Q3 2024 Magna International Inc Earnings Call
Thank you for standing by my name is Kaitlin I will be your conference operator today at.
At this time I would like to welcome everyone to the Magna International third quarter 'twenty 'twenty four results webcast.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
We'd like to withdraw your question again press the star and one.
Speaker Change: I would now like to turn the call over to Louis Tonelli, Vice President of Investor Relations you may begin.
Thanks, very much Hello, everyone and welcome to our conference call covering our third quarter 2024.
Speaker Change: Joining me today are swamy quarter, Gary and Pat Mccann.
Speaker Change: Yesterday, our board of directors met and approved our financial results for the third quarter of 2024.
Speaker Change: Our updated outlook for 2024.
Speaker Change: We issued a press release this morning outlining our results.
Speaker Change: You'll find the press release today's conference call webcast. The slide presentation to go along with the call and our updated quarterly financial review all in the Investor Relations section of our website at <unk> Dot com.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Please refer to today's press release for a complete description of our safe Harbor disclaimer.
Please also refer to as a reminder, slide included in our presentation that relates to our commentary today.
Speaker Change: With that I'll pass the call over to Swamy.
Swamy: Thank you Louis good morning to everyone. I appreciate you joining our call today as always let's jump right in.
Swamy: Let me highlight a few key takeaways before we get into the details of the quarter.
Swamy: We are mitigating industry headwinds, including lower production volumes in each of our core regions and continued to execute within adjusted EBIT margin.
Swamy: Five 8% in line with Q3 2023, despite 4% lower global vehicle production.
Swamy: We expect our adjusted EBIT margin to be in the five 4% and five 5% range for 2024.
Swamy: Despite softer than anticipated vehicle production in North America, and Europe, which has negatively impacted sales.
Swamy: Still expect.
Swamy: Adjusted EBIT margin to be within our original five 4% to 6% range from our February outlook, which highlights effective cost savings strategies, we have executed on.
Swamy: We continue to expect margin expansion in 2024 hour compared to 2023.
Swamy: Operational excellence activities remain on track to collectively contribute about 75 basis points to margin expansion during 'twenty four and 'twenty five.
Swamy: And we are benefiting from our ongoing restructuring activities and a $90 million of reduced gross mega trend engineering spend for 2024.
Swamy: While we are reducing our spend we maintain confidence in our long term positioning and ability to reap the rewards of recent investments.
Swamy: We have a continued focus on strong free cash flow generation and capital discipline.
Swamy: We have further lowered our expected capex range by another 100 million for a reduction of up to $300 million for 2024 compared to our February outlook.
Swamy: And we are maintaining our free cash flow outlook range at $600 million to $800 million.
Swamy: And we are leveraging the elements within our control.
Swamy: Further reinforcing our conviction in our growing free cash flow beyond this year.
Swamy: As a result of this we are planning to restart meaningful share repurchases this quarter.
Swamy: We continue to focus on free cash flow generation and capital discipline to preserve our ability to return capital to shareholders, while ensuring balance sheet.
Swamy: Turning to a high level review of the numbers for the third quarter for 2024 compared to the third quarter of 2023.
Swamy: Consolidated sales were $10 3 billion down, 4%, mainly reflecting lower production in our key markets and the divestiture of a controlling interest in our metal forming operations in India, partially offset by new program launches.
Swamy: Despite the challenging production environment, including Detroit, three North American production being down 12% in the quarter.
Swamy: We posted 1% sales growth over market.
Swamy: Adjusted EBIT was $594 million up $17 million from Q2 2024, despite sequentially lower vehicle production in all key regions.
Swamy: Adjusted EPS came in at dollar one to eight.
Swamy: Inclusive of approximately 10.
Swamy: <unk> net impact associated with the higher income tax rate, which Pat will cover later.
Swamy: And free cash flow generated in the quarter was 174 million a strong $151 million increase from last year, reflecting continued capital discipline.
Swamy: Yeah.
Swamy: Our capital discipline and allocation principles remain unchanged.
Swamy: We continue to maintain a strong balance sheet ample liquidity.
Swamy: And high investment grade ratings to provide flexibility to invest for the future and managed through downturns.
Swamy: As we continue to invest for profitable growth. We also regularly review and refine our product portfolio to ensure all business lines are aligned with our strategy to be a leading player in relevant markets and to generate value for shareholders.
Swamy: And as we have for many years, we intend to continue returning capital to shareholders.
Swamy: Flowing a period of heightened investment we are focused on returning to a more historical cadence and returning capital to shareholders.
Swamy: Overall, our disciplined profitable approach to growth has served magna and our shareholders well over the years and will remain a foundational principle going forward.
Swamy: At the end of Q3, we had about $3 7 billion in liquidity, including about $1 1 billion in cash.
Swamy: We have been reducing our adjusted debt to adjusted EBITDA ratio for a peak of about 2.2 X in.
Swamy: In 2023 currently our ratio is at $1 93, and we are on a path to returning to our targeted range.
Swamy: When we talk about returning to a normal cadence.
Swamy: Look at the past dozen years.
Swamy: Some context to our capital allocation strategy.
Swamy: Overall, we believe our long term approach to investing for future value creation.
Swamy: And capital return to shareholders is balanced.
Swamy: Or the 2013 through 2023 timeframe, we invested about $20 billion into our business.
Swamy: Almost 90% of which has been capital spending, including four new product areas programs and geographies to bolster our establish strong market positions.
After a more recent period of investment in battery enclosure assembly capacity to support the ongoing transition to Evs.
Swamy: Our capex as a percent of sales is on a path to more normal levels of mid 4% next year and around 4% by 2026.
Swamy: And over the same 2013 through 2023 period, we've returned about 15 billion to shareholders in the form of dividends and share repurchases.
Swamy: As you can see following a period of elevated investment in 2023 2024.
Swamy: We expect our capital allocation profile to normalize starting in 2025.
Swamy: Okay.
Swamy: With our free cash flow generation this year.
Swamy: And our confidence in further free cash flow growth beyond 2024.
Swamy: Optimizing value creation by meaningfully increasing our return of capital to shareholders beyond our consistent dividend policy.
Swamy: Our board approved a share repurchase plan for up to 10% of Magnus public float or over 28 million shares.
Swamy: We expect to restart meaningful share repurchases this quarter.
Swamy: The repurchases are in addition to our ongoing quarterly dividend.
Swamy: We believe this capital allocation strategy provides us with continued flexibility to both support future growth and further return capital to our shareholders.
Swamy: In summary, we are responding to the volatile operating environment and are focused on margin expansion free cash flow generation and increasing return on capital.
Swamy: With that I'll pass the call over to Pat.
Pat McCann: Thanks, Swamy and good morning, everyone.
Pat: As <unk> indicated we continue to mitigate the impact of ongoing industry challenges.
Pat: Comparing the third quarter of 2024 to the third quarter of 2023.
Pat McCann: Consolidated sales were $10 3 billion, 4% lower than Q3 2023 and in line with a 4% decrease in global light vehicle production.
Pat McCann: On an organic basis, we posted a 1% weighted growth over market for the quarter.
Pat McCann: Adjusted EBIT was $594 million and adjusted EBIT margin was unchanged at five 8%.
Okay.
Adjusted EPS came in at $1 28 down 12% year over year, mainly reflecting slightly lower EBIT and higher income taxes, which cost us about <unk> 10.
Pat McCann: The higher tax rate was largely related to noncash foreign exchange losses, including on certain deferred tax assets that are not deductible for income tax purposes.
Pat McCann: And free cash flow generated in the quarter was $174 million a substantial increase.
Pat McCann: <unk> to $23 million in the third quarter of 2023.
Pat McCann: During the quarter, we paid dividends of $138 million and with respect to our outlook. We are once again, lowering our capital spending range and maintaining our expectations for 2020 for free cash flow.
Pat McCann: Finally, we recognized a $196 million of other income from Fisker related deferred revenue as a result of the cancellation of the manufacturing agreement this past quarter.
Pat McCann: Let me take you through some of the details.
Pat McCann: Okay.
Pat McCann: North America, and China light vehicle production were each down 6% and production in Europe declined 2% netting to a 4% decline in global production.
Pat McCann: Breaking down North American production further while overall production in the third quarter, a decrease 6% production by our Detroit based customers declined 12%.
Pat McCann: Our consolidated sales were $10 3 billion compared to $10 7 billion in the third quarter of 2023.
Pat McCann: On an organic basis, our sales decreased 4% year over year for a 1% growth over market in the third quarter. Despite negative production mix from lower <unk> production in North America.
Pat McCann: The lower global vehicle production end of production of certain programs the divestiture of a controlling interest in our metal forming operations in India and normal course customer price give backs were partially offset by the launch of new programs and increases to recover certain higher input costs.
Pat McCann: Adjusted EBIT was $594 million and adjusted EBIT margin was five 8% in line with Q3 2023.
Pat McCann: The EBIT percentage in the quarter reflects 75 basis points of net discrete items due to higher net favorable commercial items, including approximately 50 basis points of net unfavorable items in the third quarter of 2023, partially offset by higher net warranty costs.
Pat McCann: And supply chain premiums, partially as a result of a supplier bankruptcy.
Pat McCann: And 50 basis points of net operational improvements, including operational excellence activities, partially offset by higher net input new facility and launch costs.
Pat McCann: These were offset by volume and other items, which collectively impacted us by about negative 90 basis points. These.
Pat McCann: These include reduced earnings on lower sales and lower vehicle Assembly volumes, partially offset by the impact of the UAW strike in the third quarter of 2023.
Pat McCann: And negative 40 basis points related to lower equity income largely as a result of net favorable commercial items and lower unconsolidated sales and our LG magnet joint venture, partially offset by lower launch costs.
Pat McCann: Interest expense increased $5 million, mainly due to higher interest rates on the debt refinancing during 2023 and 2024.
Pat McCann: Our adjusted effective income tax rate came in at 27, 2% significantly higher than Q3 of last year due to unfavorable foreign exchange adjustments recognized for U S. GAAP purposes, and a change in the mix of earnings.
Pat McCann: Net income was $369 million compared to $419 million in Q3 of 2023, mainly.
Pat McCann: Mainly reflecting lower adjusted EBIT and higher income tax expense.
Pat McCann: And adjusted diluted EPS was $1 28, including approximately <unk> <unk> associated with the higher income tax rate compared to a $1 46 last year.
Pat McCann: Turning to a review of our cash flows and investment activities.
Pat McCann: In the third quarter of 2024, we generated $785 million in cash from operations before changes in working capital and invested $58 million in working capital.
Pat McCann: Investment activities in the quarter included $476 million for fixed assets and $115 million increase in investments other assets and intangibles.
Pat McCann: Overall, we generated free cash flow of $174 million in Q3 compared to $23 million in the third quarter of 2023, and we are maintaining our free cash flow expectations of $600 million to $800 million for 2024, despite the challenging industry environment.
Pat McCann: And we continue to return capital to shareholders paying $138 million in dividends in the third quarter.
Speaker Change: In addition, as Swamy noted, we intend to begin repurchasing our shares this quarter, which demonstrates our confidence in our free cash flow profile and our focus on shareholder value.
Speaker Change: Next I will cover our updated 2024 outlook, which incorporates reduced vehicle production in all key regions.
We also assume exchange rates and our outlook will approximate recent rates. We now expect a slightly higher Canadian dollar Euro and Chinese RMB for 2024 relative to our previous outlook.
Speaker Change: We are narrowing and lowering our expected sales range, reflecting lower volumes in North America, and Europe, partially offset by positive foreign exchange, mainly from the higher euro.
Speaker Change: We have narrowed our adjusted EBIT margin range to five four to five 5% as we are now three quarters of the way through 2024.
Speaker Change: Consistent with our original outlook commentary in February customer recoveries, and lower net engineering spend contributed to higher margins in Q3 compared to what we saw in the first half of the year.
Speaker Change: And they are expected to help drive margins to the highest level of the year in Q4.
Speaker Change: Our reduced equity income range, largely reflects lower expected unconsolidated sales of EV components.
Speaker Change: We raised our effective income tax rate to approximately 23% mainly due to the weak Mexican peso relative to the U S dollar leading to unfavorable foreign exchange adjustments incurred for U S GAAP purposes.
Speaker Change: We have narrowed and lowered our adjusted net income to largely reflect lower EBIT and higher income tax rate.
Speaker Change: We now expect capital spending to be in the two two to $2 $3 billion range. This was down another $100 million from our previous outlook now totaling up to 300 million for the full year compared to our February outlook.
Speaker Change: This mainly reflects our continued focus on capital discipline and offsetting the impacts from a weaker vehicle production environment.
Speaker Change: And our interest expense and free cash flow expectations are unchanged from our previous outlook.
Speaker Change: Okay.
Speaker Change: To summarize the quarter.
We had solid operating performance and we continue to execute despite a more challenging environment with adjusted EBIT margin in line with Q3 of 2023, despite lower vehicle production in all key regions.
Speaker Change: We continue to be focused on margin expansion capital discipline and free cash flow generation.
With respect to our updated 2024 outlook, we are reducing the top end of our sales range, reflecting lower expected production.
Speaker Change: Projecting to be in the five four to five five range for adjusted EBIT margin.
During our capital spending once again and maintaining our free cash flow expectations for the year.
Speaker Change: We plan to restart meaningful share buybacks in Q4, as always seeking to optimize value creation.
Speaker Change: And we continue to work to mitigate the impact of market challenges we are facing.
Speaker Change: Thank you for your attention. This morning, we would be happy to answer your questions.
Speaker Change: At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Speaker Change: Our first question comes from the line of John Murphy with Bank of America. Your line is open.
John Murphy: Good morning, guys.
John Murphy: Just maybe a first question on the fourth quarter implied it seems like sales on a year over year basis at the midpoint would be about flat and the margin or the adjusted EBIT margin six 4% to six 7%.
John Murphy: Sort of in light of everything that's going on right now those are pretty strong implied results. Just curious if theres anything rolling on as far as new business in the fourth quarter and sort of what's the sort of the confidence in what looks like a very good.
Speaker Change: Fourth quarter, they're more recoveries coming in.
Speaker Change: What's driving this.
Speaker Change: Good morning, John.
Speaker Change: I think.
Speaker Change: There is nothing significant in terms of rolling on or off other than the normal cadence of launches that happened in Q3.
Speaker Change: Q3, and maybe a slightly into Q4.
Speaker Change: All our assumptions are based on.
Not just the numbers, but <unk> in their leases.
Speaker Change: We're seeing.
Speaker Change: Other than that I think there is nothing that is.
Speaker Change: Significant there is portion of recoveries.
Speaker Change: We've always said are towards the back half of the year, but I wouldn't say they are.
Speaker Change: <unk> significantly different inputs quarter than they were in.
Speaker Change: Sure.
Okay, and then just maybe a follow up to that given the strength of what looks like six 2% margin in the second half of the year.
Speaker Change: And the Great work you guys have done on rationalization.
Speaker Change: How do you think we should think about sort of wanting to get.
Speaker Change: Into 2021 I'm sure you're not going to give exact outlook there, but as Pat as we think about sort of the walk off point for 2024.
Given that youre, putting up what looks to be very good results in a very tough environment in the second half with the benefits of some of this restructuring.
Speaker Change: What do you think that the correct walk off point is for margins as we think forward forget about even saying 2025 exactly the basis that we should be thinking of.
Speaker Change: John like you said I think it's difficult for 2020, but I think one of the key things that we talked about is the <unk>.
Speaker Change: 75 basis points.
Speaker Change: Margin improvement between 2020 five.
And I would say we are on track and.
Very much left in 'twenty four we feel good that we have achieved that so we have that operational runway.
Speaker Change: Whatever we end mid Q4, which we are talking about full year being five 4% to five five.
Speaker Change: And that we have the operational improvement of <unk> 35 to 40 basis points going into.
Speaker Change: 25, and I would say two other things to be continuing to look at so I would say that's the best way to look at how we're going to end this year going into 'twenty five.
That's very helpful and just lastly on the Capex is most of the pullback here on the battery and closure and other EV.
Speaker Change: <unk> spending and how should we think about sort of that commitment to that business I would imagine it's still pretty strong, but I mean is there a lower capacity levels.
Speaker Change: You might need going forward.
John Murphy: I think John you kind of hit the nail on the head.
John Murphy: Couple of clients to make just a couple contextual and decouple.
John Murphy: Correct in.
Speaker Change: In 2003, and 24 I would say the significant investments above the normal water level has been in the BFS segment, specifically for <unk>.
Speaker Change: Enclosures youre right on that.
Speaker Change: I would say most of the significant heavy lifting on that topic is behind us unless it is new programs, but those new programs would be more program capital rather than brick and mortar and other things and.
Speaker Change: And John you might know, but just for others send everyone.
Speaker Change: This is normal course, if you go back I know I'm going a little bit into the history, but into the mid and late Ninety's.
Speaker Change: And magna was getting into the frame business.
Speaker Change: Capex to sales ratio intensity was in the level of nine and 10 for about three or four years.
That business, we still continue to flourish after 30 years, so the vaccine enclosures business.
Speaker Change: He is in a similar vein and the same design space of the vehicle similar capital intensity.
Speaker Change: We feel we have built that foundation now and.
Speaker Change: I have always said that <unk> is a secular trend and the trajectory picked unpredictable, but when it comes that will serve as a tailwind.
Speaker Change: Tailwind for US given the foundation is done and behind Us.
Speaker Change: And maybe just one last follow up on that.
Speaker Change: Off pitch on that investment is not necessarily just this next product cycle. It might be many product cycles going forward is that is that a fair statement swamy.
Speaker Change: That's fair enough John I think three buckets I always like to consider on baked investments like this one is more like brick and mortar for which youre right.
Speaker Change: B and a multiple design cycles in the past we were building frame plants in Ontario in Mexico, and southern part of U S. So that bucket you are right. The second part is using capacity like stamping process casting them, so on and so forth.
As there is volatility in production, we are using that capacity.
Speaker Change: To bring back some of the outsourced stroke spent behalf to leverage that and use that capacity right now in <unk>.
Speaker Change: <unk> are the critical programs come back we can flex back and forth again, so that's the second bucket third bucket Israeli capital specific to programs like Assembly capital.
Speaker Change: That is very program dependent so that's kind of how I look at the business overall.
Speaker Change: Great. Thank you very much guys.
Thanks, Jonathan.
Speaker Change: And your next question comes from the line of Timmy Chen with BMO capital markets. Your line is open.
Speaker Change: Hi, good morning, Thanks for the question Pat.
Timmy Chen: Pat I wanted to ask about the starting of your buyback well for this quarter Q4.
Timmy Chen: That's a fairly substantial amount to for the next 12 months it.
Timmy Chen: It is earlier I believe than your previous commentary. So I just wanted to better understand what specific will move this timeline forward I think my prior understanding was the big hurdle was your leverage to be below one five times or so.
Timmy Chen: At one nine times. So can you just talk a bit about what what moves the buyback timeline up quite a bit.
Speaker Change: Yes, I think yes, good morning, Tammy as.
Speaker Change: As far as the NCI.
Speaker Change: We are looking at Swamy said to get back into our long term ratio of 101, and a half I think that's core and foundational to magna when we looked at our business plans and where we as we progressed through the year, we're getting closer and closer to what we were talking about last year was that we were going to initiate buybacks during 2025.
Speaker Change: We've effectively done is is pulled it ahead may be one or two quarters. It is not a substantive change. It's it's consistent with where we are and I think it really just reflects our our view.
Speaker Change: <unk>.
Speaker Change: Of our execution over the past nine months or one nine is where we expect it to be actually slightly ahead, so were tracking and.
Speaker Change: We're pulling it ahead I don't think it's a change in our strategy is really just we're accelerating from where we expect it to be for Tommy.
John Murphy: Tommy I would say that our capital allocation principles are unchanged like Pat said.
Speaker Change: It's just that we have the confidence of taking the right steps to drive margin and cash flow, including the operational initiatives that I talked about lowering capital reducing engineering spend.
Speaker Change: And as Pat said looking at what we have in terms of visibility you believe we can increase the free cash flow.
Speaker Change: Even in a relatively modest production environment assumptions.
Speaker Change: Got it and just to clarify on that.
Speaker Change: You don't it doesn't sound.
Speaker Change: Sound like you foresee any impact or issue to your investment grade rating to pulling back and start pulling forward and starting to buy back.
Speaker Change: So that means we are not obviously doing this in isolation, we have had.
Speaker Change: Discussions.
Speaker Change: And meetings with the major credit rating agencies, obviously I cannot talk about that decision.
Speaker Change: But we work them through.
Speaker Change: This isn't a this was done in a very meaningful measured discussed.
Speaker Change: With the appropriate parties.
Speaker Change: Okay, Okay and my other question is on the power <unk> vision segment. So good to see the margin performance this quarter.
Speaker Change: It's been a bit of a volatile segment, if I think through the quarters. This year and I'm just trying to put together all the pieces between some of your prior comments about that.
Speaker Change: In sourcing in China, some Oems reassessing the entire vehicle architecture. So can you just remind us at this point here, how youre thinking about the trajectory of the business, whether it's sales growth the margin anything that would be helpful. Thank you.
Speaker Change: Yes, Tammy I think.
Speaker Change: Overall for the <unk>.
Speaker Change: About the annual guidance right.
Speaker Change: It's a small change, but not substantially from where we started the beginning of the year.
Speaker Change: And I remember the question asked in the first quarter. When we were in the low twos and I said.
Speaker Change: To monitor the volatility or whether its production or program launches and customer recoveries.
Speaker Change: And I came out and said they expect double of what you saw in the first quarter into the second quarter just to give you an indication.
Speaker Change: It's actually the volatility of the program the customer recoveries the engineering recoveries from the programs launch that's what is driving the volatility it's not about the business.
Speaker Change: So I think I would look at what we are indicating as the margin range.
Speaker Change: Annually, rather than look at it.
Speaker Change: Quarter by quarter and that might be you want to add something I think Tammy when you think about the volatility quarter to quarter Pmt's burdened with the three big areas I would say one is equity income really moves margin based on where it is because there's no sales that's number one.
Speaker Change: We're seeing it.
Speaker Change: At move around and we talked about that even in our comments number two is we have engineering spend thats flex this quarter to quarter and then the recovery is that relate to it so that drives cross margin into the back half of the year.
And then I think the third factor is consistent with all the other groups. There's a lot of our commercial inflationary recoveries. As we said from February onwards are going to be in the back half of the year and Thats what were expecting.
Speaker Change: In fact, a swarm of comment on the full year basis I think.
Speaker Change: Not that view is unchanged, we expect continuing growth in merchant, but within the quarters continue I would still expect to see this.
Speaker Change: Unusual cadence of a weak Q1 as margins growth throughout the year and that's what we're seeing and to answer your question on the other part time is.
Speaker Change: The only one way code program it was not.
Speaker Change: Call it a trend or we have not seen any other programming was one customer one change. These turn continue to have traction on a lot of large programs.
Speaker Change: In Adas.
Speaker Change: So stay tuned and we'll keep you posted.
Speaker Change: Thank you.
And your next question comes from the line of Adam Jonas with Morgan Stanley. Your line is open.
Speaker Change: Hi, Good morning, William Tacking on for Adam Jonas. Thanks for taking my question I'm. Just curious if you guys are seeing anything new whether its program push outs or just volatility in this quarter and what you expect into 2025 really anything that youre seeing for 2025 that kind of helped catalyze the buyback thanks guys.
Speaker Change: If your question has meant a sourcing.
Speaker Change: Program decisions by the customers, yes, we have seen a bunch of.
Speaker Change: Call it delayed or deferments.
Speaker Change: And maybe continuing to follow that but.
Speaker Change: As I said that is not what's driving.
Speaker Change: Margin expansion.
Speaker Change: Spansion into the next year.
Speaker Change: Our specific task that are.
Speaker Change: At hand.
Speaker Change: On the roadmap that we have set.
Speaker Change: I think in the comments into one of the previous questions.
Speaker Change: The 75 basis points half of it is already in place. The other half are based on what we have in place.
Speaker Change: And if there is any other changes in terms of better volumes are.
Speaker Change: EBIT trajectory changing to a better well.
Speaker Change: All of those would be tailwind.
Speaker Change: Got it.
Speaker Change: That's helpful guys and then maybe are you seeing anything new in terms of pricing and mix on the EV side. This quarter in particular, if you're seeing Oems push for lower pricing as we move into 2025.
Speaker Change: Not really Matt as you know right.
Speaker Change: Working through right now was a decision towards two years ago.
Speaker Change: In the sourcing in terms and conditions and fuels.
Speaker Change: So no we're not seeing any anything Greg.
Matt: Got it.
Speaker Change: Helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: And your next question comes from the line of Dan Levy with Barclays. Your line is open.
Speaker Change: Hi, good morning, Thanks for taking the questions.
Dan Levy: I wanted to start first with just a question on the implied guidance for our complete vehicles segment. There is a substantial step up in the fourth quarter, both in revenue and margins.
Dan Levy: Can you just give US a reminder, whats going on there and the underlying dynamics as you move past that.
Dan Levy: Fiscal program.
Speaker Change: Good morning, Dan.
Speaker Change: Yes, I think the math shows that I agree.
Speaker Change: Really the biggest changes coming out of the engineering segment, so for everybody's benefit.
Speaker Change: Our complete vehicles has a.
Okay.
Speaker Change: Significant engineering business and most of that engineering gets a lot of the settlement and the customer negotiations happened in the fourth quarter and Thats our expectation. So as you mentioned <unk> behind US we're in the middle of finalizing negotiations with a couple of other customers.
Speaker Change: Related to various programs and we expect those conversations to happen in the fourth quarter and so that's really what's driving the change in sales and in margin.
Speaker Change: And is there any update on <unk>.
Speaker Change: The idled or they can capacity.
Good morning, Dan.
Speaker Change: Continue to have discussions, but nothing significant to talk about.
Speaker Change: The call at the customer end use in discussions about.
Speaker Change: I can say there is a few discussions ongoing towards the I would say that 'twenty six 'twenty seven timeframe, maybe more into 2007.
Speaker Change: Got it thank you.
Speaker Change: Just a follow up I wanted to ask about.
Speaker Change: The recovery, so I understand <unk> is a non repeat benefit.
Speaker Change: But what is the outlook on recoveries going forward and specifically.
Speaker Change: You've talked to this.
Speaker Change: You've obviously incurred a fair amount of extensive tooling validation expense for <unk>.
Speaker Change: Different programs that have been delayed volumes coming in.
Speaker Change: Far below what was originally anticipated. So maybe you can just give us a sense of the tone and tenor of those discussions.
And the <unk>.
Speaker Change: <unk> for recovery payments down the line.
Speaker Change: I think Dan I'll start on your behalf Swamy.
Speaker Change: In this first thing is the customer facing piece of it when you look at the commercial and we have in the.
Speaker Change: And the discrete items in that role we talk about the 75 basis points.
Speaker Change: 50 basis points.
Speaker Change: Commercial.
Speaker Change: Just wanted to clarify I think what we had was we had commercial headwinds in Q3 of 2023 that arent recurring so really the impact that we have in Q3 of 2024 are not as significant.
Speaker Change: And these are commercial recoveries related to various customer negotiations and eight similar to the inflationary recoveries, we expect in the second half of the year.
Speaker Change: And I think that the question regarding your.
Speaker Change: Tooling and engineering, and so on and so forth even with the aforementioned volume reductions there pulling remains agnostic right, we get paid on that.
And the upfront there is two pieces of engineering payments, one that I would say is paid.
Speaker Change: Once you get to a certain.
Speaker Change: Milestone MD program that is usually pretty good.
Speaker Change: The question becomes the amortized.
Speaker Change: Engineering into the peace price that becomes a discussion right.
Speaker Change: To your second part of the question the tone and tenor of the.
Speaker Change: Discussions there are always tough.
Speaker Change: Anything else this negotiations or discussions, but I would say we are on track.
Speaker Change: They are fair.
Speaker Change: But we also have no choice you have to address.
Speaker Change: All the headwinds that we've been facing and in the spirit of partnership date jewelry of ice engine.
Speaker Change: Are things on the table.
Speaker Change: All we need to be healthy so that we can have no partnership healthy and it's good for the industry. So yes. They are tough, but we are having those conversations.
Speaker Change: Great. Thank you.
Speaker Change: And your next question comes from the line of Joseph Spak with UBS. Your line is open.
Speaker Change: Okay.
Speaker Change: Hi, Good morning, it's all a Honda on for Joe.
Speaker Change: Just sort of following up on the.
Speaker Change: Recoveries afford publicly talked about sort of supply reimbursements for the canceled <unk> program.
Speaker Change: I was wondering if you could sort of give us some timeline as to when you would expect sort of those recoveries is that sort of more of a 2025 event.
Speaker Change:
Speaker Change: Yes, I think it's a combination of other things because puts a big customer for us.
Speaker Change: Overall, Holistically I think.
Speaker Change: It's difficult to put a specific date given the complexity of various things that are growing it's the overall.
Speaker Change: And it's progressing well.
Speaker Change: Have a framework that couldn't be there, but I think it can be multiple years as we go through.
Speaker Change: And can you give us sort of a little more color like how much you were investing for that program and what was built out already in what's still did.
Speaker Change: It did not get built out for that program.
Speaker Change: We won't comment on that because of.
Speaker Change: You would have a facility part of the facility there is capacity allocation and the specific program our capital that would go on so it was difficult to go through it some of it was in place and some of it was phase four which was not put in place. So it's a liberty complex.
Speaker Change: A question to put a discreet number on.
Speaker Change: Okay, and then maybe just as a follow up.
Speaker Change: Can you just give us a little more color on what's driving higher sales quarter over quarter at the midpoint.
Based on sort of your production outlook for the year it looks like production.
Speaker Change: Would be down a little more.
Speaker Change: Year over year in the fourth quarter, just maybe some puts and takes on to higher sales in the fourth quarter.
You have to back that consolidated level.
Speaker Change: Q3 does tend to be a low production period Alejandro.
Speaker Change: Yeah.
Dan mentioned earlier, we are seeing an uptick in sales in our CPA segment, primarily related to the engineering, which wouldn't be production base, but rather.
Speaker Change: Finalization of the engineering agreements.
And that that'd be the biggest driver on the upside and we have a little bit of foreign exchange tailwind.
Speaker Change: Great. Thank you.
Speaker Change: Welcome.
Speaker Change: And your next question comes from the law.
Speaker Change: Line of Tom <unk> with RBC capital markets. Your line is open.
Speaker Change: Alright, thanks, guys.
Speaker Change: A question on the buyback on financing the buyback you mentioned you had $1 1 billion in cash balance of $3 7 billion total liquidity potential.
Speaker Change: Potentially more free cash flow coming from lower Capex.
Speaker Change: And I know you have that 193 leverage coming down to one five or one in that one five just putting all that together any event production comes down next year as a lot of folks some folks are expecting.
Speaker Change: How would you seek to finance given all of these different dynamics, which can reduce the <unk>.
Speaker Change: Cash balance dip into liquidity.
Speaker Change: Is there thoughts of paying down debt to get that leverage ratio and the EBIT EBITDA comes down next year, which a lot of suppliers are talking about just would love to hear how you think about the different puts and takes.
Speaker Change: Good morning, Tom I think like I said, the key thing for us is to have that balance between.
Speaker Change: Turning to investment grade rating.
Speaker Change: And sticking to the guardrails that we talked about the 1% to one five.
Speaker Change: Into the end of the next year.
There might be some lumpiness, but that's two kind of like the guiding.
Speaker Change: <unk> principle.
Speaker Change: <unk>.
Speaker Change: As Pat talked about you look into the visibility of the plan that we have at this point into 'twenty five.
Speaker Change: And I would say.
Speaker Change: Modest.
Speaker Change: Setup assumptions for volume production that's number two.
Speaker Change: Given all of that we feel comfortable that fee.
Speaker Change: And get to the up 2% to 10%.
Float buyback.
Speaker Change: But as you know the share repurchase as we have to balance that with market conditions. The market conditions change drastically at that point of time.
Speaker Change: The balance between what we're buying back in what we have in terms of balancing but this has to be more at industry level change.
Speaker Change: Would affect everybody at that point in time, and then we have to relocate.
Speaker Change: How much and what we're doing and how we go about it but at this point of time with very modest assumptions up production into 25 bps.
Speaker Change: We feel pretty confident that we have a plan in place.
Speaker Change: Yes, I think the only thing I would add Tom is if you go back to when we laid out this plan going back 18 months, our Delevering plan.
Speaker Change: Completed that we have a term debt that is repayable, we borrowed against our CP programs.
Speaker Change: And he put that factor in that's still in place and you have to.
Speaker Change: Ill put it perspective that our cash flow expectations that we executed in 2023 against our free cash flow. We continue to expect to execute in 2024. So we're just moving along the path into Tammy as earlier questions. We just have more confidence in that path and so I don't think it's going to be a situation cash.
Speaker Change: Bounce up and down $1 $200 million, just depending on timing, but at work going along that path of how we pay down the term debt and stock boring on CP.
Speaker Change: Okay, and the expectation on the better free cash flow, that's coming from a combination of potentially lower capex and it gets better EBITDA rate coming from.
Speaker Change: I guess growth over market production assumption.
Speaker Change: That's right, Tom it's lower engineering spend lower Capex better EBITDA.
Speaker Change: But not just growth of our market is also operational excellence right.
Speaker Change: Yes, great great cost control and.
Speaker Change: Obviously I'm sure you guys are seeing a lot of the suppliers.
In the industry.
Speaker Change: Cautious on 25.
Speaker Change: There is one OEM customer, which you guys have that's been dramatically cutting production this quarter and potentially next year and we've heard European Oems talking about the Sidoti clip on regulatory which they're worried that some of them. Some of them are trying to shut down plants.
Speaker Change: The thinking is that in Europe.
Speaker Change: Your Saar level, so to speak could dropped to like a $14 million level set of it used to be 16 before the <unk>.
Speaker Change: Pandemic now that said there is a pick up expected in EV sales to meet the Cotwo.
Speaker Change: Requirement. So it's kind of like this double edged sword thing.
Speaker Change: Is it a net benefit evs recover for you guys, especially in Europe.
Speaker Change: In the event there is a drop in production.
Speaker Change: <unk> has higher content per vehicle et cetera.
Speaker Change: How do you think about that kind of.
Speaker Change: Disaster scenario production falling off next year, if it picks up next year.
Speaker Change: Yeah.
Tom I think there is a couple of clients day one.
Speaker Change: The scenario planning for drastic drop outs like you said it Kotalik type scenario is something that you don't read as a baseline to build that to figure out how we can address it if that happens right. So that's one.
Speaker Change: The second thing between <unk> and ice I would say, we would be pretty balanced.
On some of the EV platforms and our beds as an example, our VTS segment.
Speaker Change: The content per vehicle would be higher so if there is tailwind.
Speaker Change: Some of the programs that we've invested or like the Bachelor enclosures, and you will see a tailwind.
Yes.
Speaker Change: So that's on the back side.
Speaker Change: I think we have always been saying your bill.
Speaker Change: We have and continue to build for flexibility a lot of our product lines are agnostic, one way or the other but.
Evs, if the auto and EV platform supplying a myriad of RSC direct or.
Speaker Change: Any other products, obviously can have an impact but.
Speaker Change: The idea is.
Speaker Change: No matter, which way it goes I think we feel pretty balanced.
Speaker Change: But it <unk> take off.
Speaker Change: Our content per wafer and in that case.
Speaker Change: Got it and if I can just sneak in one last one I know you talked about complete vehicle the margin uplift in Q4, but it looks like the implied margin for the yes for Q <unk> is the highest in the midpoint I think in the whole year.
Speaker Change: That's coming from.
Speaker Change: <unk>.
Yeah.
Speaker Change: We were talking about earlier.
Pricing will.
Speaker Change: Recovery, sorry from the Oems or is there something else specific going on.
Speaker Change: But I think you got it right it's settlement homeowner shovel recoveries.
Speaker Change: Got it.
Speaker Change: Thanks.
Speaker Change: And your next question comes from the line of James <unk> with BNP Paribas. Your line is open.
Speaker Change: Okay.
Speaker Change: Hi, guys.
Speaker Change: Just on your industry volume assumption of down 2% for the full year.
Speaker Change: Largely aligns with IHS, but I assume it's informed by your customer build schedules at this point right. So could you just provide context Todd.
Speaker Change: What your level of visibility is for the fourthquarter.
Speaker Change: For the fourth quarter because.
Speaker Change: There are a few other suppliers that are calling for a 4% cut to the full year, implying almost a 10% decline for this upcoming quarter. So I guess to piggyback off John's first question, how would you handicap your industry volume assumption.
Speaker Change: What is that level of backlog or <unk>.
Unique seasonal timing for for Magnus programs that that informs this fourth quarter assumption. Thanks.
Speaker Change: So good morning, James maybe Louis can add I think we are.
Speaker Change: We have visibility on.
Speaker Change: Program releases obviously.
Speaker Change: But you have to consider the program <unk> mix.
Speaker Change: And they are changes.
Speaker Change: Given the uncertainty in what's happening in the industry and how they're dealing with inventory and so on and so forth.
Speaker Change: So you cannot put that in the system.
Speaker Change: Willing with on an everyday basis by flexing, what we can in terms of direct labor and.
Speaker Change: Other aspects of our business.
Speaker Change: So we take that and continue to effects.
Speaker Change: On operational level, absolutely that's part of our operational.
Speaker Change: Yes.
Speaker Change: Difficult to we are seeing softness in the fourth quarter for sure.
But I think we have been pretty prudent.
Speaker Change: But with that said Mr. <unk> got eight more weeks to go in there are some announcements that came out yesterday.
Speaker Change: Which obviously, we didnt account for in the data that Youre seeing.
Speaker Change: Got it thanks, and then just on the buybacks.
Speaker Change: And apologies if this was already answered but.
Speaker Change: With respect to your leverage target.
Speaker Change: Is there.
Speaker Change: And our expectation to trend slightly or moderately above that for a period of time through next year.
Speaker Change: Yes.
Speaker Change: Just so we could get a sense for the bandwidth.
Speaker Change: That leverage for share buyback commitment for for the next 12 months.
Speaker Change: But James I think we have said our principles are unchanged and we have talked about getting to the targeted range towards the end of 2005 and that Hasnt changed I think Pat in answering one of the questions. Dave mentioned that there might be ups and downs as we go through the year in terms of the cash balances and our.
Speaker Change: Leverage ratio.
Speaker Change: But.
Speaker Change: Our directional.
Speaker Change: Target of getting to the <unk>.
Speaker Change: Leverage ratio target by end of <unk>.
Speaker Change: 25 remains.
Speaker Change: Thanks.
Speaker Change: Welcome.
Speaker Change: And your next question comes from the line of Bruno Destino with Wolfe Research. Your line is open.
Speaker Change: Yeah.
Speaker Change: Hi, Thank you for taking the questions.
Speaker Change: I was hoping to get some more context on the free cash flow outlook, both near term near and longer term.
Speaker Change: So I guess near term youre still guiding to $700 million free cash flow this year at the midpoint.
Speaker Change: If my math is right.
Speaker Change: <unk> year to date, it's roughly breakeven. So maybe first you could help us understand the bridge to <unk>.
Speaker Change: Between six and 800 million of free cash flow in in the fourth quarter alone and then longer term and I think this is more of a follow up to to Tom's earlier question, but.
Speaker Change: Look.
Next year.
Speaker Change: And we don't need an exact guy, but we know that next year could be.
Speaker Change: Be challenging for no other reason than Youre lapping a year, where your largest customers are restocking and we know that order books for European consumers going.
Speaker Change: Or have been softening and so I was hoping you could quantify the factors fully in your control like Capex R&D spend and potentially for the restructuring.
Speaker Change: You could do to expand free cash flow.
Speaker Change: With respective of the production outlook. Thanks.
Speaker Change: So I think the biggest thing variable would be the volumes right.
Speaker Change: Said, we are kind of considering.
Speaker Change: The volumes growing into next year being flattish or maybe you are on that and we give a lot more color and specifics firmly come back in February.
But I think in the what Youre seeing in terms of free cash flow is normal course for this year and we feel pretty good about us.
Speaker Change: Staying in the range of the six to 800 that we mentioned.
Speaker Change: And we also kind of indicated in the last calls for 2026.
Speaker Change: Expecting to be in the range of.
2 billion right.
Speaker Change: Given the market economics, as we sit today and the volume assumptions, which are pretty flattish or setup assumptions being flattish compared to 24 going into 'twenty five 'twenty six.
Speaker Change: I won't say, they're still hold but if that assumption has changed drastically deck. You said, obviously, we have to look for it.
Speaker Change: But a lot of the things that are not control, whether it's capital whether it's.
Speaker Change: Operational discipline.
Speaker Change: Engineering that we feel pretty good about it.
Speaker Change: And we continue to scrub and look at those numbers.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: And our last question is going to come from the line of Mark Delaney with Goldman Sachs. Your line is open.
Mark Delaney: Yes, good morning, and thanks very much for taking my question. Just one from me is following up on James's question and just trying to understand some of your comments around the fourth quarter.
Mark Delaney: The revenue outlook I think you said there were some developments that came out yesterday that maybe you didn't account for in the.
Mark Delaney: The industry view, but you also described the revenue forecast is prudent so I just wanted to make sure I understood.
Mark Delaney: What your message is there and.
Mark Delaney: Maybe the revenue view as more bottom up and based on schedules and so you still feel confident in that and maybe there are some yes.
Mark Delaney: So tell me if I could.
Mark Delaney: In fact that the industry forecast, but I did want to make sure you weren't trying to say there are some rest of the revenue view.
Mark Delaney: You answered James's question.
Speaker Change: Good morning, Mark and thanks for asking that question no. What I meant is to give you. An example that announcements are coming on aggregate basis, so it'd be very difficult to put.
Speaker Change: An exact number and everything but just to clarify given all of the data that we have and the setup assumptions that you have taken unless there is something very drastic still forthcoming we feel pretty comfortable and expect.
Speaker Change: To be in line with what we put out for the fourth quarter, and even where we have releases.
Speaker Change: Our recent history is that the releases keeps beach the results actually will become short of releases were kind of handicapping that as well a little bit. So I think we've taken a pretty prudent prudent view here.
Understood. Thank you for the clarification.
Speaker Change: Thanks Mark.
Speaker Change #100: We did have another question queue. Our next question will come from the line of Colin Langan with Wells Fargo. Your line is open.
Oh, Thanks for taking my question.
Colin Langan: Just wanted to follow up on the.
Colin Langan: Quarter over quarter walk from Q3 to Q4.
Colin Langan: The sales are it looks like about a 44% contribution margin on those higher sales sequentially.
Colin Langan: Which is pretty high and on top of it most of the call pretty.
Colin Langan: Pretty much all of the growth is actually coming from CVA, which has a lower margin business. So.
Speaker Change #102: I think you mentioned in CES Theres, maybe a settlement coming that's helping what is driving that sort of outsized underlying contribution margin.
Speaker Change #102: And is that sort of Q4 rate sustainable.
Speaker Change #102: Yes, I think marni.
Speaker Change #103: Collyn when you think about moving from Q3 into Q4.
Speaker Change #103: Hang on and the sales change, we talked about the engineering and.
Speaker Change #103: Just the pattern.
Speaker Change #103: Settlements in the fourth quarter so.
Speaker Change #103: So that's not going to have a traditional pull through its more binary in nature I would say when you look overall we are.
Speaker Change #103: <unk> going to expect to see improvements in our commercial settlements, which would be consistent with what we've seen over the last two years.
Speaker Change #103: And then part of the offset is in the <unk> group, we are seeing again everything at the midpoint. Some some sales softness relative to Q3. So when you put those three together thats really the bridge.
Speaker Change #103: Broadly.
Speaker Change #104: And what is driving the sales softness.
Speaker Change #103: Okay.
Speaker Change #103: It comes back to everything Swamy and Lewis spoke about as far as the mix, we're going to talk macro not as what we have on our coal volumes you get a little bit more granular as Swamy said, we look at our releases and then you have mix within those releases. So it's across hundreds of platforms. It's a bottoms up.
Speaker Change #103: And.
Speaker Change #103: <unk>.
Speaker Change #103: The reduction is is less than 10%, but it just all adds up collyn.
Colin Langan: Got it.
Speaker Change #105: The payback is discussed a lot, but any framing of how we should think about meaningful because if I go back to 2018 2019, you were actually doing over $1 billion a year of buybacks, which is more than your free cash flow is this more like a 100 $200 million a quarter for $500 million a quarter, how should we be modeling it as we go forward.
Colin Langan: Yes.
Speaker Change #106: And I won't get into the specifics so as we've talked about.
Speaker Change #107: Share repurchase is really a long term strategy and not a one time thing and thats, how we intend to use.
Speaker Change #107: And when we say, we want to buy up to a 10% float that.
Speaker Change #107: That is really our target right, maybe not exactly but that's kind of how we are heading but it's also a.
Depends on market conditions, and what happens in volumes from dropouts in the macro doesn't change significantly it's difficult to say this is what we are planning now right.
Speaker Change #107: But the idea of saying meaningful is it's just not we.
We are not going to sit here and wait for the third or fourth quarter next year Youre going to start now and it's going to be meaningful in the overall scheme of 10% float.
And 10% by when.
Speaker Change #108: Hi, Brian when you want to get the <unk> rules are up to 10% float and it applies for 12 months starting from the release. So this November two next November.
Speaker Change #109: Okay. Okay.
Speaker Change #110: Okay. All right. Thank you for taking my questions.
Speaker Change #111: And our next question comes from the line of Michael Glen with Raymond James Your line is open.
Michael Glen: Well. Thank you for getting my question in.
Michael Glen: I just wanted to ask one on commercial recoveries and the visibility on commercial recoveries.
Michael Glen: Is there a scenario where if the industry turns in 2025 Oems come under margin pressure is there a risk that we could see these commercial recoveries and rolled back in a meaningful way.
Speaker Change #113: The simple answer no.
Speaker Change #113: I think in the previous calls I've talked about a lot of this commercial recoveries are.
Speaker Change #113: More procedural so they go into.
Speaker Change #113: Our disorders are different terms and conditions and so on and so forth. So.
Not something that we are negotiating every year. There is some part of it but that goes into productivity that goes into various other parts.
Speaker Change #113: You know the various commercial discussions, but largely I would say thats not the risks.
Speaker Change #113: And then just on inventory levels I know, we read a lot of though.
Speaker Change #114: Some concern on inventory levels, particularly across the D. Three are you seeing any different communication from your customers on inventory levels versus what is being written about in the media.
Speaker Change #115: No no.
Speaker Change #115: Not specifically by platform right. We did look very granular on our own based on all of US have said in various comments.
Speaker Change #115: Releases and what we see in inventory just for are reflecting of our operations.
Haven't seen anything specific other than what youre seeing in the fourth quarter.
Speaker Change #115: Okay. Thank you for getting me in.
Speaker Change #115: Yes.
Speaker Change #115: Yeah.
Speaker Change #116: And our final question is going to come from the line of John Murphy with Bank of America. Your line is open.
John Murphy: Good morning, guys I appreciate you sneaking me in for this this quick follow up I was wondering when you talk about these recoveries in commercial settlements in the second half of this year.
Speaker Change #117: Really the Genesis of those as a results of contracts not working out from a volume perspective, the way. The OEM originally anticipated. So effectively these are kind of hedges and they wouldn't be occurring if business was going fairly well on those programs. So I mean, you would actually prefer the business to go well.
Speaker Change #118: Earned the money the way you were planning as opposed to dealing with these settlements right is there kind of an offset here I just want to understand because I think there's kind of a view that these are onetime kind of like you guys hitting the lottery. The reality. There is a result of things not going right at the OEM level.
Speaker Change #118: Is that a fair characterization.
Speaker Change #119: My simple answer is your characterization is correct.
Speaker Change #119: We would like the business to be running well the market looking at lump sums.
Speaker Change #119: There is some parts of it which is entrenched inflation what's happened in 'twenty two.
How we amended the terms some part of it maybe addressing on a yearly basis, but its more how do we make it embedded into the normal course of business and the overall intent like you said Jon is normal business Rumsfeld embedded color the way we need to.
And the way it was intended to.
Speaker Change #119: Great. Thank you very much.
Thanks, Sean.
Speaker Change #120: And there are no further questions at this time Swamy I turn the call back over to you.
Swamy Lewis: Thanks, everyone for listening in today.
Swamy Lewis: As you might have heard and hopefully get that remain.
Very highly focused on margin expansion the capital discipline free cash flow generation and obviously.
Swamy Lewis: On normalizing our capital allocation with increasing returns of capital to shareholders.
Swamy Lewis: We remain very confident in magna's future. Thanks for listening in and have a great day.
And this concludes today's conference call you may now disconnect.
Swamy Lewis: Yeah.
Swamy Lewis: Okay.
Swamy Lewis:
Swamy Lewis:
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