBIT margin ended the year at 5.2%, up 70 basis points year-over-year and in the middle of the 5.1 to 5.4% range we guided to in November of last year.
Swamy: <unk> to the comparable period in 2022.
Swamy: Adjusted EBIT increased 52% to $558 million in Q4, and EBIT margin increased 150 basis points to five 3%.
Swamy: Adjusted EBIT margin ended the year at five 2% up 70 basis points year over year and in the middle of the 5.1254% range, we guided to in November of last year.
Seetarama Kotagiri: Our adjusted EPS for the quarter was up 41% to $1.33 and ended the year at 5.49. And free cash flow in Q4 was $472 million, up $132 million relative to Q4 last year. Turning to key accomplishments in 2023, we executed on a number of short and midterm operational excellence activities that contributed about 75 basis points to margin expansion this past year and is expected to contribute a further 75 basis points combined over the next two years. Our customers continue to recognize our efforts in operational excellence and innovation. Last year, we received 107 customer awards in recognition of quality and operational performance.
Swamy: Our adjusted EPS for the quarter was up 41% to $1 33.
Swamy: And ended the year at 5.49.
Swamy: And free cash flow in Q4 was 472 million up 132 million relative to Q4 last year.
Speaker Change: Turning to key accomplishments in 2023.
Speaker Change: We executed on a number of short and mid term operational excellence activities, which contributed about 75 basis points to margin expansion this past year.
And is expected to contribute a further 75 basis points combined over the next two years.
Speaker Change: Our customers continue to recognize our efforts in operational excellence and innovation.
Speaker Change: Last year, we received 107 customer awards in recognition of quality and operational performance. One reason, we continue to win business.
Seetarama Kotagiri: One reason we continue to win business. And in 2023, we committed to achieve net zero emissions by 2050. Operational excellence is enabled by our ongoing focus on people development. This past year, we launched our operational management accelerator program aimed at identifying and cultivating individuals within Magna to become future leaders in our division. For the second year in a row, Magna has been named one of the world's most ethical companies.
Speaker Change: And in 2023 be committed to achieve net zero emissions by 2050.
Speaker Change: Operational excellence is enabled by our ongoing focus on people development.
Speaker Change: This past year, we launched our operational management accelerator program aimed at identifying and cultivating individuals within magna to become future leaders in our divisions.
Speaker Change: For the second year in a row Magna has been named one of the world's most ethical companies.
Seetarama Kotagiri: And I'm proud that Magna received 16 leading employer recognitions this past year, including Fortune's world's most admired companies and Forbes' best employers, both for the seventh consecutive year. With respect to sales growth, we once again outgrew our markets in 2023. We were awarded about $12 billion in new business, which will contribute to further sales growth above market as these programs launch in the future. And we are on track with integration and synergies for the V&A acquisition. Lastly, our commitment to innovation has helped us win business in core areas, including advanced high-volume front camera modules with a European-based global OEM, battery enclosures with four global OEMs, and E-Drive Systems with a European-based and North American-based global OEM. With that, I will pass it over to Pat to cover our financials in more detail. Thanks, WAMI, and good morning, everyone.
Speaker Change: And I am proud that Magna received 16, leading employer recognition this past year.
Speaker Change: Including Fortune's world's most admired companies and Forbes best employers bought for the seventh consecutive year.
Speaker Change: With respect to sales growth.
Speaker Change: Once again outgrew our markets in 2023.
Speaker Change: Were awarded about $12 billion in new business, which will contribute to a further sales growth above market as these programs launch in the future.
Speaker Change: And we are on track with integration and synergies for the Vmware acquisition.
Speaker Change: Lastly, our commitment to innovation has helped us win business and core areas, including advanced high volume front camera modules with a European based global OEM.
Speaker Change: Battery enclosures with four global Oems.
Speaker Change: And E drive systems with a European based and North American based global OEM.
Speaker Change: With that I.
Speaker Change: I'll pass it over to Pat to cover our financials in more detail.
Pat McCann: Thanks, Swamy and good morning, everyone I'll start with a review of our results.
Pat: I'll start with a review of our results. As SWAMI indicated, we were pleased with our 2023 operating results. Overall, global light vehicle production increased 8% in 2023, or 9% weighted for our geographic sales. Our consolidated sales rose 13% year-over-year.
Pat McCann: As Swamy indicated we were pleased with our 2023 operating results overall global light vehicle production increased 8% in 2023 or 9% weighted for our geographic sales.
Pat McCann: Our consolidated sales rose, 13% year over year on an organic basis, our sales increased 11% driving a 2% weighted growth over market for the year. Despite the negative impact of the UAW strikes in the third and fourth quarters.
Pat: On an organic basis, our sales increased 11%, driving a 2% weighted growth over market for the year, despite the negative impact of the UAW strikes in the third and fourth quarters. Our adjusted even margin improved 70 basis points to 5.2%, reflecting earnings on higher sales, including improved margins due to the impacts of operational excellence, cost initiatives, productivity improvements, and lower costs at previously underperforming facilities. These are partially offset by higher costs associated with new assembly business, and the negative impact of the UAW strike. The Net Unfavorable Impact of Commercial Items
Pat McCann: Our adjusted EBIT margin improved 70 basis points to five 2%, reflecting earnings on higher sales, including improved margins due to the impacts of operational excellence.
Pat McCann: Cost initiatives productivity improvements and lower costs at previously underperforming facilities.
Pat McCann: These were partially offset by higher costs associated with new Assembly business the negative impact of the UAW strikes the net unfavorable impact of commercial items.
Pat: Lower amortization related to the initial value of public company security, higher launch costs, and the impact of acquisitions net of divestiture. mainly as a result of our sales growth and margin expansion. For the fourth quarter, sales increased 9% to $10.5 billion, adjusted EBIT improved 150 basis points to 5.3%, and adjusted EPS rose 41% to $1.33. I'll take you through some of the details.
Pat McCann: Lower amortization related to the initial value of public company Securities.
Pat McCann: Higher launch costs and the impact of acquisitions net of divestitures.
Pat McCann: Mainly as a result of our sales growth and margin expansion adjusted EPS increased 29% to $5 49.
Pat McCann: Yes.
Pat McCann: For the fourth quarter sales increased 9% to $10 5 billion adjusted EBIT improved 150 basis points to five 3% and adjusted EPS rose, 41% to $1 33.
Speaker Change: I'll take you through some of the details.
Pat: North American, European, and Chinese light vehicle production was up 5%, 7%, and 12%, respectively, resulting in an overall 7% increase in global production. Breaking down North American production further, while overall production increased 5 percent, production by our Detroit-based customers, which were targeted in the UAW strikes, actually declined 11 percent in the fourth quarter. Our consolidated sales were $10.5 billion, 9% of which was due to higher global vehicle production, the launch of new programs, the acquisition of Bioneer Active Safety, net of the divestiture of our manual transmission plant in Europe, and 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 in Graz, Austria, and an estimated $275 million impact from the UAW strikes in North America. On an organic basis, our sales increased 4% year over year, or 7% excluding complete vehicles. This compares to a 6% increase in weighted global production. Once again, negative production mix, largely driven by the UAW strike, unfavorably impacted our year-over-year sales growth in the fourth quarter.
Speaker Change: North American European and Chinese light vehicle production were up 5%, 7% and 12% respectively, resulting in an overall, 7% increase in global production.
Speaker Change: Breaking down North American production further while overall production increased 5% production by our Detroit based customers, which were targeted and the UAW strikes actually declined 11% in the fourth quarter.
Speaker Change: Our consolidated sales were $10 5 billion up 9% over the fourth quarter of 2022.
Speaker Change: The sales increase was primarily due to the higher global vehicle production the launch of new programs and the acquisition of D&A or active safety net of the divestiture of our manual transmission plant in Europe, and the net strengthening of currencies against the U S dollar.
Speaker Change: These were partially offset by lower complete vehicle sales, mainly due to a program changeover in Graz, Austria, and an estimated $275 million impact from the UAW strikes in North America.
Speaker Change: On an organic basis, our sales increased 4% year over year or 7% excluding complete vehicles.
Speaker Change: This compares to a 6% increase in weighted global production.
Speaker Change: Once again negative production mix largely driven by the UAW strikes.
Speaker Change: Unfavorable unfavorably impacted our year over year sales growth in the fourth quarter.
Pat: Adjusted EBIT was $558 million, and adjusted EBIT margin was 5.3%, compared to 3.8% in Q4 of 2022. Our continued focus on operational excellence and performance on cost initiatives, in addition to higher volumes, is driving strong earnings on higher sales. This was despite the negative impacts of a program changeover in complete vehicles and the UAW strikes in North America, which we estimated cost us about 50 basis points. The net effect of these generated 30 basis points of net improvement. Adjusted EBIT margin was also positively impacted by about 80 basis points of net operational items, which include productivity and efficiency improvements at certain facilities and higher tooling contributions, non-recurring items, which together had a net favorable impact of about 30 basis points and about 20 basis points related to lower net input costs. EBIT margin was negatively impacted by lower equity income, which reduced it by about 10 basis points.
Speaker Change: Adjusted EBIT was $558 million and adjusted EBIT margin was five 3% compared to three 8% in Q4 of 2022.
Speaker Change: Our continued focus on operational excellence and performance on cost initiatives. In addition to higher volumes is driving strong earnings on higher sales.
Speaker Change: This was despite the negative impacts of a program changeover in complete vehicles and the UAW strikes in North America, which we estimated cost us about 50 basis points.
Speaker Change: Net effect of these generated 30 basis points of net improvement.
Speaker Change: Adjusted EBIT margin was also positively impacted by about 80 basis points of net operational items, which include productivity and efficiency improvements at certain facilities.
Speaker Change: And higher tooling contribution.
Speaker Change: Nonrecurring items, which together had a net favorable impact of about 30 basis points and about 20 basis points related to lower net input costs.
Speaker Change: EBIT margin was negatively impacted by lower equity income, which reduced margin by about 10 basis points earned.
Pat: Earnings on higher unconsolidated sales were more than offset by the finalization of year-in-tax balances and some negative product mix in 1GV. In addition to these items, relative to our expectations, there was some re-timing of expected customer recoveries into 2024. As Swami alluded to earlier, relative to our expectations for the fourth quarter, the lower equity income, together with a foreign exchange loss on the devaluation of the Argentinian peso, cost us about $35 million, or about $0.11 per share. Now, a review of our cash flows and investment activities. In the fourth quarter of 2023, we generated $660 million in cash from operations before changes in working capital, up $127 million, or 24% from 2022. We also generated $918 million in working capital for a total cash from operations of $1.6 billion for the quarter. Investment activities in the quarter included $944 million for fixed assets, largely to support program awards, and $189 million for investments, other assets, and intangibles. Overall, we generated a pre-cash flow of $472 million in Q4.
Speaker Change: Earnings on higher unconsolidated sales were more than offset by the finalization of year end tax balances and some negative product mix and one JV.
Speaker Change: In addition to these items relative to our expectations. There were some re timing of expected customer recoveries into 2024.
Speaker Change: As swamy alluded to earlier relative to our expectations for the fourth quarter, the lower equity income together with a foreign exchange loss on the valuation devaluation of the Argentinean peso cost us about $35 million or about <unk> 11 per share.
Speaker Change: Turning to a review of our cash flows and investment activities.
Speaker Change: In the fourth quarter of 2023, we generated $660 million in cash from operations before changes in working capital up $127 million or 24% from 2022, we also generated $918 million in working capital for total cash from operations of $1 6 billion for the quarter.
Speaker Change: Investment activities in the quarter included 944 million for fixed assets largely to support program Awards.
Speaker Change: <unk> $189 million for investments other assets and intangibles.
Speaker Change: Overall, we generated free cash flow of $472 million in Q4.
Pat: And we also paid $133 million in dividends in the quarter. Growing our dividend remains an element of our financial strategy. And yesterday, our board approved an increase in our quarterly dividend to $0.475 per share, our 14th consecutive year of increased fourth quarter dividends, reflecting the board and management's collective confidence in the outlook for our business. We have increased our dividend per share at an average annual growth rate of 11% going back to 2010. And now, I'll pass it back to Swami to cover our...
Speaker Change: And we also paid a 133 million in dividends in the quarter.
Growing our dividend remains at element of our financial strategy.
Speaker Change: And yesterday, our board approved an increase in our quarterly dividend to <unk> 47, and a half cents per share our 14th consecutive year of increased fourth quarter dividends, reflecting the board and managements collective confidence in the outlook for our business.
Speaker Change: We have increased our dividend per share at an average annual growth rate of 11% quite back to 2010.
Speaker Change: And now I'll pass it back to Swamy to cover our outlook.
Seetarama Kotagiri: Thanks, Pat. Over the past three years, we have been highlighting our go forward strategy to propel our business into the future. The key aspects of our strategy are unchanged. Despite continuing industry challenges, we are making significant progress with our strategy. This progress is reflected in our outlook, and we expect to realize further benefits beyond our outlook period. As always, our outlook reflects both tailwinds and headwinds.
Swamy: Thanks Pat.
Swamy: Over the past three years, we have been highlighting our go forward strategy to propel our business into the future.
Swamy: The key aspects of our strategy are unchanged, despite continuing industry challenges and we are making significant progress in our strategy.
Swamy: This progress is reflected in our outlook and we expect to realize further benefits beyond our outlook Peter.
Swamy: As always our outlook reflects both tailwind and headwinds.
Seetarama Kotagiri: In terms of Tailwinds, we are launching content on a number of new programs, which is contributing to sales growth. Our Megatron business is expected to continue to grow significantly, which we anticipate will drive profitability as we leverage the sales growth. And we expect further traction in our operational excellence activity, contributing to additional margin expansion. In terms of headwinds included in our outlook... We anticipate further net input cost increases substantially related to continued elevated inflation driving higher labor rates. And scrap prices are expected to continue to decline.
Swamy: In terms of tailwind we are launching content on a number of new programs, which is contributing to sales growth.
Swamy: Our megatrend business is expected to continue to grow significantly rich.
Swamy: Which we anticipate will drive profitability as we leverage the sales growth.
Swamy: And we expect further traction in our operational excellence activities contributing to additional margin expansion.
Swamy: In terms of headwinds included in our outlook.
Swamy: We anticipate further net input cost increases substantially related to continued elevated inflation driving higher labor rates and scrap prices are expected to continue to decline.
Seetarama Kotagiri: The industry appears to be moving from supply-constrained to demand-constrained as macro challenges persist, and expected EV penetration rates have been pushed out, which is having some negative impact on our anticipated short and midterm sales growth. So how does all this translate into our key financial metrics? We expect continued solid organic sales growth over the market in the range of 3 to 5% on average per year over our outlook period. We anticipate margin expansion of 180 basis points or more from 2023 to 2026. Our engineering investments in megatrend areas should average about $1.2 billion annually before customer recovery. This includes about $300 million related to the acquisition of V&A Air Active Safety.
Swamy: The industry appears to be moving from supply constrained demand constrained as macro challenges persist.
Swamy: And expected EV penetration rates have been pushed out which is having some negative impact on our anticipated short and mid term sales growth.
Speaker Change: So how does all of this translate in our key financial metrics.
Speaker Change: We expect continued solid organic sales growth over market in the range of 3% to 5% on average per year over our outlook period.
Speaker Change: We anticipate margin expansion of 180 basis points or more from 2023 through 2026.
Speaker Change: Our engineering investments and megatrend areas should average about $1 2 billion annually before customer recoveries.
Speaker Change: This includes about $300 million related to the acquisition of <unk> active safety.
Seetarama Kotagiri: We expect a modest decline in Megatrend engineering spend in 2026 relative to 2024 and 2025 levels while sales are increasing. Capital spending is expected to decline beyond this year, and CapEx 2 fails is on a path to return to more normal levels, as we have highlighted previously. Lastly, we expect our free cash flow generation to increase each year over our outlook period as sales continue to grow, margins expand, and CapEx to sales normalize. We anticipate over $2 billion in free cash flow by 2026.
Speaker Change: We expect a modest decline in megatrend engineering spend in 2026 relative.
Speaker Change: Relative to 2024, and 2025 levels, while sales are increasing.
Speaker Change: Capital spending is expected to decline beyond this year and Capex to sales is on a path to return to more normal levels as we have highlighted previously.
Speaker Change: Lastly, we expect our free cash flow generation to increase each year over our outlook period as sales continue to grow margins expand and capex to sales normalize.
We anticipate over 2 billion in free cash flow by 2026.
Seetarama Kotagiri: Last year, we highlighted our significant expected sales increases in megatrend areas and the fact that our engineering spend in absolute dollars was largely unchanged through our outlook. While our midterm sales in megatrend areas have been somewhat impacted by lower expected volumes, particularly related to EVs, the trajectory of our sales growth in these areas remains considerable, growing by over $4 billion in the next three years. Lower expected megatrend profits on the reduced sales are the most significant factor, shifting our profitability inflection point from 2025 to 2026. While our outlook reflects a modest 2025 loss here, we continue to work to reduce or eliminate this loss.
Speaker Change: Last year, we highlighted our significant expected sales increases in megatrend areas and the fact that our engineering spend in absolute dollars was largely unchanged through our outlook.
Speaker Change: While our midterm sales and megatrend areas have been somewhat impacted by lower expected volumes.
Speaker Change: Particularly related to Evs.
Speaker Change: Trajectory of our sales growth in these areas remains considerable growing by over $4 billion in the next three years.
Speaker Change: Lower expected megatrend profits on the reduced sales is the most significant factor shifting our profitability inflection point from 2025 through 2026.
Speaker Change: While our outlook reflects a modest 2025 last year.
Speaker Change: Continue to work to reduce or eliminate this loss.
Seetarama Kotagiri: Regardless, we expect significant improvement in our results in these areas over our outlook period and solid profitability by 2026. Next, let me cover our Consolidated Outlook. In terms of key assumptions, our outlook reflects essentially no growth in weighted global light vehicle production and only modest growth of about 1% on average over the 23 to 26 period. In other words, it's our content growth that is driving our organic sales. We assume exchange rates in our outlook will approximate recent rates. Net net, the impact of currency on our outlook is expected to be negligible.
Speaker Change: Regardless, we expect significant improvement in our results in these areas for our outlook period and solid profitability by 2026.
Speaker Change: Next let me cover our consolidated outlook.
Speaker Change: In terms of key assumptions in our outlook reflects essentially no growth in weighted global light vehicle production.
Speaker Change: And only modest growth of about 1% on average or the 23 through 2006 period.
Speaker Change: In other words, it's a content growth that is driving our organic sales.
Speaker Change: We assume exchange rates in our outlook will approximate recent rates.
Speaker Change: Net net the impact of currency to our outlook is expected to be negligible.
Seetarama Kotagiri: We expect weighted sales growth over the market between 3% and 5% over our outlook period. From 23 to 24, sales growth substantially reflects the launch of new and replacement programs, a higher amount of directed content on the new Mercedes G-Class assembly program, and the acquisition of Vienneer active safety. These are partially offset by lower sales in the remainder of our complete vehicle business, largely as a result of the end of production of certain programs and a higher proportion of vehicles assembled whose sales we account for on a value-added basis.
Speaker Change: We expect weighted sales growth all market between three and 5% for our outlook period from.
Speaker Change: From 'twenty three 'twenty four sales growth substantially reflects the launch of new and replacement programs.
Speaker Change: Higher amount of directed content on the new Mercedes G Class Assembly program and the acquisition of <unk> active safety.
Speaker Change: These are partially offset by lower sales in the remainder of our complete vehicles business largely as a result of the end of production of certain programs and a higher proportion of vehicles assembled whose sales we account for on a value added basis.
Seetarama Kotagiri: From 2024 to 2026, the most significant contributors to sales growth are the launch of new and replacement programs and increased Directed content sales on the Mercedes G-Class as volumes run. In addition, we expect an 8% to 9% compounded sales growth from unconsolidated JVs over our outlook period, including from our LG JV for electrified components and systems, our eDrive systems JV in China, and our seating JV. We expect another step up in consolidated margins in 2024 to a range of 5.4 to 6%. Our 2024 margin is expected to benefit from contribution from higher sales and ongoing operational excellence activity. Partially offsetting these are higher launch and new facility costs associated with new programs as well as higher net input costs expected to impact us by about 30 basis points.
From 2024 to 2026, the most significant contributors to sales growth are the launch of new and replacement programs and increase.
Speaker Change: Directed content sales on the Mercedes G class as volumes ramp.
Speaker Change: In addition, we expect an 8% to 9% compounded sales growth from unconsolidated jv's over our outlook period, including from our LG JV for electrified components and systems.
Our E drive systems, JV in China, and our seating jv's.
Speaker Change: We expect another step up in consolidated margins in 2024 to a range of five 4% to 6%.
Speaker Change: Our 2020 for margin is expected to benefit from contribution on higher sales and ongoing operational excellence activities.
Speaker Change: Partially offsetting these are higher launch and new facility costs associated with new programs as well as higher net input costs expected to impact us by about 30 basis points.
Seetarama Kotagiri: While we do not provide a quarterly outlook similar to last year, we expect our 2024 earnings to be lowest in the first quarter of 2024 and improve meaningfully in the second quarter. We expect a further step up in margins to the 7 to 7.7% range from 2024 to 2026, largely driven by further contribution from higher sales.
Speaker Change: While we do not provide a quarterly outlook similar to last year, we expect our 2020 for earnings to be lowest in the first quarter of 2024 and improve meaningfully in the second quarter.
Speaker Change: We expect a further step up in margins to the seven to seven 7% range from 2024 through 2026.
Speaker Change: This is largely driven by further contribution on higher sales continued operational excellence activities, the reversal of launch and new facility costs as programs come on.
Seetarama Kotagiri: Continued Operational Excellence Activities, the Reversal of Launch and New Facility Costs as Programs Come On, Lower engineering spend, and growing equity income. These are partially offset by a 10-basis point impact from higher directed content on the G-class as volume stress.
Speaker Change: Lower engineering spend and growing equity income.
Speaker Change: These are partially offset by a 10 basis point impact from higher directed content on the G class as volumes ramp.
Pat: Many of the same factors that are impacting consolidated sales and margins out to 2026 are also impacting our sector. In the interest of time, we will not run through the segment details. However, we are happy to discuss any questions on that. I'll pass it back over to Pat to cover some of the highlights of our financial strategy. Thanks, Swami.
Speaker Change: Many of the same factors that are impacting consolidated sales and margins out through 2026 are also impacting our segments.
Speaker Change: In the interest of time, we will not run through the segment detail power, we are happy to discuss any questions on that.
Speaker Change: I'll pass it back over to Pat to cover some of the highlights of our financial strategy.
Pat McCann: Thanks Swamy.
Pat: We have been consistent in communicating our capital allocation principles over the years, and I'd like to repeat that we want to maintain a strong balance sheet, ample liquidity, and a high investment grade rating; invest for growth through organic and inorganic opportunities along with innovation spending, and return capital to shareholders. Our balance sheet continues to be strong, with investment-grade ratings from the major credit agencies.
Pat McCann: We have been consistent in communicating our capital allocation principles over the years and I would like to repeat these.
Pat McCann: We want to maintain a strong balance sheet ample liquidity and high investment grade ratings.
Pat McCann: Invest for growth through organic and inorganic opportunities along with innovation spending and return capital to shareholders.
Pat McCann: Our balance sheet continues to be strong with investment grade ratings from the major credit agencies.
Pat: At the end of Q4, we had over $4 billion in liquidity, including about $1.2 billion in cash. Currently, our adjusted debt to adjusted EBITDA ratio is at 1.89. We anticipate a reduction in our leverage ratio to be back within our targeted range during 2025. Additionally, we expect capital spending for 2024 to be approximately $2.5 billion. This includes about $100 million that will be funded by our customers. Under U.S. GAAP, such customer-funded amounts are included in deferred revenue, whereas previously they were netted against capital spending.
Pat McCann: At the end of Q4, we had over 4 billion in liquidity, including about $1 2 billion in cash.
Pat McCann: Currently our adjusted debt to adjusted EBITDA ratio is at 189.
Pat McCann: We anticipate a reduction of our leverage ratio.
Pat McCann: To be back within our targeted range during 2025.
Pat McCann: We expect capital spending for 2024 to be approximately $2 $5 billion. This.
Pat McCann: This includes about $100 million that will be funded by our customers.
Pat McCann: Under U S. GAAP such customer funded amounts are included in deferred revenue, whereas previously they were netted against capital spending in other words this capex with cash.
Pat: In other words, this CapEx is cash flow neutral, and capital spending would be $2.4 billion. Our 2024-2026 capital spending outlook also includes approximately $400 million related to recent program awards from a high-volume EB-OEM that were not included in our previous outlook. Despite these new awards, we expect CAPEX as a percent of sales to decline over the 24 to 2026 timeframe in line with what we had been indicating over the past year. EV volumes remain uncertain, and we continue to have discussions with customers about future plans. We remain laser-focused on capital to assess where we may have the opportunity to stagger, delay, or eliminate capital from our plan.
Pat McCann: Cash flow neutral and capital spending would be $2 4 billion.
Pat McCann: Our 24 to 2026 capital spending outlook also includes approximately $400 million related to recent program awards from a high volume OEM that were not included in our previous outlook.
Pat McCann: Despite these new awards, we expect Capex as a percent of sales to decline over the 24 to 2026 timeframe in line with what we had been indicating over the past year.
Pat McCann: EV volumes remain uncertain and we continue to have discussions with customers about future plans.
Pat McCann: We remain laser focused on capital to assess where we may have the opportunity to stagger delay or eliminate capital from our plan.
Pat: As a result of growing earnings and declining capex levels, we expect free cash flow to accelerate through our outlook period. We anticipate over $2 billion in free cash flow by 2026. In summary, we expect continued organic growth above market with more than $4 billion increase in megatrend sales over the outlook period. Further margin expansion this year and in each of the next two years, including through ongoing operational excellence activities, and at least $1.7 billion in increased EBITDA over our outlook period through 2026. We anticipate that these increasing metrics will lead to accelerating free cash flow generation over the next three years. We remain confident in executing our plan and continuing to drive our strategy forward. Thank you for your attention. We would be happy to answer your questions.
Pat McCann: As a result of growing earnings and declining Capex levels, we expect free cash flow to accelerate through our outlook period, we anticipate over 2 billion in free cash flow by 2026.
Pat McCann: In summary, we expect continued organic growth above market with more than $4 billion increase in mega trend sales over our outlook period.
Pat McCann: Further margin expansion this year and in each of the next two years, including through ongoing operational excellence activities and at least $1 7 billion and increased EBITDA over our outlook period through 2026.
Pat McCann: We anticipate that these increasing metrics will lead to accelerating free cash flow generation over the next three years.
Pat McCann: We remain confident in executing our plan and continuing to drive our strategy forward.
Speaker Change: Thank you for your attention we would be happy to answer your questions.
Pat: At this time, if you would like to register for a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered, and you would like to withdraw your registration, please press the 1 followed by the 3. If you're using a speakerphone, please lift your handset before entering your request.
Speaker Change: At this time, if you would like to register for a question. Please press the one followed by the four on your telephone.
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Speaker Change: If your question has been answered and we'd like to withdraw your registration. Please press the one followed by the three.
Speaker Change: If you're using a speaker phone please lift your handset before entering a request.
Operator: Once again, to register for a question, please press the 1, followed by the 4. One moment, please, for the first question. And our first question is from the line of John Murphy with Bank of America. Please go ahead.
Speaker Change: Once again to register for a question. Please press the one followed by the four <unk>.
Speaker Change: One moment please for the first question.
Speaker Change: And our first question is from the line of John Murphy with Bank of America.
John Murphy: Please go ahead.
John Murphy: Good morning, guys. Thanks for all the info, particularly on the 26 Outlook. You know, if we think about slides 35 and then 36, you know, it seems like you're remaining very committed to your CapEx plans. You know, it certainly seems like you are on the R&D side, but Swami, you know, there's obviously tectonic shifts that are going on here very quickly in the way that the expectations are evolving for EV penetration, you know, program potential cancellations, or at least pushouts. You know, how flexible is your CapEx spending and R&D spending to potentially be pushed down and to the right to deal with that and, you know, potentially even deal with potential cancellations in programs? Good morning, John.
John Murphy: Good morning, guys. Thanks.
John Murphy: Thanks for all the info, particularly on the 26 outlook.
John Murphy: If we think about on slide 35, and then 36. It seems like you are remaining very committed to your Capex plans.
Speaker Change: Certainly certainly it seems like you are on the R&D side, but as you know, there's obviously tectonic shifts that are going on here.
Speaker Change: Very quickly in a way to sort of the expectations are evolving for EV penetration.
Speaker Change: Program potential cancellations or at least push outs.
Speaker Change: How flexible.
Speaker Change: Is your capex spending and R&D spending to potentially be pushed down into the right deal with that and potentially even deal with us digitally.
Speaker Change: Cancellations in programs.
Speaker Change: Good morning, John.
Seetarama Kotagiri: Great question. If you just think through what's happening, I think one of the key things we've been focused on and have been discussing is the, If you look at the capex ratio, we have been talking capex to sales, we've been talking about going back to the, you know, the low to mid force. And, you know, happy to say we are on track to that. When we talk about this year, Pat.
John Murphy: Great question. If you just think through whats happening I think one of the key things we have been focused on and have been discussing is the capex.
John Murphy: <unk>.
John Murphy: You can look at the Capex ratio being a capex to sales we have been talking about going back to the.
John Murphy: Low to mid course, and happy to say, we are on track to that.
John Murphy: When we talk about this year Pat.
Seetarama Kotagiri: Touched on his prepared comments that 100 million of the 2.5 that we are showing is really, you know, given by the customer. And we actually talked about a program for another about $150 to $200 million spend, which was not contemplated, but we felt, given the program... It was a good idea to invest in that program going forward strategically, right? So those were the two; otherwise, it would have been around $2.2 billion in CapEx. So that's one part of it. The second part of the question that you asked regarding R&D, and we've always talked about the 900 million plus with the V&AIR 300, it's 1.2. With sales increasing again, the ratio of R&D spent to revenue is going to decline.
<unk> his prepared comments that $100 million of the two five that we are showing it.
John Murphy: Jamie.
John Murphy: Given by the customer.
John Murphy: And we actually talked about a program.
John Murphy: Put another about $150 million to $200 million spend which was not contemplated but we felt given the program.
John Murphy: It was a good idea to.
John Murphy: Yes.
John Murphy: We invest in that program going forward strategically right. So those were the two otherwise could have been at on the coupon 2 billion in Capex. So that's one part of it.
John Murphy: The second part of the question that you asked regarding R&D.
<unk> always talked about the 900 million plus with the Vmware 300 is the one two.
John Murphy: With the sales increasing.
John Murphy: Again, the ratio of R&D spend to revenue was going to decline.
Seetarama Kotagiri: But having said that, we are looking very seriously into the Spending of that if it's not related to the direct launch of a program. Then everything is under scrutiny, and again in the prepared comments, we talked about it. We are also looking at capital in terms of, discussions with customers, obviously, how can we stagger given the push out of the dates for the launches, or just even in terms of the volume ramps. So we're looking at staggering capital, looking at the modularity, having discussions with the customers, and also a little bit on how we look at, Ow, volumes on given programs by the customers, although we have to run at a rate for them at We take into account volume assumptions when we look at revenue from such programs.
John Murphy: But having said that we are looking very seriously into the <unk>.
John Murphy: Spending of that if it's not related to the direct launch of their program.
John Murphy: Then everything is under scrutiny and again in the prepared comments, we talked about it.
John Murphy: We are also looking at capital income so.
John Murphy: With discussion with customers. Obviously is how can we be CAGR given push out of the base for the launches.
John Murphy: Or just even in terms of the volume ramp so we're looking at staggering capital.
John Murphy: Looking at the modularity, having discussions with the customers.
John Murphy: Also an impact in how we look at.
Volumes on <unk> programs by the customers, although we have to.
John Murphy: Radnet right for them at feedback and so on.
John Murphy: We take into account the volume assumptions when we look at revenue on such programs.
Pat: So we are looking at all of that. So pushing out in terms of CAPEX spend or R&D engineering spend, depending on the program cadence, absolutely yes. Just to give an example, over the last three weeks, I, along with the senior management team, have spent at least about 40 hours going line by line on all our projects, and we are looking at the value proposition of each project, what it brings to us, obviously, while keeping in mind, obviously, that it cannot hurt the future and cannot hurt the launch. That's very helpful. And then Pat, if we were to kind of suspend disbelief and say you guys are being too conservative with your volume forecast, and let's say there's, you know, a two to 3% upside in global LVP in 24, or maybe even just think about it sort of as a 1%, you'd hire, you know, in a plain middle way being 450 million more in revenue. Do you have any capacity?
John Murphy: So we're looking all of that so pushing out in terms of Capex spend our R&D engineering spend.
John Murphy: Depending on the program cadence absolutely, yes, just to give an example over the last three weeks.
John Murphy: I along with the senior management team has spent at least about 40 hours a line by line on all other projects and we are looking at.
John Murphy: Value proposition of each project, what it brings to us.
John Murphy: Keeping in mind, obviously that cannot hurt the future and cannot hurt the launch.
Speaker Change: Okay. That's very helpful and then Pat.
Pat McCann: If we were to add.
Pat McCann: Kind of suspend disbelief and say you guys are being too conservative on your volume forecasts.
Pat McCann: Let's say there is a 2% to 3% upside in global LBP in 'twenty four or maybe you can just think about it sort of was 1%.
Pat McCann: Youll hire any claim an old way being $450 million more of revenue do you have capacity.
John Murphy: Um, you know, obviously, this is kind of a generic question, but to take that on, and what kind of incremental would we be thinking of if all of a sudden, you know, sales came in two to 3% higher than you were thinking because LVP was higher? So. Morning, John. In that scenario, when I think of, that's probably a best case scenario, if you go back to Swami's comments, where we have capacity installed up to planning volumes, right, so if we flex up, you know, you might be, you could speed up the line or add another shift, and that's where you have a lot of leverage in your model, so your incrementals in that scenario would be quite strong And Steyr's a little bit different, John. It's because of all the...
Pat McCann: Obviously this is kind of a generic question, but two.
Pat McCann: Take that on and what kind of incremental would we be thinking obviously, if all of a sudden sales came in 2% to 3% higher than you were thinking because LDP was higher.
Yeah.
Speaker Change: Good morning, John.
Speaker Change: In that scenario there when I think.
That's probably the best case scenario. If you go back to <unk> comments, where we have capacity installed up to.
Speaker Change: To planning volumes right. So if we flex up.
Speaker Change: You might be you could speed up the line or add another shift and Thats why you have a lot of leverage in your model. So here your incrementals in that scenario to be quite strong and that would be what we've seen historically.
Speaker Change: They are different by segment, but the.
Speaker Change: The <unk> for <unk>.
Speaker Change: And that seating.
Speaker Change: Pending on the region 12 to 17, 5% and starts a little bit different John.
Speaker Change: Because of all the <unk>.
Speaker Change: Coverings, but.
Pat: I think that would be the best possible scenario for Magna. The worst-case scenario is when you have to put in new facilities, and that's, you know, when you go through our business plan and you look out into the future, some of the incrementals aren't at that, let's say, 20-ish percent, and it's because they're coming through more at the corporate average, where you're adding bricks and mortar and new facilities and overhead. So, long answer, but the scenario you're describing is the best case for Magna.
Speaker Change: I think that would be a best case scenario for Magna.
Speaker Change: That's the worst case scenario is when you.
Speaker Change: You have to put in new facilities and Thats. When you go through our business plan and you look out into the future some of the incremental foreign debt that let's say twentyish percent and its because theyre coming through more of the corporate average, where youre, adding bricks and mortar in new facilities and overhead so long answer, but the scenario you're describing the best case for Magna.
John Murphy: And then just one last question. Can you comment on what region that high-volume EV manufacturer is domiciled in? Is it a North American manufacturer or a Chinese manufacturer?
Speaker Change: And then just one last question can you comment on what region that high volume EV manufacturer is domiciled in news in the North American manufacturer, China manufacturer and it is therefore battery tray or battery structure or is there something else that that capex is allocated for the 400 million.
Seetarama Kotagiri: And is that for the battery tray or battery structure, or is there something else that CapEx has allocated for the $400 million? John, under strict confidentiality, we are not able to give too much detail, but I can say that... This is a material investment in the southern US and Mexico for a significant future product of Tesla. Very helpful. Thank you very much, guys. Thanks, John. Thanks, John. Our next question is from the line of Chris McNally with Evercore. Please go ahead.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: John under strict confidentiality, we are not able to give too much detail, but I can say that.
Speaker Change: This is.
Speaker Change: Material investment in southern U S and Mexico.
Speaker Change: For a significant future product of Tesla.
Speaker Change: Okay.
Speaker Change: Very helpful. Thank you very much guys.
Speaker Change: Thanks, John Thanks, John.
Speaker Change: Okay.
Speaker Change: Our next question is from the line of Chris Mcnally with Evercore.
Chris Mcnally: Please go ahead.
Chris Mcnally: Thanks so much, gentlemen. One really benign question on seeding and then maybe on capital and the buyback. So seeding, Swami, can we take a step back?
Chris Mcnally: Alright, thanks, so much gentlemen, one really benign at question on PD and then maybe on the capital.
Chris Mcnally: Buyback.
Chris Mcnally: CD Swamy can we take a step back this.
Seetarama Kotagiri: You know, this has now been an underperformer for a couple of years. I mean, obviously, you have a different ROIT, so a slightly different margin compared to peers. But I know you can't be happy with the margin that has perpetually been a target. And, you know, so that 5% or 6% range. Can you help us walk through what are some of the issues and what will get us, you know, eventually to that 5% to 6%? Good morning, Chris.
Chris Mcnally: This is now been an underperformer for a couple of years I mean, you obviously you have a different.
Chris Mcnally: ROIC towards slightly different margin compared to peers.
Chris Mcnally: I know you can't be happy with the margin that has perpetually been targeting so that five or 6% range.
Chris Mcnally: Can you can you help us walk through what are some of the issues and what will get us.
Chris Mcnally: <unk> G that five 6%.
Speaker Change: Good morning, Chris.
Seetarama Kotagiri: I think if you look at the last couple of years, the significant impact on feeding has been the mix and certain programs. Significantly underperforming volume expectations compared to the planned volumes, right? And as you know, in seeding, once you have the facility and you have the labor, it's pretty much dedicated to the program. We make our attempts to flex. It's not possible to negate everything, so that has been one of the primary reasons. The one other thing that you will see in the dynamics looking ahead this year and going forward a little bit. On the seating, last year we had assumed that we would exit with a high volume. Hello everyone.
Speaker Change: I think if you look at the last couple of years, the significant impact on seating have been.
Speaker Change: And certain programs.
Significantly underperforming the volume expectations compared to the planned volumes right and as you know in seating.
Speaker Change: Once bumps you have their facility and you have the labor pretty much dedicated to the program.
Speaker Change: Our cost to collect.
Speaker Change: Got.
Speaker Change: Not profitable to make everything so that has been one of the primary reasons.
Speaker Change: The one other thing that you will see in the dynamics looking this year and going forward <unk>.
Speaker Change: On the seating last year, we had assumed that we would exit the high volume.
Speaker Change: Low margin program.
Seetarama Kotagiri: My name is Seetarama Kotagiri, and I'm the CEO of Magna International Inc. And I'm here to talk to you about our new low-margin program, and we had discussions with the customer. And during the process, we were able to secure a fair and good appropriate margin in return on the next generation. So we are maintaining the existing business now. It's starting to launch in 2026. It's a staggered launch, but it will start in 2026. Also, the seating team has been extremely focused on all the items of operational excellence, so they are looking at all the details during the planning process. You know, minus the big program that I talked about going out into 26, 27, I feel comfortable that we are on the path to the margins that we talked about that are in the 5 to 6 percent. Okay, super, super helpful detail on that problematic platform.
Speaker Change: And we were having discussions with the customer.
Speaker Change: And during the process, we were able to secure.
Speaker Change: Fair and appropriate margin and return on the next generation.
Speaker Change: So we are maintaining the existing business model, so that having a negative impact in the.
Speaker Change: Short term the new program the next generation with the appropriate margin center tons.
Speaker Change: It's starting to launch in 2026, it's a staggered launch, but it will start on the 2026.
Speaker Change: So that the seating team has been extremely focused on.
Speaker Change: All of the items of operational excellence, so looking at all the details during our planning software.
Speaker Change: Sure.
Speaker Change: Minus the big program that I talked about going out into 'twenty six 'twenty seven I feel comfortable that we're on the path.
Speaker Change: The margins that we talked about that is in the 5% to 6%.
Speaker Change: Okay Super Super helpful detail on on that problematic platform.
Seetarama Kotagiri: Can we just now maybe move to, you know, the capital allocation and the idea of the buyback? So I know you have, you know, sort of the debt to EBITDA ratios you used in the past. Obviously, net debt is a little bit more attractive.
Speaker Change: Now maybe move to capital allocation and the ideas of the buybacks still.
Speaker Change: I know you have sort of the.
Speaker Change: Debt to EBITDA ratios you used in the past, obviously net debt is a little bit more attractive.
Seetarama Kotagiri: And also, given where your stock is, can you talk about, you know, what the potential for more of a historical buyback ratio could be? Obviously, the free cash flow goes up every year 24 to 26. But, you know, sort of like your investors buying low, you know, rather than buying high, as always, sort of a favorable strategy. So, you know, just how are you thinking about getting ahead of some of those better free cash flow numbers in years to come? I think the capital allocation strategy and how we are looking at that, as Pat talked about in the prepared comments, remains truly an all-star for us, Chris. If you look at the leverage ratio in 2024, our first priority is to get back to 1 to 1.5. Right?
Speaker Change: Also given where your stock is.
Can you talk about what the potential for more of a historical buyback ratio.
Speaker Change: B, obviously, the free cash flow goes up every year 24 to 26, but.
Speaker Change: Sort of like your investors buying low.
Speaker Change: Rather than buying high as always sort of a favorable that strategy. So just how you're thinking about getting ahead of some of those better free cash flow numbers in years to come.
Speaker Change: I think the capital allocation strategy and how we are looking at that.
Speaker Change: <unk> talked about in the prepared comments remains.
Speaker Change: Truly as a north star for Us Chris.
Speaker Change: You can look at the leverage ratio in 2024, our first priority is to get back to the one to one five right.
Seetarama Kotagiri: And we think given, you know, the EBITDA profile and the sales, we see that in the early part of 2025. So once we start having cash, and the cash flow operationally is on track to what we expect it to be. Then we go back to our priority being, investing organically or inorganically for the appropriate returns, you know, that equity to value, and anything remaining. Obviously, the preference is to go back to the share buyback.
Speaker Change: We have given.
Speaker Change: EBITDA profile and the sales.
Speaker Change: We see that in the early part of 2020 cost.
Speaker Change: So once we start having the cash.
Speaker Change: Cash.
Speaker Change: And the cash flow operational rice is on track to what we expect it to be.
Speaker Change: Then we go back to our priority of being.
Speaker Change: Investing organically or inorganically for the appropriate returns.
Speaker Change: Got it accretive to value.
Speaker Change: Remaining obviously did their preference is to go back to the share buybacks. So we'll be looking at it towards the end of 2024.
Chris Mcnally: So we'll be looking at it towards the end of 2024 in the normal course of action, you know, getting back on staying in the levels ratio that we talked about. Okay, thanks so much. Thanks, Chris. Our next question is from the line of Tommy Chen with BMO Capital Markets. Please go ahead. Thanks. Good morning.
Speaker Change: In the normal course of pattern and.
Speaker Change: Getting back on staying in the level of pressure that we talked about.
Speaker Change: Okay. Thanks, so much.
Speaker Change: Thanks, Chris.
Speaker Change: Our next question is from the line of Tami Chen with BMO capital markets. Please go ahead.
Tami Chen: Thanks, Good morning.
Tammy: First question is, I guess on the low end of your 24 EBIT margin guidance, which would imply a very modest year over year improvement of 23, which I have a number of headwinds, such as cost inflation, the underperforming BES facility, unstable production schedules, and, of course, the UAW strike. So I'm just wondering, can we just go back to what assumptions you've got in there for the low end of the range? Like, are you baking with just a degree of conservatism? Morning, Tammy. I don't, you know; I don't think it's conservative.
Tami Chen: First question is just on the low end of your 24 EBIT margin guidance I mean, you would imply very modest year over year.
Tami Chen: Improvement of 23, which had a number of headwinds.
Tami Chen: With inflation.
Tami Chen: Falling BS facility on stable production schedules and of course, the UAW strike so.
Speaker Change: I'm just wondering can we just go back to what assumptions, you've got and Dan for the low end of the range like are you baking in just a degree of conservatism.
Dan: Good morning Tammy.
I don't think it's conservative, but I think we have a well balanced plan, there's a fair amount of volume uncertainty and.
Tammy: I think we have a well-balanced plan. There's a fair amount of volume uncertainty. And, you know, inflation continues to be a headwind. The one part you do have to consider is the impact of the G-Class repricing. So the G-Class at Steyr is a new contract that's launching in 2024.
Dan: <unk> continues to be a headwind.
Dan: The one part Jay do you have to consider is the impact of the GE plus re pricing. So the G cloud at Shire as a new contract that's launching in 2024 and effectively what's happened with all the inflation their bill of materials has increased so we have higher revenue.
Pat: And effectively, what's happened with all the inflation, their bill of materials has increased. So we have higher revenue and exactly the same higher cost of sales. So we're dollar margin neutral, but you have a drag.
Dan: Exactly same higher cost of sales so a dollar margin neutral, but you have a drag.
Pat: That's impacting us by about 10 basis points, just on that one program alone. So, you know, I think just the starting point, apples to apples, would be a 10 basis point difference. And then you start going through it.
Dan: That's impacted us by about 10 basis points, just on that one program alone. So.
Dan: I think just the starting point apples to apples would be 10 basis point difference and then you start going through we burn a plaque volume scenario.
Seetarama Kotagiri: We were in a flat volume scenario. We do have some negative mix, and then we have headwinds again, also on scrap sales. So when you put them all together, I think a couple of things to think about is that last year we were at a 100 basis point spread. We've tightened our gap because we feel more confident in our plan. And when you add the 10 basis points, I think it's a pretty balanced plan. Okay, I see. And on the continuing cost inflation at this point, do you expect you could still realize some additional recoveries from customers, or are we sort of in a different environment versus last year with respect to recoveries from the OEM? Yeah, I think so. Good morning, Tammy.
Dan: We do have.
Dan: Some negative mix and and then we have <unk>.
Dan: Winds again also on scrap scrap sale, but I think when you put them altogether I think a couple of things to think about is last year. We were at a 100 basis point spread we've tightened our GAAP because we feel more confident in our plan.
Dan: Yes, the 10 basis points I think it's a pretty solid with content.
Dan: Okay.
On the continuing cost inflation at this point.
Dan: Do you expect you could still.
Dan: Realized some additional recoveries from customers or at least sort of it I guess that environment versus last year with respect to recoveries and Oems.
Yeah, I think <unk> talked about.
Seetarama Kotagiri: We talked about inflation and some of these topics still as continuing headwinds. Last year, we talked about a hundred million magnitude. And as of November, we said we were going to negate that with various activities, including recoveries. And we achieved that. And this year, we still have embedded inflation in terms of labor. Transcribed by https://otter.ai Okay, got it.
Dan: Inflation in some of these topics still as continuing headwinds.
Dan: Last year.
Dan: You talked about a $100 million magnitude and as of November we said, we weren't going to mitigate that with various activities including recoveries.
Dan: And we achieved that.
Dan: This year, we still have embedded.
Dan: Inflation in terms of labor.
Some things have.
Dan: Trended down like energy and so on but there is some stickiness on some of the products steel commodities, including labor.
Seetarama Kotagiri: And one last question here is back on the customer-funded CapEx that you've highlighted for 24, the 100 million. So is that a new thing? Or have you had that, and you're just highlighting it now?
Dan: So it's going to be a combination of recoveries as well as definitely our continued efforts on operational excellence.
Speaker Change: Okay got it and sorry, one last question here back on the customer funded Capex that you highlighted for 2000 and for the $100 million.
Tammy: And is that the only one in your 24 CapEx guidance that's customer funded? And so you're calling that out? Thanks. It's a new program that was awarded, Tammy. Previously you would have just shown it as a subsidy under the old rules, but effectively what's happened more broadly when you think about the commercials issues is we went to the customer and said they wanted our support, and we said we need your support to do that, and in that scenario what we did was we looked at it on a cash basis, and you have some crazy accounting happening, but on a cash flow basis it's you have higher cap backs and you have higher deferred revenue, and in 2024 we're cash neutral, so we didn't look at the account.
Speaker Change: So is that a new thing.
Speaker Change: You've had that he just highlighting it now and is that the only one in your 2000 and for Capex guidance that customers find it and fingers, calling that out.
Speaker Change: It's a new program that was awarded Tammy and.
Speaker Change: Previously you would have just showing it as a subsidy under the old tools, but effectively what's happened more broadly when you think about the commercials.
Speaker Change: Issues as well.
Speaker Change: We went to the customer said they wanted our support and we said we need your support to do that and in that scenario. What we did was we looked at it on a cash basis and.
Speaker Change: Have some crazy accounting happening, but on a cash flow basis.
Speaker Change: You have higher Capex, and you have higher deferred revenue and.
Speaker Change: In 2024 were cash neutral so we didn't look at the account.
Tammy: We looked at the business decision, which was, it's a good program, it's a good customer, and the customer is paying for the capital, and we had the open space, so we took on the program. The Bulletproof Executive 2013, I think, I mean, just to add to that is... It is not normal for customers to invest in capital. They fund and own tooling, typically.
Speaker Change: We looked at the business decision, which was it's a good program that good customer.
Speaker Change: And the customer is paying for the capital we have the open space. So we took on the program.
Tommy: Okay. Thanks Tommy.
Speaker Change: Just to add to that.
Speaker Change: Not normal for customers to invest in capital They fund and owned tooling typically.
Pat: But this is one of the things that we've been considering and working through. Right, I see. Thank you. Thanks, Tammy. Our next question is from the line of Mark Delaney with Goldman Sachs. Please go ahead. Good morning.
Speaker Change: But this is one of the things that we've been considering and working through.
Speaker Change: Right.
Speaker Change: Thank you.
Speaker Change: Thanks Tammy.
Speaker Change: Yes.
Speaker Change: Our next question is from the line of Mark Delaney with Goldman Sachs. Please go ahead.
Mark Delaney: Yeah. Good morning, I appreciate you guys taking the questions.
Mark Delaney: I appreciate you guys taking the questions. With the new outlook for Megatrend revenue, can you help us better understand how conservative Magna was with its assumptions around customer-built schedules and EV volumes, especially given that some of the North American OEMs have emphasized are going to be flexible on how fast they plan to ramp up their new EV program? Good morning, Mark.
Mark Delaney: The new outlook for Megatrend revenue can you help us better understand how conservative Magna was with us with its assumptions around customer build schedules in EV volumes, especially given that some of the North America Oems have emphasized are going to be flexible on how fast they plan to ramp up their new EV programs.
Speaker Change: Good morning, Mark.
Seetarama Kotagiri: Over the last number of years, I would say, going back even six, eight years, we have typically been saying that, you know, the global EV market penetration would be somewhere in the low 30s. Globally, obviously higher in China, followed by Europe, and then North America. I think we still believe it's in that buffer. And I also said previously, as we look at program by program, whether it's EV or not, we tend to have our own viewpoint on. The program volumes, for revenue calculation purposes, try to estimate our revenues, although we have to hit the run rates. It definitely We are weighted a little bit in OEM production in North America for the migration areas, called electrification. As that tends to have a decline, we'll have a negative impact. And like I said, we'll do everything to stagger capital, work with the customers, and look at modularity in the program, both products and processes. But it will have a negative impact.
Speaker Change: Over the last number of years I would say going back even six eight years.
Speaker Change: Typically been saying that.
Speaker Change: The global EV market penetration would be somewhere in the low thirties.
Speaker Change: Globally, obviously higher in China, followed by Europe, and then North America.
Speaker Change: I think we still believe it's in that ballpark.
And I also said previously as we look at program by program, whether its <unk> or not.
Speaker Change: We tend to have our own viewpoint.
Speaker Change: Sure.
Speaker Change: The program volumes for revenue calculation purposes site to estimate our revenues, although we have to hit the run rates.
Speaker Change: <unk>.
Speaker Change: Yeah definitely we are weighted a little.
Speaker Change: Baked in or.
Speaker Change: Yes production in North America.
Speaker Change: For the Max and Avs, so called electrification.
Speaker Change: As that tends to have a decline.
Speaker Change: Have a negative impact and like I said, we'll do everything to staggered capital work with the customers look at modularity program.
Speaker Change: Both products and processes.
Speaker Change: Do you have a negative impact, but I think the.
Seetarama Kotagiri: But I think the magnitude of the impact we are seeing on revenue would be a little bit lower than what the market is saying based on the assumptions we made before. But this is something that we need to watch continuously and be agile about it. So that's the long answer. Very helpful. I appreciate all the context, and I know it is a very dynamic situation for you all to deal with.
Speaker Change: No.
Speaker Change: Magnitude of impact we're seeing on the revenue.
Speaker Change: Be a little bit lower than.
Speaker Change: And then what the market is seeing based on the assumptions we made before.
Speaker Change: But this is a something that we need to watch continuously and be agile about it.
Speaker Change: So thats a long answer.
Speaker Change: Yes.
Speaker Change: Helpful. I appreciate all the context and I know a very dynamic situation for you all to deal with.
Seetarama Kotagiri: On a related topic, as OEMs are adjusting, and generally lowering their EV build plans, there's perhaps some offset toward hybrid and ICE builds. Are you seeing any higher revenue coming from different powertrains? And maybe talk a little bit more about the extent to which the 2024 and 2026 outlooks that you gave are correct. Have you seen some increased revenue coming from ICE and hybrid vehicles? Yeah, I would say, Mark, a vast majority of our capabilities are really agnostic to powertrain, right? But, in some cases, like in the powertrain, our DCT or dual clutch transmission has a package-neutral, you know, hybrid option that we are currently producing with three OEMs.
Speaker Change: Unrelated topic as Oems are adjusting generally lower their EV build plans right, there's perhaps some offset towards hybrid and <unk> are you seeing any higher.
Higher revenue coming from different different powertrains, and maybe talk a little bit more to what extent with the <unk>.
Speaker Change: <unk> 24 in 2026 outlooks that you gave are you have you assumed some some increased revenue coming from.
Speaker Change: And I've read vehicles.
Speaker Change: Yeah, I would say.
Speaker Change: Market watch the majority of our capabilities are really ignostic powertrain right, but.
Speaker Change: In some cases like in the powertrain.
Speaker Change: T or dual clutch transmission as a packaged neutral yes.
Speaker Change: Hybrid option that we are currently producing with three Oems.
Speaker Change: Early to say like how the dynamics of the volumes that are playing out.
Seetarama Kotagiri: Next slide, please. So as you have seen, our unified standardizes, SE, the innovation standards, and it's classified by the California State level. So. You know, in some cases, we are on both platforms, both ice and. Transcripts help us provide librarians with licensing, translations, and videos of the workshops. Thank you.
Speaker Change: We also have E drive capabilities that can support high voltage hybrids.
And as you know as you would remember that GTA V can supply electrification components like motors and Inverters that balance with LIFO the hybrid.
Speaker Change: So.
Speaker Change: In some cases, we are on both platforms, both ice and.
Speaker Change: <unk>.
Speaker Change: Evs for example on seating.
Speaker Change: But that dynamic we have to see how it goes but on 2027 looking out.
Speaker Change: I would still say the targets that we had provided in terms of the megatrend areas.
Speaker Change: We feel comfortable that we are still on track.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of Tom <unk> with RBC. Please go ahead.
Tom Narian: Our next question is from the line of Tom Narian with RBC. Please go ahead. All right, thanks for taking the questions. A couple of little housekeeping ones.
Tom: Hi, Thanks for taking the questions.
Tom: A couple of little housekeeping, one slide 31.
Tom Narian: Slide 31, that's the segment outlook or guidance for 2024. Seeding, uh, top lines coming down in 24, just, I'm sure you, I think you maybe explained that, apologies if I missed it, just curious what's going on there. Then on complete vehicle, thanks Pat for talking about the G-class repricing, that's explaining the margins coming down despite top lines, the revenue going up. Are there any other things we should be aware of explaining that dynamic in Thanks. Morning, Tom.
Tom: The segment outlook or guidance for 2024.
Tom: Seating top lines coming down in 'twenty, four just I'm sure.
Tom: Maybe explain that apologies if I missed it just curious what's going on there.
Tom: And then on complete vehicle, thanks, Pat for talking about the G class repricing.
Tom: Meaning the margins coming down despite top lines the revenue going up.
Tom: Are there any other things we should be aware of explaining that dynamic in 'twenty four for complete vehicle.
Tom: Yes.
Tom: Good morning, Tom on the seat like go through it firstly, so if you look at the seating piece the volume decline is.
Pat: I think on the seat. I'll go through it first. So if you look at the seating piece, the volume decreases. It's effectively mixed. We have, the way a seeding business works is you have dedicated JIT facilities, and one of our... Our programs in North America, the volumes from the customer are down on a year-over-year basis. That's the primary driver. On the Magna Steyr piece, or the complete vehicle piece, the volume is up, as I mentioned, because of the G-Wagon primarily, and then within there, there's also a little bit of, that's the majority of the reduction, but we also have some commercial benefits in 2023 that we don't expect to recur, and there's a little bit of amortization related to We do still have growth in our market accelerating through that 22-26 period, so it's just a 24th of a blip, but we still see it going back there. Got it.
Speaker Change: Effectively mix we have.
Speaker Change: The way of seating business works is you have dedicated.
Tom: Jet facilities.
Tom: One of our.
Tom: Our programs in North America, the volumes from the customer is down on a year over year basis. That's the primary driver of this in the seating space.
Tom: On the on the Magnus Shire piece or the complete vehicle piece.
Tom: The volume is up.
Tom: As I mentioned because of the <unk> wagon primarily.
Tom: And then within there there is also a little bit but that's the majority of the reduction but we also have we.
Tom: We had some commercial benefits in 2023 that we don't expect to recur and there is a little bit of amortization related to some of the warrants.
Tom: Are some of the engineering on the fiscal program that's rolling off these.
Tom: Do you still have growth over market in seeding through that 2226 periods. So it's a <unk> 24 positive uplift, but we still see it coming back to us.
Tom: <unk>.
Speaker Change: Got it.
Tom Narian: And then my next one, you know, we heard some inventory build chatter from a particular supplier in 2023 that impacted their 2024 kind of guidance. That company is basically, in their own market. So, but just curious, is that something you guys were seeing at all? You know, on your guys and just the inventory bill that might be impacting your 2024 outlook? Or are you not not seeing that? I think, Tom, for us, I would say the simple answer is no, we don't see that impact. And, you know, the other way of looking at it, we even looked at it, I would say, This is a question for both of you.
Speaker Change: And then my next one we heard some inventory build.
Speaker Change: Chatter from a particular supplier.
Speaker Change: In 2023 that impacted their 2024.
Speaker Change: Guidance that companies.
Speaker Change: Basically is there one market. So just curious is that something you guys were seeing at all.
Speaker Change: On your guys and just the inventory build that might be impacting your your.
Speaker Change: 2024 outlook or not not seeing that.
Swamy: Go ahead Swamy.
Swamy: I think Tom.
Swamy: I would say the simple answer is no we don't see that impact in.
Swamy: The other way of looking we even looked at I would say.
Swamy: 50 stock last year versus going into this year, if anything Thats 200, you're seeing we were kind of in the magnitude of 200 million MPC now towards the $100 million.
Seetarama Kotagiri: We talked about the safety stock last year versus going into this year. If anything, that's even reduced. We were kind of in the magnitude of 200 million. We see it now at around 100 million. So short answer, materially, we don't see that happening in our case. Okay, great. Thank you. We don't have the ability to do what they're doing.
Swamy: So short answer materially we don't see that happening in our case.
Speaker Change: Okay, great. Thank you.
Speaker Change: Yes.
Speaker Change: Two we don't have the ability to do what they're doing.
Tom Narian: We're on a pull system. So we're only able to sell to our customers what they call off. So we don't have an ability to push stuff into the supply, into our customers, compared to that company you're referring to. Got it. Maybe I'll just do a quick follow-up that, you know, at CES, you guys showcased some really impressive ADAS capabilities. We met folks from Vieneer, et cetera.
Speaker Change: We're on a pull system. So we only we're only able to sell to our customers what they call off so we don't have an ability to push stuff into the supply into our customers.
Compare to that.
Speaker Change: Company Youre, referring to.
Speaker Change: Got it maybe I'll just do a quick follow up.
Speaker Change: At CES.
Speaker Change: You guys showcase some really impressive what you'd ask capabilities, we met folks from pioneer et cetera.
Seetarama Kotagiri: Just curious, you know, as things evolve with autonomy, Level 3, you know, et cetera. You know, we met with some Tier 2s, with the LIDAR makers, too, at CES, who were kind of, for lack of a better word, in trouble. It seems like the Tier 1s, like you guys, are really well-positioned in ADAS as the time horizon for things like Level 4 gets pushed out farther and farther. Do you guys view, you know, these Tier 2 LIDAR players as potential acquisition targets for you guys, or is that something you would potentially do organically if and when we ever get to Level 4? Thanks. Tom, I think we've been pretty consistent in saying our focus is very much on what I call the driver assist systems, away from autonomy, to a high degree of driver assist systems, as I call it, right, because there's so much ambiguity in what we call L2 plus and L3, that's why I use the term, Driver Assist Functions Sensor Capabilities, The software associated with, and the integration capabilities to bring all the sensors ....
Speaker Change: Did you just curious as you see things.
Speaker Change: Move.
Speaker Change: <unk> with with autonomy level III et cetera.
Speaker Change: We met with some some Q2's lidar makers to at CES, who are kind of I dunno lack a better way to trouble.
Speaker Change: It seems like the tier ones like you guys are really well positioned.
Speaker Change: <unk>.
Speaker Change: As the time horizon for things like level for getting pushed out farther and farther do you guys view.
Speaker Change: These Q2 lidar players as potential acquisition.
Speaker Change: Targets for you guys or is that something you would potentially do organically, if and when we ever get to level four happening. Thanks.
Speaker Change: Tom.
Speaker Change: We have been pretty consistent in saying our focus is very much on what I call the driver assist systems.
Speaker Change: Away from economy to a high degree of driver assist systems as I call. It trade because there's so much ambiguity on what we call out to a plus 3% that's why I use the term term.
Speaker Change: Driver assist functions.
Speaker Change: Given that.
Speaker Change: We believe we are in a good position from.
Speaker Change: Sensor capabilities.
Speaker Change: The software associated and the integration capabilities to bring all defenses together the compute.
Speaker Change: Call it an issue or a domain controller of all types.
Tom Narian: So I think we're really focused on getting through the integration process that we have, which is going on track, and we are happy to report that. So we want to get that through, and there is a lot of interest from the customers and programs and us launching. So as you look into the future, the way you talked about... We are really focused now on getting market share and launching the programs and getting the growth that we talked about on the ADA towards the 2027 loss. I think we were in the 4.25 billion range.
Speaker Change: So I think we're really focused on.
Speaker Change: Getting through the integration.
Speaker Change: Process that we have which is growing on track and we are happy to report that.
Speaker Change: We want to get that through and there is a lot of interest from the customers on programs and that's launching.
Speaker Change: As you look into the future of the way you've talked about.
Speaker Change: We are really focused now on getting the market share and launching the programs and getting the growth that we've talked about.
Speaker Change: On the head towards 2027 Lewis I think we were in the $4 billion to $5 billion range.
Seetarama Kotagiri: So we are on track, and we are focused on that. So will we be obviously looking at some building blocks of the future? Yes, but that remains to be seen. I think we can give more color as we get towards the end of the year. Great, thank you so much. Our next question is from the line of Itay Michaeli with Citigroup. Please go ahead. Great, thanks. Good morning, everybody.
Speaker Change: So we are on track.
Speaker Change: We are focused on that so we'll be obviously looking at some building blocks of the future yes.
Speaker Change: But detriments to see methane, we can give more color as we.
Speaker Change: To get towards the end of the year.
Speaker Change: Great. Thank you so much.
Speaker Change: Our next question is from the line of ITI Mccalley with Citigroup.
Chris Mcnally: Please go ahead.
Chris Mcnally: Great. Thanks, Good morning, everybody just a couple of questions from me Firstly, just going back to the margin bridge. This year just want to ask a question on the operational excellence activities, but just curious how much line of sight you have on those initiatives how much you've already identified and then kind of just remind us what youre seeing in terms of.
Itay Michaeli: Just a couple of questions for me. First, just going back to the margin bridge this year, I just want to ask a question about the operational excellence activities. Just curious how much line of sight you have on those initiatives, how much you've already identified. And then kind of just remind us what you're seeing in terms of broader production stability and kind of what you're assuming for production volatility or stability for 2024. Good morning, Itay.
Chris Mcnally: Broader production stability and kind of what youre, assuming for production volatility or stability for 2024.
Speaker Change: Good morning.
Speaker Change: If you just look at the prepay.
Seetarama Kotagiri: If you just look at the prepared comments, I talked about achieving 75 basis points this year, which we did. And we have good line of sight for achieving 75 basis points in 24 and 25. Typically, we have continuous improvement activities and on-going initiatives that we work through, or operational excellence initiatives, I should say, that we work through. They're very, very granular.
Speaker Change: Prepared comments I talked about achieving 75 basis points this year, which we achieved.
Speaker Change: We have good lineup of side for achieving this 75 basis points in 2025.
Speaker Change: Typically we have continuous improvement activities then.
Speaker Change: On top of the initiatives that we've worked through our operational excellence initiatives I should say that we've worked through.
Speaker Change: They are very very granular there is very defined streams of work that are championed by executive team.
Seetarama Kotagiri: There are very defined streams of work that are championed by the executive team all the way, you know, into the divisions. So we feel pretty good about the visibility of those going forward. But again, at the beginning of the call, I made a few comments. Given the volume volatility and whatever else is happening in terms of programs being pushed out and so on, we are not stopping there, right? We'll continue to look at... Any dollar spent, does it provide value? And at what time?
Speaker Change: All the way.
Speaker Change: Into the divisions.
Speaker Change: We feel pretty good about the.
Speaker Change: Visibility of those going forward.
Speaker Change: But again in the beginning of the call I made a few comments on.
Speaker Change: Given the volume volatility and whatever else is happening in terms of programs being pushed out and so on we are not stopping there we will continue to look at.
Speaker Change: Any dollar spend does it provide the value and at what time and maybe it's not right now.
Seetarama Kotagiri: And maybe it's not right now, and if it adds value in the future, we'll go back to it. But we're looking at all of these aspects, and we feel pretty comfortable, from a visibility perspective for the 75 basis points coming up, or adding to the bottom line in 2425. That's 2425, collectively, each year? Right, right, over a two-year period. That's helpful.
Speaker Change: Tax value in the future, we'll go back to it but we're looking at all of that aspect, we feel pretty comfortable.
Speaker Change: From a visibility perspective for the 75 basis points coming up or adding to the bottom line in 'twenty four 'twenty five 'twenty four 'twenty five collectively it's about each year to drive the two year over two year period.
Speaker Change: That's helpful.
Itay Michaeli: Just as a quick follow-up on the Megaton's outlook for 2026, just curious what portion of the revenue outlook is already booked, and maybe broadly, Swami, if you could just comment on what you're seeing along the pace of ADAS bookings and penetration there. Yeah, I think I just mentioned a little bit a little while ago that looking at 2027, right, we were talking about 4.25 billion roughly. And I think we are on track to do that, right? That's what we talked about yesterday. In the megatrend areas, we've talked about battery enclosures in addition to ADAS and the powertrain.
Speaker Change: Quick follow up on some of the.
Speaker Change: Outlook.
Speaker Change: For 2026, so just curious what portion of the revenue outlook is already booked and maybe broadly if you can just comment on what youre seeing.
Speaker Change: The pace of a desk bookings and penetration there.
Speaker Change: Yes, I think.
Speaker Change: Just mentioned a little bit linked while ago that looking at 2027% rate, we were talking about the $4 25 billion roughly.
Speaker Change: And I think we are on track to that right. That's what we had talked about at our Investor day.
Speaker Change: In the megatrend areas, we've talked about.
Speaker Change: Vaccine closures in addition to aid us in powertrain.
Seetarama Kotagiri: Again, looking at the 2027 timeframe, we were over four, four and a half, or 4 billion in powertrain electrification managed sales. I think we are still on track to that. Battery enclosures, we talked in the range of 2 to 2.5 billion. Again, we are on track to that.
Speaker Change: Again looking at that 22007 timeframe.
Speaker Change: We were over four four and a half our $4 billion in their powertrain electrification managed sales I think we are still on track to that vaccine closures. We've talked in the range of two to $2 5 billion.
Speaker Change: We are on track to that.
Seetarama Kotagiri: We have to keep in mind that if the volumes on certain programs change drastically, obviously, we'll have to come back and talk about it. But we are working through those. I feel pretty comfortable with the numbers we talked about in 2027. Louis, I don't know if you agree with that.
Speaker Change: We have to keep in mind that if the volumes are.
Speaker Change: Certain programs changed drastically obviously will have to come back and talk about it but.
Speaker Change: We are working through those I feel pretty comfortable to the numbers III talked about in 2027 Lewis I don't disagree with that.
Itay Michaeli: Yep, that's very helpful, thank you. And just to add, maybe for 2026, 90% of our sales will be books. 90, great, that's very helpful, thank you.
Speaker Change: Yes.
Speaker Change: That's very helpful. Thank you.
Speaker Change: And just to add maybe for 2026.
Speaker Change: 90% held for sale is booked.
Speaker Change: 90, great. That's very helpful. Thank you.
Itay Michaeli: Thank you. Thank you. Thank you. The Bulletproof Executive 2013, Our next question is from the line of Krista Friesen with CIBC. Please go ahead.
Speaker Change: Okay.
Speaker Change: Our next question is from the line of Christopher <unk> with CIBC. Please go ahead.
Krista Friesen: Hi, thanks for taking that question. Just on here on the margin guide, so for 2026, 7 to 7.7. And then looking back to the investor day, the 2025 guide, I believe the top end was 7.8, so 2026 is about 10 bits lower at the top end. Can you just walk us through what's led you to this?
Christopher: Hi, Thanks for taking my question.
Christopher: And just one here on the margin guide for 2026.
Christopher: 777.
Christopher: And then looking back to the Investor Day that 2025 guide at least the top seven.
Christopher: So 2026 weeks tend to slow or at the top end can you just walk us through.
Christopher: What led you to this and is it mostly the mega trends.
Pat: And is it mostly the mega trends or a lower production environment? Morning Krista, the big, big picture when you look at the puts and takes and in 25 itself, we just look where we are today projecting for 25 and compared to last year, you know, we do have lower volume assumptions as we go through the plan, and we have some higher launch and new facility costs just because of the book business increasing, but offsetting that are some operational improvements. That's why we touched on that earlier.
Christopher: Or a lower production environment.
Speaker Change: Good morning Christa.
Christopher: Yes.
Christopher: Okay.
Christa: Big picture when you look at the puts and takes in 'twenty five itself. If we just look where we are today projecting for 25 and compared to last year, we do have a lower volume assumptions as we go through the plan.
Christa: We have some higher launch and new facility costs, just because of the book business increasing.
But offsetting that is some operational improvements at <unk>, while we touched on earlier so the net effect of those at the mid point, we were previously at 735% the impact of those about 30 30 basis points and then.
Krista Friesen: So the net effect of those at the midpoint is that we were previously at 7.35%. The impact of those is about 30 basis points. And then the last piece, again, I'm going to come back to this Mercedes-Benz G-Wagon pricing, the impact in 25 and into 26 is 20 basis points alone on it. So, apples to apples, I would say we're in line with the midpoint of our range. Great, thank you. Maybe just a housekeeping one.
The last piece again, I'm going to come back to the Mercedes Benz G wagon pricing the impact in 'twenty five as we ended two to 26 or 20 basis points alone.
Christa: On it so.
Christa: Apples to apples I would say, we're aligned with the midpoint of our range.
Speaker Change: Great. Thank you and maybe just a housekeeping one have you seen any sort of.
Krista Friesen: Have you seen any sort of supply chain impact from any of the issues going on in the Red Sea right now? Nothing material. We haven't seen really anything material. A lot of the industry disruptions, whether it was chips, we're probably more into what we would have seen historically for OEMs going down. It's very different than it was 18 months ago. Okay, great. Thanks. I'll jump back in the queue.
Christa: Supply chain impacts in it.
Christa: Uh huh.
Christa: Let's see right now.
Christa: Okay.
Christa: Nothing material I haven't seen we haven't seen really anything material.
Christa: A lot of the industry disruptions, whether it was chips were probably more into what we would have seen historically for for Oems going down there is not a real it is very different than it was 18 months ago Kristen.
Speaker Change: Okay, great. Thanks, I'll jump back in the queue.
Rod Lache: Thank you. Our next question is from the line of Rod Lache with Wolf Research. Please go ahead. Good morning, everybody.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of Rod Lache with Wolfe Research. Please go ahead.
Rod Lache: Good morning, everybody.
Rod Lache: I wanted to ask about just a couple earnings bridge questions. I believe your Adas business was 181 9 billion revenue in a few hundred million dollars loss, making in 2023.
Rod Lache: I wanted to ask about just a couple earnings bridge questions. I believe your ADAS business was 1.8 1.9 billion revenue and a few $100 million loss making in 2023. Since your gross profit couldn't really, at that point, offset the R&D that's spent in the business, I think it's about two-thirds of your Megatrend spending. Are you still expecting 8x revenue of $3 billion and EBIT at around break-even in 2024 and then corporate average margins in 2025? Good morning, Rod.
Rod Lache: Your gross profit Couldnt.
Rod Lache: Couldnt really at that point to offset the R&D spent in the business I think it's about two thirds of your Mega trend spending.
Rod Lache: Are you still expecting <unk> revenue of $3 billion in EBIT at around breakeven in 2024, and then corporate average margins in 'twenty five.
Speaker Change: Good morning Rod.
Rod Lache: I think there are a couple of things I think when we talked about <unk>.
Seetarama Kotagiri: I think we, there are a couple of things. I think when we talked about being here, one of the key things was being EBITDA neutral in 24. I think we are on track to get there, and we feel comfortable about it.
Speaker Change: One of the key things was being EBITDA neutral.
Speaker Change: In 2004.
Speaker Change: I think we are on track to get there.
Speaker Change: And we feel comfortable about it.
Seetarama Kotagiri: Looking at the sales for 2024, I think we are on track. We're still there.
Speaker Change: At the.
Speaker Change: Sales for 2024, I think we are on track and we're still.
Speaker Change: Still there.
Rod Lache: And as I mentioned, we are looking at the profitability of AIDAS, you know, overall, as we look at that segment or that piece of the megatrend. We feel comfortable looking at the spend on the programs that we have unless the programs make changes. And, as you know, we still have to launch the programs and work through the stuff. And if the revenue gets smaller, only based on volumes, it might impact. Otherwise, I think we feel we are progressing from spend to revenue and towards profitability in the right way. OK. Yeah, I'm just thinking about the midpoint of your revenue and the midpoint of your margin guidance, which implies about $300 million of earnings growth this year in 2024 versus 2023.
Speaker Change: And as I mentioned, we are looking at the <unk>.
Speaker Change: Profitability of.
Speaker Change: Adas.
Speaker Change: Overall as we look at that.
Speaker Change: Segmental that piece of the Mega trend.
Speaker Change: We feel comfortable looking at the spend on the programs that we have unless the program mix changes and as you know we have to still launch the programs and worked through the stuff and if the revenue gets smaller the only based on volumes it might impact otherwise.
Speaker Change: Otherwise increased feel we are progressing.
Speaker Change: From the spend to revenue and towards the profitability.
Speaker Change: In the right way.
Speaker Change: Okay.
Speaker Change: <unk>.
Speaker Change: Yes, I'm just thinking about the midpoint of your revenue and the midpoint of your margin guidance.
Speaker Change: <unk> is about $300 million of earnings growth this year in 2024 versus 23.
Rod Lache: And I thought that the ADAS improvement alone, I know you had about 70 million in veneer synergies, and it seemed like there was a meaningful amount of improvement year-over-year in ADAS. And if you get half of the 75 basis points of performance, this year, that's another $150 million. Is there something that I'm missing in terms of the headwinds on a year-over-year basis that brings it back down to about $300 million of earnings growth in 2014? Good morning, Rod.
Speaker Change: And.
Speaker Change: I had thought that the the Aaas improvement alone I know you had about $70 million is the in year synergies and it seemed like there was a.
Speaker Change: A meaningful amount of improvement year over year, and eight ounce and.
Speaker Change: If you get half of the 75 basis points of performance.
Speaker Change: This year.
That's another $150 million.
Speaker Change: Is there something that I'm missing in terms of the headwinds.
Speaker Change: On a year over year basis that brings it back down to about $300 million of earnings growth in 'twenty four.
Speaker Change: Yes, good morning, Rod I think your math you throw it out as is in the ballpark for the our Adas business.
Pat: I think your math you're throwing out is in the ballpark for the R8S business, so I think you're bang on there. A couple of pieces just to consider as well are when you look at the bigger picture, our sales are flat year over year, and this is going to be the third time I say it. I feel like a broken record, but our G-Wagon impact is that our sales are up $620 million. So what we are seeing is some volume weakness beyond that, given the flat environment.
Speaker Change: Thank you are bang on there.
Speaker Change: Couple of pieces just to consider as well is when you look big picture, our sales are flat year over year.
Speaker Change: Because it's the third time, I said I feel like a broken record, but our G wagon impact as our sales are up $620 million. So what we are seeing is some some volume weakness beyond that given the environment.
Pat: Beyond that, we also then have continued inflationary headwinds and lower scrap pricing, which has impacted us in the range of about 30 basis points. And then there is some, and that's the positive offset, is the operational excellence that Swami spoke about. And then the last piece really is what you referred to in the 8s pieces of the megatrends as the sales grow. So net net, that works out to your 300 Okay, and then just lastly, it sounds like you're not anticipating any recovery on the 30 basis points of higher input costs. Can you just give us a little bit of color because it seemed like you had some significant impact in 2021 and 2022.
Speaker Change: But beyond.
Speaker Change: Beyond that we also have.
We do have continued inflationary headwinds and <unk>.
Speaker Change: And lower scrap pricing, which.
Speaker Change: His impact is in the range of about 30 basis points.
Speaker Change: And then.
Speaker Change: And then we do have some.
The positive offset is the is the operational excellence that swamy spoke about.
Speaker Change: And then and then the last piece really is what you referred to on the.
Speaker Change: On the <unk> piece and some of the Mega trends as the sales growth. So net net that works out to your 300.
Speaker Change: Okay.
Speaker Change: And then just lastly.
Speaker Change: It sounds like Youre not and.
Speaker Change: <unk> any recovery on the 30 basis points of higher input costs can you just give us a little bit of color because it seemed like.
You had some significant impact.
Speaker Change: In 2021, 2022, you kind of neutralized the headwind in 2023, but had not yet recovered.
Rod Lache: You kind of neutralized the headwind in 2023, but you had not yet recovered the cost that you had absorbed prior to that. And now it sounds like there's another round of material cost headwinds. So on a very high level, how are you thinking about the recoveries for what you've absorbed and these additional headwinds? It's primarily not material-related headwinds, other than the scrap, right?
Speaker Change: The cost that you had absorbed prior to that and now it sounds like there is another round of material cost headwinds.
Speaker Change: And a very high level basis, how are you thinking about the recoveries for what you've absorbed in these.
These additional headwinds.
Speaker Change: Yes.
Speaker Change: It's primarily not material related headwinds other than the scrap rates of scrap re prices every month and it's just a factor when you are selling your engineered scrap back into the dealers, but the primary driver of higher cost as the elevated inflation that we're seeing globally and it's driving higher labor rates Rod. So if you think about.
Pat: So scrap prices go up and down every month, and it's just a factor when you sell your engineered scrap back to the dealers. But the primary driver of higher costs is the elevated inflation that we're seeing globally, and it's driving higher labor rates, Rod. So if you think about, you know, traditionally, you'd be in North America, whether you're US or Canada, Germany, Austria, or big regions, you'd be operating, pick a number, say roughly 2% labor inflation on a year-over-year basis. We're seeing increases that are above that. I would say in North America, so in Canada and the US, we're seeing increases.
Speaker Change: Traditionally you would be in North America, whether your U S or Canada, Germany, Austria are big regions you'd be operating pick a number say roughly 2% labor inflation on a year over year basis, we're seeing increases that are above that.
Speaker Change: Say in North America, So in Canada U S. We're seeing increases.
Pat: And in Europe, we're seeing bigger impacts, and it's primarily driven by the higher energy costs that local residents are feeling. So there is embedded inflation through the labor side. The flip side to that is, we do have assumed recoveries from our customers to offset those amounts. We're not taking it lightly.
Speaker Change: Maybe a couple of points above that and in Europe, we're seeing bigger and bigger impact and is primarily driven by the higher energy costs that the the local residents are feeling so there is embedded inflation through the labor side. The flip side to that is what we do has assumed recoveries from our customers to offset those amounts were not taken up.
Pat: But as Swami said earlier, the more important thing is how do we become more efficient so that we're actually changing our fixed cost structure so that these labor impacts aren't as impactful to Magna overall as we go forward. Yeah. The Bulletproof Executive 2013, Thanks for the clarification. Thanks, everyone.
Speaker Change: Lightly, but as Swamy said earlier the more important thing is how do we how do we become more efficient so that we're actually changing our fixed cost structure that.
Speaker Change: These labor impacts aren't as impactful.
Swamy: Magna overall as we go forward.
Swamy: Yes.
Speaker Change: Makes sense.
Speaker Change: Thanks for the clarity.
Speaker Change: Thanks Rod.
Rod Lache: As a reminder, if you would like to register for a question, please press the 1 followed by the 4. Our next question is from the line of Brian Morrison with TD Securities. Please go ahead.
Speaker Change: As a reminder, if you'd like to register for a question. Please press the one followed by the four.
Speaker Change: Our next question is from the line of Brian Morrison with TD Securities. Please go ahead.
Brian Morrison: Thanks, good morning. Pat, I just want to clarify from a V&A perspective: your engineering costs, have they increased, or has the duration been extended from your prior outlook? And then my second question is, I know it's not typical that you talk about your prior three-year guidance, but you did reiterate your guidance for 2025 back in as late as November. I'm wondering if you can provide us an update on what your outlook is for that, or at least the cadence from 5.7 this year to, I guess it's 7.35 in 2026. Hey Brian, morning.
Brian Morrison: Thanks, Good morning, Pat I, just wanted to clarify from your perspective, Peter engineering cost and the increase or the duration has been extended from your prior outlook and then my second question is I know, it's not typical that you talk about your prior three year guidance, but you did reiterate your guidance for 2025 back in his latest November.
Brian Morrison: I'm wondering if you can provide us an update on what your outlook is for that or at least the cadence from $5 seven this year too.
Brian Morrison: 703, 735% in 2026.
Pat McCann: Hey, Bryan good morning.
Bryan: I think two questions. So on the first one being the the megatrend engineering spend so.
Speaker Change: We're projecting on average one 2 billion per year over our outlook period. That's in line with what we provided US an update in September. So it's really so last year's outlook. We had talked about the 900 range. We increased it to one to fully reflect the acquisition of <unk> in here. So no change in our engineering profile.
Pat: I think we have two questions here. So on the first one, being the megatrend engineering spend, we're projecting on average $1.2 billion per year over our Outlook period. That's in line with what we provided as an update in September. So it's really...
Pat: So last year's Outlook, we talked about the $900 range. We increased it to $1.2 billion fully to reflect the acquisition of V&Air. So no change in our engineering profile. When you talk about our 2025 margin from September, I took Krista through the walk. So long story short, when you look at our 2025 numbers, we do see some headwinds related to volumes and some launch costs and new facility costs, given some of the recent awards, but it's partially being offset by operational improvements that Swami covered in detail. So the net of those, if you look at our midpoint for 2025, we were 7.35. The impact of those three categories is about a 30 basis point negative impact.
Speaker Change: When you talk about our 2025 margin from September.
Speaker Change: I took christa through.
Speaker Change: But the work so we're not long story short when you look at our 2025 numbers.
Speaker Change: We do see some headwinds related to volumes.
Speaker Change: Sure.
Speaker Change: Some launch costs and new facility costs, given some of the recent awards, but it's partially being offset.
Speaker Change: By operational improvements that swamy covered in detail. So the net of those if you look at our midpoint to 'twenty five we were 73, 5% the impact of those three categories. It's about a 30 basis point negative impact and then lastly, we have.
Speaker Change: Again, this G wagon pricing, which is about a 20 basis point headwind.
Speaker Change: So just just to be clear when we're talking about updating 25, we wanted to make sure we could incorporate the impact of via the air and import incorporate the impact of the amortization, but I think we have a footnote that said that based on the assumptions that we had when we started the year right. We are in right in the middle of our business plans and we're giving that information volunteered changed since then.
Pat: And then lastly, we have again this G-Wagon pricing, which is about a 20 basis point headland. So just to be clear, when we're talking about updating 25, we wanted to make sure we could incorporate the impact of V&A and incorporate the impact of amortization. But I think we have a footnote that says that it's based on the assumptions that we had when we started the year, right? We were right in the middle of our business plans when we gave that information. Volumes have changed since then, http://www.youtube.com.uk Our next question is from the line of, Pardon me. Our next question is from Colin Langan with Wells Fargo. Please go ahead. Oh great, thanks for taking my questions. Any color on your exposure to Fisker?
Speaker Change: And mix has changed.
Speaker Change: That's fair just looks like it's a mid <unk> margin for 2025 is what you're implying I appreciate it. Thank you.
Speaker Change: Our next question is from the line of.
Speaker Change: Pardon me. Our next question is from the line of Colin Langan with Wells Fargo. Please go ahead.
Colin Langan: Oh, great. Thanks for taking my questions.
Colin Langan: Any color on your exposure to <unk>, obviously, there's some concerns there if something happened I mean, what kind of sales or earnings impact could you say.
Speaker Change: Good morning Collyn.
Speaker Change: You take a boat.
Speaker Change: The exposure obviously pfister.
Speaker Change: A big customer for our assembly operations and.
Speaker Change: As far as our our exposure to them we.
Speaker Change: We do disclose in our financial statements our exposure related to all new entrants and when I talked about exposure, it's basically related to.
Colin Langan: Obviously, there are some, you know, concerns there. If something happened, I mean, what kind of sales or earnings impact could you see? Morning Colin.
Speaker Change: Working capital long term assets dedicated type assets and.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: There's a statement the numbers aren't out, but it's going to be in the range that that gross numbers probably in the range of about 600 million. The majority of that has disappeared.
Pat: When you think about the exposure, obviously Fiskars is a big customer for assembly operations. You know, as far as our exposure to them is concerned, we do disclose in our financial statements our exposure related to all new entrants. And when I talk about exposure, it's basically related to, you know, working capital, long-term assets, dedicated type assets, and, you know, the numbers aren't out, but it's going to be in the range of, that gross number is probably in the range of about $600 million, the majority of that being fiscal. But if sales were to go away too, there'd be some earnings dragged down too. We should be thinking about if there's a risk there. It's a little bit tricky, Colin.
Speaker Change: Got it any sales.
Speaker Change: Sales were to go away to there'd be some earnings drag it should we should be thinking about it there's a risk there.
Speaker Change: It's a little bit tricky Collyn I don't want to talk you down in this call but.
Speaker Change: Contracts, we have with Shire, not only with <unk>, but all of the contracts. They are they are a little bit more complicated than you'd see in a normal.
Speaker Change: Industry, where it's at.
Speaker Change: No volume requirement Peel these have more much more complex contracts, where you have fixed cost recoveries depending on.
Speaker Change: Fixed cost incurred and.
Speaker Change: And then assumptions on original volume projections versus actuals. So there is a true up mechanism. So it's not an easy answer.
Speaker Change: Okay.
Speaker Change: It was a quick.
Speaker Change: So that's why you don't see CVA margins move around us revenues will increase or decrease.
Speaker Change: Like our other segments.
Pat: I don't want to bog you down in this call, but the contracts we have with Steyr, not only with Fisker, but all the contracts, they're a little bit more complicated than you'd see in the normal industry where it's a no volume requirement PO. These have much more complex contracts where you have fixed cost recoveries depending on fixed cost incurred and then assumptions on original volume projections versus actual. So there is a true up mechanism. So it's not an easy answer. Okay. Sirs, that's why you don't see CBA's margins move around as revenues increase or decrease, like our other, Just a quick one.
Speaker Change: Okay.
Speaker Change: Just a quick one equity income I think it was only $3 million in the quarter, but the guidance is.
Speaker Change: 121, 50 for next year.
Speaker Change: What what was the unusual issue in Q4 and the confidence in getting back to those higher numbers.
Speaker Change: Yes, I think Q4, there was a I would say there was one was operational which was we had a mix issue within one joint venture between products that drove.
Speaker Change: So even though you don't see it but even though the revenue within the joint venture was consistent we had negative product mix and then you had margin negative headwinds on that.
Speaker Change: We also had some commercial items that we had expected to collect in the fourth quarter that had been pushed into 2024.
Colin Langan: Equity income, I think it was only $3 million in the quarter, but the guidance is $120 million, $150 million for next year. What was the unusual issue in Q4 and the confidence in getting back to those higher numbers? Yeah, I think Q4 there was a, I would say there was.
Speaker Change: And then.
Speaker Change: The most significant piece of it or it was.
Speaker Change: When we did the not we but when the joint venture partner data Finalization of all the deferred tax assets for U S. GAAP purposes, there was an adjustment to our final tax numbers.
Pat: One was operational, which was we had a mix issue within one joint venture between products that drove it. So even though you don't see it, but even though the revenue within the joint venture was consistent, we had a negative product mix, and then you had margin negative headwinds on that. We also had some commercial items that we had expected to collect in the fourth quarter that had been pushed into 2024. And then the most significant piece of it was when the joint venture partner did a finalization of all the deferred tax assets for U.S. GAAP purposes, so there was an adjustment to our final tax numbers. And because equity income is on an after-tax basis, that flows through that line. Okay. I got it. Thanks for taking my question. All right, bye. Our next question is from the line of Joseph Spak with UBS Securities. Please go ahead. Thanks. Good morning, everyone.
Speaker Change: And began because equity income on an after tax basis that flows through.
Speaker Change: That line.
Speaker Change #100: Okay got it all right. Thanks for taking my questions.
Speaker Change #101: Alright. Thanks.
Speaker Change #101: Our next question is from the line of Joseph Spak with UBS Securities. Please go ahead.
Joseph Spak: Thanks, Good morning, everyone just quickly back on the customer funded capex.
Joseph Spak: Is it possible to sort of indicate what product line that is or is it across product lines and some of that.
Joseph Spak: Associated revenue already considered in the 26 guidance.
Joseph Spak: Yes, I think the associated.
Speaker Change #103: Revenue is included for sure.
Speaker Change #104: I don't think we can get into the specifics of the product line.
Speaker Change #105: Got it.
Stuart: It's Stuart.
Stuart: And I would say yes.
Stuart: Okay.
Speaker Change #107: Maybe to follow on from some rods question before if we look at power and revision.
Speaker Change #107: And if I'm looking at.
Speaker Change #107: The 24 to 26 like the incremental margins there.
Speaker Change #107: A significantly stronger, which I imagine is in part driven by the breakthrough in the active safety business, but is there anything else sort of driving that area like our synergies maybe coming in maybe.
Joseph Spak: Just quickly back on the customer-funded CapEx. Is it possible to sort of indicate what product line that is? Or is it across product lines? And is some of that associated revenue already considered in the 26 gap? Yeah, I think the associated revenue is included, for sure. I don't think we can get into the specifics of the product line. OK.
Better than that $70 million that you sort of originally targeting or anything else driving the strong incrementals there.
Speaker Change #107: So just.
Speaker Change #108: We're proud of it as the synergies right.
Speaker Change #108: You talked about $70 million run rate.
Speaker Change #109: Carnify so.
Speaker Change #109: Seem to be a.
Seetarama Kotagiri: It's toward electrification, I would say. Okay, um, maybe to follow on from some of Rod's questions before, if we look at power and vision, and if I'm looking at, you know, the 24 to 26, like the incremental margins, they are significantly stronger, which I imagine is in part driven by, you know, the breakthrough and the active safety business. But is there anything else sort of driving that? Like our synergy is maybe coming in maybe better than that 70 million that you sort of originally targeting or anything else sort of driving the strong incrementals? The Bulletproof Executive 2013, So just a right. Part of it is the synergies, but I, you know, talked about the 70 million run rate by the end of 25, so it seems to be a good track to that. So we'll hit 24, half of that run rate going forward.
Speaker Change #109: Good talk to that so really hit 24 half of that run rate going forward. That's one of the other one is also the <unk>.
Speaker Change #109: Sales 70, we're coming right and keeping the.
Speaker Change #109: R&D costs and training spend constant.
Speaker Change #109: If you look at the trajectory that we talked about going into 'twenty five 'twenty six.
Speaker Change #109: That also contributes.
Speaker Change #109: The margin expansion compared to where we were in 'twenty three.
Okay.
Speaker Change #109: Yes.
Speaker Change #110: And to add to that is.
Speaker Change #110: Swamy refers to the sales growth and we're starting to see that inflection point in the Mega trends in most of the Mega trends are in the PSV Group Swamy has also referring to on consolidated sales. So when you look at our equity income, we're seeing a benefit come through equity income and.
Speaker Change #110: Equity fund.
Speaker Change #110: Sales were seeing about a 15 basis point benefit just even out of equity income on its own.
Speaker Change #111: Okay, that's super helpful.
Speaker Change #111: Maybe just one more quick one if I'm if I'm not mistaken I think you did push out your mega trend breakeven.
Seetarama Kotagiri: That's one of them. The other one is also keeping the sales revenue coming, right, and keeping the R&D costs and engineering spend constant. If you look at the trajectory that we talked about going into 25, 26, that also contributes, you know, to the margin expansion compared to where we were in 23. Okay, if I could... Another thing to add to that is, when SWAMI refers to the sales group, and we're starting to see that inflection point in the megatrends, and most of the megatrends are in the P&V group, SWAMI is also referring to unconsolidated sales, so when you look at our equity income, we're seeing a benefit come through equity income, and as equity income goes up in those Maybe just one more quick one.
Speaker Change #111: A year.
Speaker Change #112: To make sure is that basically solely related to some of the slower EV development, you've talked about or is there anything else going on there.
Speaker Change #112: So it's purely related to the volume and program programs being pushed out so it's nothing different I've got like I said again.
Speaker Change #113: We will continue to look at it.
Speaker Change #113: R&D and <unk> spend and all that stuff to see.
Speaker Change #113: What opportunities we have to bring it back.
Speaker Change #114: Thank you very much.
Speaker Change #114: Our final question is from the line of Michael Glen with Raymond James. Please go ahead.
Michael Glen: Hello, Thanks for getting me in.
Michael Glen: The $900 million of Mega trend spending.
Michael Glen: That sits as part of the one point to.
Michael Glen: Are you able to give a kind of a rough breakdown of what those buckets consist stuff across the segments.
Michael Glen: Yeah.
Speaker Change #116: Good morning, Michael I think typically when we do that there is some.
Speaker Change #117: Call It cross synergies growing between whether it's Australia or were there some other aspects of it but predominantly it is in the electrification and the Adas area. It will be difficult to break it down exactly what those are there is some overlapping.
Joseph Spak: If I'm not mistaken, I think you did push out your Megatrend break even by a year. And I just wanna make sure is that basically solely related to some of the slower EV development you've talked about? Or is there anything else going on there? So it's purely related to the volume and programs being pushed out. Joseph, nothing different.
Speaker Change #117: Areas that reduce spend to keep the synergies where we need to.
Speaker Change #118: So okay.
Just to be Crystal is the vast majority of it is in the P&C segment.
Seetarama Kotagiri: And like I said, again... We will continue to look at it from R&D and spending and all that stuff to see what opportunities we have to bring it back. Okay, thank you very much. Transcribed by https://otter.ai. Our final question is from the line of Michael Glen with Raymond James. Please go ahead.
Okay and.
Speaker Change #118: How do we think about if you.
Speaker Change #118: Like are you able to shut that level of spend like the $1 2 billion. If we're thinking about that are you able to turn that off pretty quickly.
Speaker Change #118: It depends on the projects.
Speaker Change #118: Product associated with.
Michael Glen: Oh, thanks for getting me in. The 900 million in megatrend spending sits as part of the 1.2. Are you able to give kind of a rough breakdown of what those buckets consist of across the segment? Yeah. Good morning, Michael.
Speaker Change #118: Engineering or efforts that are towards the launch of awarded programs.
Speaker Change #118: We have to be cautious and we work with the customers to see how we can work through it and again. The one two is the gross spend at the end of the day rates. So some of it will be covered on Nevada programs in behalf too.
Seetarama Kotagiri: I think typically, when we do that, there is some Transcription by Trans-Expert at Fiverr.com areas that we do spend to keep the synergies where we need them. So the vast majority of it is in the P&V segment. Okay, and how do we think about, if you like, are you able to shut that level of spending down, like the 1.2 billion if we're thinking about that? Are you able to turn that off pretty quickly?
Speaker Change #118: Make sure we keep the efforts going.
Speaker Change #118: On the future like if youre looking at a specific project out three or four years.
There is not a specified program associated with it then obviously, we can turn that off or defer it to the future.
Speaker Change #118: Yes.
Speaker Change #119: And just one more.
Speaker Change #119: If we think of the history of Mega trend spending.
Seetarama Kotagiri: It depends on the project, the part associated with the... engineering or efforts that are towards the launch of an awarded program. We have to be cautious, and we work with the customers to see how we can work through it. And again, the 1.2 is the gross spend at the end of the day, right?
Speaker Change #119: How do we and in terms of what we've seen from the results like what what.
Speaker Change #119: What what's the takeaway that we should have with respect to return on invested capital with six investments up until now because it does it just it doesn't look good from what we've seen so far and I'm just looking for some commentary that works against that in terms of we're not seeing what's taking place beneath the surface or something.
Seetarama Kotagiri: So some of it will be recovered on awarded programs, and we have to make sure we keep the efforts going. For the future, if you're looking at a specific project, you know, out three or four years, if there is not a specified program associated with it, then obviously, we can turn that off or defer it to the future.
Speaker Change #119: Like that.
Speaker Change #120: Yes, we've talked about this $900 million for a few years now right in there at all.
Speaker Change #120: Part of the Mega trend spend for programs that we have won and are launching.
Seetarama Kotagiri: And just one more. So if we think of the history of megatrend spending, how do we, and in terms of what we've seen from the results, like what, what, what's the takeaway on that we should have with respect to return on invested capital with these investments up till now? Because it just, it doesn't look good from what we've seen so far.
Speaker Change #120: There are some which are actually for the evolution of the product line going into the future. So we don't have a melting ice cube. This is a long term view of how to keep stability in the business as the industry is evolving.
Seetarama Kotagiri: I'm just looking for some commentary that works against that in terms of us not seeing what's taking place beneath the surface or something like that. Yeah, we've talked about this 900 million for a few years now, right? And they're all a part of the Megatrend spend for programs that we have won and are launching. And there are some that are actually for the evolution of the product line going into the future. So we don't have an melting ice cube.
Speaker Change #120: How do we go up market is just.
Speaker Change #120: As we get a project, we look at what programs and what platforms reach customers what is the market size.
Speaker Change #120: And what is the right to win those.
Speaker Change #120: Those are some of the questions we answer before.
Speaker Change #120: We started investing on the project.
Speaker Change #120: The one way to measure it as the program ramps that we are getting like we talked about the mega trends.
Seetarama Kotagiri: This is a long-term view of how to keep stability in the business as the industry is evolving. How we go about it is, as we get a project, we look at what programs and what platforms, which customers, what the market size is, and what our right to win is. Those are some of the questions we answer before we start investing in a project. The one way to measure it is...
Growing in revenue from 22.
Speaker Change #120: $200 million.
Speaker Change #120: Through 2027.
Speaker Change #120: And as I've mentioned in my previous comments that we are on track for Adas and electrification.
Speaker Change #120: Electrification managed sales and on track.
Speaker Change #120: For battery and closures. So that's the measure after return we are getting.
Seetarama Kotagiri: The program wins that we are getting, like we talked about the megatrends, you know, going in revenue from 22 in a few hundred million to 2027. Right. And as I mentioned in my previous comment, we're on track for ADAS, we're on track for electrification, managed sales, and on track for battery enclosures. So that's a measure of the return we are getting, and also getting the mix that we need. That means the product line is evolving as the industry and, you know, the car of the future is evolving.
Speaker Change #120: And also getting the mix that we need that means.
Speaker Change #120: That line is evolving as the industry.
Speaker Change #120: The future is evolving.
Speaker Change #120: So that's the discipline, we have and we feel pretty good how we're going about it and like I said, we continue to look at it as market conditions change.
Speaker Change #121: Okay. Thank you for taking the questions.
Speaker Change #122: Thanks, Michael.
Speaker Change #123: So thanks, everyone for listening in today I am pleased with the progress we made in 2023.
Speaker Change #123: And want to reassure we remained highly focused on executing our strategy and meeting our mid and long term outlook.
Michael Glen: So that's the discipline we have, and we feel pretty good how we're going about it. And like I said, we continue to look at it as market conditions change. Okay, thank you for taking the question. Thanks Michael. So thanks everyone for listening in today. I'm pleased with the progress we made in 2023 and want to reassure we remain highly focused on executing our strategy and meeting our mid and long-term outlook. And we are confident that we can achieve them. Thank you and have a great day. © The Bulletproof Executive 2013, ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ??
Speaker Change #124: And we are confident that we can achieve them. Thank you and have a great day.
Speaker Change #124: Okay.
Speaker Change #124: No.
Speaker Change #124: Tom.
Speaker Change #124: Sure.
Speaker Change #124: [music].
Speaker Change #124: Okay.
Speaker Change #124: Yes.
Speaker Change #124: [music].
Speaker Change #124: Thanks.
Speaker Change #124: Okay.
Speaker Change #124: Sure.
Speaker Change #124: [music].
Speaker Change #124: Okay.
Speaker Change #124: Okay.
Speaker Change #124: [music].