Q4 2024 Magna International Inc Earnings Call
Hello, and thank you for standing by my name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the Magna International fourth quarter and year end 'twenty 'twenty four results and 2025 outlook webcast and conference call. All lines have been placed on mute to prevent any background noise.
Speaker Change: 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 then the number one on your telephone keypad to withdraw your question price at Star One again I would now like to turn the conference over to Louis Tonelli, Vice President of Investor Relations. Please go ahead, thanks, operator, Hello, everyone.
Speaker Change: And welcome to our conference call covering our 2024 results and our 2025 outlook.
Speaker Change: Joining me today are so let me go to Gary and Pat Mccann.
Speaker Change: Yesterday, our board of directors approved our financial results for the fourth quarter of 2024 is it also in 2025 financial outlook.
Speaker Change: We issued a press release this morning outlining both.
Speaker Change: Please.
Speaker Change: You'll find the press release today's conference call webcast.
Speaker Change: 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.
Speaker Change: He's also referred to as a reminder, slide included in our presentation that relates to our commentary today.
Speaker Change: I'll pass it over to <unk>.
Speaker Change: Thank you Louis Good morning, everyone. I appreciate you joining our call today unless jump right in.
Speaker Change: Overall.
Speaker Change: Pleased with our 2024 operating performance relative to our initial 2024 expectations as we once again navigated a challenging industrial production environment.
Speaker Change: Highlights include strong launch execution and continued traction on operational excellence activities.
Speaker Change: Successful efforts across the company to secure commercial recoveries largely related to delays lower than expected volumes and cancellations associated with EV programs.
Speaker Change: Ongoing restructuring actions to rightsize, our business and lower our fixed cost structure, that's starting to show results with margin expansion and are expected to benefit future years.
Speaker Change: A disciplined effort, resulting in reduced capital and discretionary cost compared to unexpected at the start of 2024.
Speaker Change: We ended 2024 with solid Q4 results.
Speaker Change: Our best quarter of the year as we expected.
Speaker Change: As you can see from the slide be performed well for the quarter and more importantly for the full year in.
Speaker Change: In the fourth quarter of 2024 hour sales increased 2% year over year to $10 6 billion.
Speaker Change: For a 2% weighted growth over market.
Speaker Change: EBIT margin increased 20.
Speaker Change: 20 basis points and adjusted EBIT increased 23%.
Speaker Change: EPS was up 27% year over year to $1 69, and we generated over $10 billion and free cash flow well ahead of 2023.
Speaker Change: That will take you through the specifics on the quarter.
Speaker Change: For the year sales of $42 8 billion essentially level with 2023.
Speaker Change: Lower volumes in our two largest markets North America and Europe.
Speaker Change: EBIT margin increased 20 basis points to five 4%.
Speaker Change: <unk> EBIT increased 4% to over $2 3 billion.
Speaker Change: EPS for 'twenty 'twenty, four was down slightly versus 'twenty three.
Speaker Change: Free cash flow increased $849 million in 2024.
Speaker Change: Our team achieved several noteworthy accomplishments in 2024 with respect to our financial performance.
Speaker Change: Our growth weighted global vehicle production, despite negative production mix as some of our largest customers.
Speaker Change: We grew our sales in China by 15% well ahead of the China market.
Speaker Change: Collecting approximately 60% exposure to fast growing domestic Oems in China.
Speaker Change: Improved margins year over year in each operating segment.
Speaker Change: Collecting our focus on cost controls and margin expansion.
Speaker Change: And we returned $746 million to shareholders through dividends and share repurchases.
Speaker Change: Other noteworthy accomplishments on the innovation front, we continue to win program awards across our business based on our pipeline of technologies.
Speaker Change: Over the last 10 years. They have won seven automotive news pace awards in 2024.
Speaker Change: Typically we've run both pace and patient pilot awards.
Speaker Change: We continue to execute on our operational excellence activities, which contributed about 40 basis points to margin expansion this past year.
Speaker Change: With a further 75 basis points combined expected over the next two years.
Speaker Change: Our efforts in operational excellence and innovation are recognized by our customers last year. We received 190 <unk> customer awards in recognition of quality and operational performance.
Speaker Change: One reason why we continue to win business.
Speaker Change: Our success is enabled by our ongoing focus on people development.
Speaker Change: And in 2024 was the inaugural year offer operational management accelerator program aimed at identifying and cultivating future leaders from within Mac.
Speaker Change: The first group graduated and a second group started and the program late last year.
Speaker Change: And Magna is regularly recognized as one of the worlds most ethical and admired companies.
Speaker Change: As you can see.
Speaker Change: <unk> has a lot to be proud of.
Speaker Change: Our efforts in 2024.
Speaker Change: I'll pass it over to Pat to cover our Q4 financials in more detail.
Pat McCann: Thanks, Swamy and good morning, everyone I'll start with a review of our Q4 results.
Pat McCann: For the fourth quarter sales increased 2% to $10 6 billion adjusted EBIT improved 120 basis points to six 5% and adjusted EPS rose, 27% to $1 69.
Pat McCann: Let me take you through some of the detail.
Pat McCann: North America, and China light vehicle production increased 2% and 10% respectively.
Pat McCann: Oil production in Europe declined, 6% netting to a 2% increase in global production.
Pat McCann: On a sales weighted basis light vehicle production was level in Q4 with the prior year.
Pat McCann: Our consolidated sales were $10 6 billion compared to $10 5 billion in the fourth quarter of 2023.
Pat McCann: On an organic basis, our sales increased 2% year over year for a 2% growth over market in the quarter.
Pat McCann: Despite negative production mix from lower D. Three production in North America.
Pat McCann: The launch of new programs. The recognition of previously deferred engineering revenue on the cancellation of a complete vehicle Assembly program.
Pat McCann: The impact of the UAW strike in Q4, 2023, and higher commercial recoveries were partially offset by lower production and the end of production of certain programs lower complete vehicle Assembly volumes.
Pat McCann: The divestiture of a controlling interest in our metal forming operations in India. The.
Pat McCann: The impact of foreign exchange rates and normal course customer price give backs.
Pat McCann: Adjusted EBIT was $689 million and adjusted EBIT margin was six 5% up 120 basis points from Q4 2023.
Pat McCann: The increased EBIT percentage in the quarter reflects a positive 60 basis points of net discrete items due to higher favorable commercial items, partially offset by higher net warranty costs.
Pat McCann: Higher restructuring costs not called out as unusual.
Pat McCann: Charges related to the insolvency of two Chinese Oems.
Pat McCann: A positive 40 basis points related to higher equity income, mainly as a result of higher net favorable commercial items.
Pat McCann: And a positive 15 basis points from operational items, reflecting operational excellence activities of about 50 basis points, largely offset by higher net input and lower tooling contribution.
Pat McCann: Volume and other items, which impacted us by positive five basis points, reflecting.
Pat McCann: The impact of the UAW labor strike in the fourth quarter of 2023.
Pat McCann: Earnings on previously deferred engineering revenue and costs due to the cancellation of a complete vehicle contract.
Pat McCann: And higher net transactional foreign exchange gains all partially offset by reduced earnings on lower sales.
Pat McCann: Turning to a review of our cash flows and investment activities and.
Pat McCann: In the fourth quarter of 2024, we generated $896 million in cash from operations before changes in working capital and over $1 billion from working capital.
Pat McCann: Investment activities in the quarter included $709 million for fixed assets, and a $207 million increase in investments and other assets and intangibles.
Pat McCann: Overall, we generated free cash flow of 1.031 billion in Q4 compared to $472 million in the fourth quarter of 2023.
Pat McCann: And we continue to return capital to shareholders paying $133 million in dividends, along with $202 million and share repurchases.
Pat McCann: Our balance sheet continues to be strong with investment grade ratings from the major credit rating agencies.
Pat McCann: Yeah.
Pat McCann: At the end of Q4, we had $4 5 billion in liquidity, including over $1 $2 billion in cash.
Pat McCann: Currently our adjusted debt to adjusted EBITDA ratio is 177 better than we had anticipated previously.
Pat McCann: Before reviewing our 2025 outlook I would like to recap how we performed against our initial notebooks over the last couple of years.
Pat McCann: During 2024, we delivered an adjusted EBIT margin within the range, we provided to start the year despite sales coming in meaningfully below our expected range.
Pat McCann: We responded to the lower sales with a number of actions, including negotiating commercial recoveries accelerating operational excellence and restructuring activities.
Pat McCann: And reducing capital spending.
Pat McCann: As a result, we exceeded our range for 2020 for free cash flow generation.
Pat McCann: We also delivered solid 2023 results relative to our initial expectations in early 2023 with sales adjusted EBIT margin adjusted net income capital spending and free cash flow all landing within or above our stated ranges.
Pat McCann: Let me take you through the details of 2020 for sales and adjusted EBIT margin relative to the expectations, we had to start the year.
Pat McCann: While global production came in slightly better than our expectations production in both North America, and Europe were down, 1% and 3%, respectively, netting to a 1% reduction in weighted production for Magna.
Pat McCann: Notably in North America production by our Detroit based customers declined 6% compared to what we expected in February 2024.
Pat McCann: In addition, the bankruptcy of Fisker cost us about $400 million in sales relative to our expectations at the start of 2024.
Pat McCann: These were the most significant elements that negatively impacted our results versus our initial outlook.
Pat McCann: Items that impacted sales, but had a limited impact on adjusted EBIT margin included updated information on the amount of directed content on the new Mercedes Benz G class Assembly programs, which lowered sales significantly but had no impact to EBIT.
Pat McCann: Modestly higher than expected complete vehicle sales and a positive impact from foreign exchange translation.
Pat McCann: We set aside the negative impact of Fisker and the positive impact from Mercedes Benz G class pricing as they are out of our control.
Pat McCann: Lower than expected vehicle production, particularly on Evs and lower equity income also mainly EV related collectively impacted adjusted EBIT margin versus our expectations by about 60 basis points.
Pat McCann: We were able to largely offset the impact of these through self help activities.
Pat McCann: Particularly commercial negotiations with our customers and operational initiatives.
Pat McCann: Commercial negotiations were mainly but not exclusively associated with EDI delays cancellations and lower volumes than previously communicated by Oems.
Pat McCann: This performance should provide you with some confidence in our ability to execute and demonstrate our agility in the face of challenges and uncertainty in our industry.
Pat McCann: It should also help reinforce that we are more focused on yearly rather than quarterly performance.
Pat McCann: Turning to our consolidated outlook.
Pat McCann: Yes.
Pat McCann: As always our outlook reflects both tailwind and headwinds relative to 2024.
In terms of tailwind, we expect further margin contribution from operational excellence activities, including from continuous improvement activities optimizing current operations and factory of the future initiatives.
Pat McCann: We took further restructuring actions in 'twenty four that are expected to benefit the coming years.
Pat McCann: We are in sourced business from tier two suppliers to optimize capacity or as a result of lower production volumes and we anticipate lower net engineering spend and a return to normal cadence of Capex to sales, particularly as significant EV investments are behind us.
In terms of headwinds included in our outlook.
Pat McCann: Macro challenges persist, including continued weak light vehicle production in our largest markets and a strong U S dollar, which reduces our reported sales and earnings.
Pat McCann: Although inflation is normalizing we anticipate further net input cost increases predominantly related to higher labor rates than long term historical levels and given the significant pullback in evs relative to previous OEM expectations, particularly in North America, we negotiated.
Pat McCann: Unusually high level of commercial settlements in 2024.
Pat McCann: Which helped mitigate the impact of EV volume shortfalls.
We anticipate less volatility from OEM program Recalibration in 2025, so while we expect to continue negotiations on commercial matters, we anticipate a lower level of net benefit from some such actions in both 2025 and 2026.
Pat McCann: Okay.
Pat McCann: In terms of key assumptions, our outlook reflects a 2% decline in weighted global vehicle production in 2025 and no growth over the 2024 to 2026 period, and we assume exchange rates in our outlook will approximate recent rates, reflecting a stronger U S. Dollar.
Pat McCann: Year over year relative to our most important currencies.
Pat McCann: Note that given the current difficulty in determining the potential outcomes. We have not included any impacts of potential tariffs and this outlook.
Pat McCann: The industry has been experiencing a high degree of volatility related to a number of factors, including EV penetration rates.
Pat McCann: Government policies market share shifts in the overall macro environment.
Pat McCann: These have made forecasting more difficult than it has been in the past.
Pat McCann: Today, we disclosed our outlook for 2025 and also updated our 2026 outlook since we had previously provided such detail.
Pat McCann: We expect.
Pat McCann: <unk> organic sales growth over market, excluding complete vehicles to be somewhere between flat and positive 3% over our outlook period.
Pat McCann: From 2024 to 2025, we expect a sales decline largely reflecting the foreign translation impact of the stronger U S. Dollar.
Pat McCann: Lower light vehicle production in North America, and Europe, and the end of production of jail or assembly programs in complete vehicles.
Pat McCann: These are partially offset by the positive impact of new and replacement program launches.
Pat McCann: From 2025 to 2026, the most significant contributor to sales growth are the launch of new and replacement programs and modestly higher light vehicle production.
Pat McCann: These are partially offset by lower sales in complete vehicles as a result of lower expected volumes on the BMW Z for and the Toyota Supra.
Pat McCann: We expect consolidated margins in 2025 to be in the range of $5 three to five 8%.
We anticipate a significant positive contribution from operational items as well as benefits from reduced net engineering spend versus 24.
Pat McCann: Certain non program related engineering is behind us.
Pat McCann: Offsetting these are lower expected sales due to lower volumes.
Pat McCann: Partially offset by incremental earnings on new program launches as well as lower anticipated net favorable commercial items, partially offset by lower expected warranty costs.
Pat McCann: While we do not provide a quarterly outlook similar to the last couple of years, we expect our 2025 earnings to be lowest in the first quarter of 2025 and improved meaningfully in the second quarter. In fact, Q1 2025 is expected to be lower than Q1 2024.
Pat McCann: We currently expect EBIT in the first half of 'twenty five to represent roughly 40% of the total year amount, which is more pronounced than we saw in 'twenty three and 'twenty four.
Pat McCann: Remember this cadence of stronger second half as what we experienced over the last couple of years, and we met or exceeded our initial EBIT margin range over both of those years.
Pat McCann: We expect a step up in margins to the six five to seven to range from 2025% to 2026. This was largely driven by contribution on higher expected sales, including as a result of new launches.
Pat McCann: A further positive contribution from operational items, including operational excellence activities.
Pat McCann: <unk> improvements and the benefit of restructuring actions, partially offset by higher labor costs and a further reduction in net engineering spend.
Pat McCann: We expect these to be partially offset by lower anticipated net favorable commercial items.
Pat McCann: Many of the factors that are impacting consolidated sales and margins out to 2026 are also impacting our segments in the interest of time, we will not run through the segment detail. However, we are happy to discuss any questions on them.
Pat McCann: Another way, we look at our business is to distinguish our automotive parts and systems segments, namely.
Pat McCann: Yes, Pnp and seating from our complete vehicles segment, including engineering, which has a different business model and our sales and margin profile.
Pat McCann: We expect the adjusted EBIT margin of Magna, excluding complete vehicles to growth from about high fives last year to approximately seven plus by 2026 now.
Swamy: Now I will pass it back to swamy to cover our business strategy.
Swamy: Thanks, Pat and before I summarize the outlook for 'twenty five 'twenty six that had just walked through.
Swamy: I would like to highlight the guiding principles that have been the cornerstone of magna for many years.
Swamy: Have a long term ownership mentality that starts with our culture of accountability.
Swamy: <unk> alignment of interests at all levels of the company.
Swamy: We manage our portfolio under a set of criteria and dispassionately assess our product lines in terms of the markets market positions Andrew Tums.
Swamy: We maintain a strong balance sheet to have the financial flexibility to manage through the cyclicality of our industry and our capital allocation strategy entails a long term balance of investing for profitable growth together with returning capital to shareholders.
Swamy: Godless of where we are in the cycle our challenges we are facing there.
Swamy: Or auction principles govern the way, we manage magna for long term success.
Swamy: Over the past 14 years after $47 billion that we're both investing in our business and return to shareholders about 30 billion or 65% of that was invested to support our continued growth in EBITDA.
Swamy: Over that period.
Swamy: Capital spending profile as postulated around the low to mid 4% range.
Swamy: While there are some periods of higher investment, we typically normalize within two to three years.
Swamy: Following a recent period of elevated investment, particularly for battery enclosure assembly capacity to support future EBITDA growth through the ongoing transition of Evs.
Swamy: We are seeing capital spending and capex to sales levels normalize.
Swamy: For 2025, we expect capital spending to be approximately $1 8 billion.
Swamy: And capex as a percent of sales to continue to decline to mid 4% and for 2026 to be in the low to mid 4% range.
Swamy: Directionally in line with what we had been indicating over the past couple of years.
Swamy: Over the same 14 year period, we have returned about 35%.
Swamy: Over $16 billion to shareholders in the form of dividends and share repurchases.
Swamy: While our fourth quarter dividend as reason for 15 consecutive years, including todays quarterly dividend increase to 48 five per share.
Swamy: Over that time, using our excess liquidity, we have also repurchased almost <unk> billion dollars.
Swamy: If our shares.
Swamy: Looking forward with the normalization of our capital profile and our leverage coming within our target ratio, we expect to increase capital returns through share repurchases.
Swamy: Ultimately, we are driving our business to generate long term free cash flow per share growth.
This allows us to continue to reinvest in the business and increased return of capital to shareholders in.
Swamy: In the last few years through a combination of industry challenges, including weak historical vehicle production levels in key markets.
Swamy: Together with an elevated investment cycle to support the ongoing transition to Evs has impacted free cash flow.
Swamy: However, with recent investments, we are well positioned for an EV transition.
Our focus on continuous improvement restructuring commercial recoveries and other operational excellence activities.
Swamy: Our cost structure is well aligned to the current vehicle production environment.
Swamy: As a result, we expect to generate about $3 5 billion and free cash flow over the 2024 through 2026 Peter.
Swamy: Leaving share buybacks aside this represents strong free cash flow per share.
Swamy: However, we are planning to continue share repurchases with excess liquidity, which would further drive free cash flow per share.
Swamy: Now, let me summarize our outlook Consol.
Consolidated sales are expected to decline in 2025, reflecting FX headwinds.
Swamy: End of production of Jaguar programs in complete vehicles.
Swamy: Lower industry vehicle production.
Swamy: And negative program mix. However, we expect a rebound in sales growth in 2026 based on modestly improved railcar production and the launch of new programs.
We expect EBIT margin to expand to the six 5% to seven 2% range by 2026% largely driven by continued operational excellence activities and lower engineering spend.
Swamy: And despite very modest production environment.
Swamy: Capital spending is normalizing and capex to sales should be mid 4% in 2025 and low to mid 4% next year.
Swamy: And we expect another year of strong free cash flow generation in 2025, and further free cash flow growth in 2006 to about $1 5 billion.
Swamy: In summary, we ended the year with a strong Q4 result, including over $1 billion in free cash flow. Despite continued industry challenges.
Operational excellence activities remain an important driver of 2020 for margin performance and we expect continued strong contributions in both 'twenty five and 'twenty six.
Swamy: We increased our dividend for the 15th consecutive year and expect continued purchases during 2025.
Swamy: And we have a solid two year outlook, including strong margin expansion and free cash flow generation over that period.
Swamy: We remain confident in executing our plan and continuing to drive free cash flow per share growth going forward. Thanks.
Swamy: Thanks for your attention and we are happy to take your questions now.
Speaker Change: At this time I'd like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad, we will take our first question from the line of Etame Chen with BMO capital markets. Please go ahead.
Etame Chen: Hi, good morning, Thanks for the question here.
Speaker Change: Wanted to start with.
Speaker Change: The controllable that theyre doing in the face of August Okay, cool pool, So I full talked about still expecting fairly sizable benefit this year to margins.
Speaker Change: Cost reduction plan restructuring I think also some rolling on better contrast, even negotiated but I'd say the lower end of your guidance here has your margin.
Speaker Change: I just wanted to understand that better I mean, what what are the assumptions were for that low end that would essentially fully offset year controllable.
Tommy: Good morning, Tommy.
Tommy: I think you remember we discussed about a 150 basis points from 'twenty three to 'twenty approximately.
Tommy: 110 basis points is behind Us and we are on track for the remaining 44, 25%.
But in addition, we're looking at 2006 and this year path for about 35 basis points, so to sum it up another 75 basis points between 25 and 26.
Tommy: If you look at the last year.
Tommy: We were down in sales from the outlook by approximately $2 billion.
Tommy: And our EBIT was down by about $200 million given some puts and takes so you can see that.
Tommy: Structurally we have made a lot of changes through different activities.
Tommy: In time our.
Tommy: Our company obviously.
Tommy: From a overall discipline, you've seen the capital where we have seen the engineering spend lower.
Tommy: You have done about 40 plants in terms of restructuring consolidation or closure.
Tommy: We've also taken up a lot of we call it operational excellence our factory of the future. We had over 300 implementation a lot of devices connected which is giving.
Tommy: Operational visibility I would say.
Tommy: Focus on automated material moment, smart automation, which is starting to yield results we have seen that.
Tommy: We see a lot of traction on a good path going forward.
Tommy: In addition to that in terms of commercial recoveries.
Tommy: Tough discussions but income so.
Tommy: They were a program cancellations volume reductions.
Tommy: We have had good success in 2024.
Tommy: We've been in conversations with the Oems. So that's what gave us the confidence to structurally reduce the decrementals and we saw that results in 'twenty four.
Tommy: And that's the tailwind going into 'twenty five.
Tommy: Even in 2005, when we said the revenue was down predominantly 2 billion of that is.
Tommy: Foreign exchange related.
Tommy: At the end of jail, our programs with minimal impact on margins right.
Tommy: And the remaining $1 billion I would say is if you look at the North American production, we are saying, it's down by about two and a half but.
Tommy: Detroit, three and that gentleman three customers are down four 7%.
Tommy: Prospectively so.
Tommy: That mix of our.
Tommy: Customer than some program mix.
Tommy: And we have to look at them so it might be.
Tommy: In the market right now.
Tommy: Feel pretty confident with what we are showing as an outlook for 2005, but more importantly, taking back into 'twenty six.
Tommy: Okay.
Tommy: Got it and my follow up and on and on 26.
Speaker Change: Yes. He does some good revenue growth and pretty sizable margin expansion I'm. Just wondering what gives you the confidence to assume that.
Speaker Change: Okay, and then just how uncertain and volatile everything this year, I mean could materially improve that much.
Speaker Change: So last year and I noticed in particular.
Speaker Change: Power envision margin quite an expansion I.
Speaker Change: As we've seen with the power Division margin.
Speaker Change: Even this year's expectation, if we were to rewind a year or two ago for what could have happened. This year I think your.
Speaker Change: Guidance now for PMT margin this year might have ended lower than what was expected.
Speaker Change: On your stocks. So I think if you can just give a bit more color as to the confidence you'll see all of that now in 2006 were really going to see that PMT margins particular expense. Thank you.
Speaker Change: Thanks Tommy.
Speaker Change: I will give some points and Pat maybe you can gentlemen jump in.
Speaker Change: When you look at 2026.
Speaker Change: The volume assumptions that we're making.
Speaker Change: Pretty modest increase from 25% 26, right and maybe a little bit.
Speaker Change: And all of the counts for us.
Speaker Change: Internal step look to looking at.
Speaker Change: Specific programs and customer needs as inventories run rates, yes, there is a little bit you have to.
Speaker Change: Predict going into 'twenty six.
Speaker Change: But we feel it's pretty modest SBC and the current conditions.
Speaker Change: You talked specifically about <unk> I think Cree.
Speaker Change: Look at the program mix and.
Speaker Change: Launches that are coming in some of the programs.
Speaker Change: With the core spending in terms of standing behind us.
Speaker Change: We feel pretty confident even looking at the run rate that we saw this year.
Speaker Change: Got anything yes, I think Tammy when I think of the change from 25%, 26% similar to 2004 to 25. So from 24 to 25, we have and Im talking just magna broadly and I'll get to <unk> in the second but broadly our sales at the midpoint youre going to be down about $3 billion.
Speaker Change: Swamy said $2 billion of that is basically margin neutral thats going to be a false positive impact on margin percent you still have to remember everything Swamy is talking about is offsetting of remaining $1 billion sales decrease and if you think about our normal decrementals in that 17 to 22, 5% that's the math.
Speaker Change: 24 to 25 from 25% to 26 it flipped on its head and you look at <unk> specifically to your question at the midpoint, we're expecting sales to be up about $1 $5 billion, that's going to flow through at historical Incrementals and then on top of it we should continue to see benefits of the operational improvements that Swamy mentioned.
Speaker Change: Thanks.
Speaker Change: We will take our next question line of Dan Levy with Barclays. Please go ahead.
Speaker Change: Yes.
Dan Levy: Hi, Thank you for taking the questions I think you may have just touched on it but.
Speaker Change: The outlook for <unk>.
Speaker Change: <unk> 24 to 25 for powering sales that's down almost a $1 billion sorry can you just double click on.
Speaker Change: What what's going on there and maybe decompose are we seeing any improvements in sort of the core megatrend areas whether it's.
Speaker Change: Aaas with via near or any of the hybrid opportunities there.
Speaker Change: Good morning, Dan I think one of the key things from a P&L perspective, especially powertrain.
Speaker Change: There is the largest exposure in Europe. So if you look at going back to the FX with the dollar strengthening against the Euro.
Almost like 462 $500 million impact there off the $1 billion.
Speaker Change: I would say, we talked about Adas being softer in China, we have talked about it in the last few calls.
Speaker Change: Oems looking at.
Speaker Change: <unk> drove decisions.
Speaker Change: And pushing out some of the.
Speaker Change: Call it down or Skus have the awards.
Speaker Change: We see a little bit of softness there.
Speaker Change: The dichotomy.
Speaker Change: Architectural discussions.
Speaker Change: Differentiation between how China is looking at it versus the Western Oems.
Speaker Change: A little bit cautious on looking at programs in terms of the spend and platform there.
Speaker Change: I'd say those are the key things for the.
$1 billion drop in revenues.
Speaker Change: And the Lta's right, rich, which come into play which is normal cadence I would say for the.
Speaker Change: The industry.
Speaker Change: Okay, great. Thank you.
Speaker Change: And then as a follow up I wanted to just unpack the.
Speaker Change: Free cash flow improvement, maybe you could just talk about working capital dynamics and.
Speaker Change: Beyond.
Speaker Change: It seems like the rest of it is coming from EBIT, but maybe you can just talk about the capex and just the broader line of sight that you have into free cash flow improving into 2026 and maintaining psoriatic arthritis.
Speaker Change: Okay.
Talk about Capex, just briefly at a high level.
Speaker Change: A little bit more detail.
Speaker Change: If you just look at Capex then.
Speaker Change: The peak really about a $1 billion approximately I would say in the last three years.
Speaker Change: It was for the beer segment for battery and closures. So if you take that off I would say the curve looks pretty normalized okay.
Speaker Change: That's behind Us.
Speaker Change: So we are talking about the $1 8 billion range in Capex this year.
Speaker Change: Then indicating that.
Speaker Change: Towards the low 4% of sales next year.
Speaker Change: So that is a significant piece going to the free cash flow.
Speaker Change: The second part of it is the training spend.
B.
Speaker Change: Typically talked about $1 2 billion gross spend right.
Speaker Change: And that is down roughly about $100 million in 2004, so it.
Speaker Change: <unk> ended up at about one one.
Plus or minus 10.
Speaker Change: And then.
Speaker Change: We're talking about at 200 million or so reduction further this year and that cadence continues to 'twenty six.
Speaker Change: So and training spend capital reduction.
Speaker Change: I would say not Capcom production, it's capturing normalization for our business.
Speaker Change: Yeah.
Pat McCann: Is that that's all adding obviously in addition to the EBIT growth right Pat.
Pat McCann: The only thing I would add Dan you had asked about the working capital. So there was a bit of a pull ahead on working capital from 25% to 20, sorry, 25% to 24. So we did outperform on the working capital line in Q4.
Pat McCann: Really a reflection of the strong performance of our commercial teams that we talk a lot about these commercial recoveries, but turning into cash flow quickly benefited us and then as we move into 'twenty.
Pat McCann: Five what you notice is we saw that also talking about these restructurings and accruals have been made this year and the cash will start flowing out the door and 25, 2% to 26, so that'll be a headwind.
Pat McCann: 'twenty five 'twenty six.
Pat McCann: Okay. Thank you.
Speaker Change: Youre welcome. Our next question comes from the line of Chris Mcnally with Evercore ISI. Please go ahead.
Chris Mcnally: Thanks, so much team.
Chris Mcnally: Just wanted to dig into some of the comments you made.
Chris Mcnally: The last time.
Chris Mcnally: Two questions, but it seems like <unk> billion. The majority is your customer mix actually being down.
Chris Mcnally: I think you said <unk>, 4% <unk>, 7% I mean, the two of them combined are like 75% of your.
Chris Mcnally: Your revenue it seems like your customers are down in that 5% plus.
Chris Mcnally: The <unk> you mentioned on top of it.
Chris Mcnally: These are some of your most profitable programs, particularly that.
Chris Mcnally: <unk>.
Chris Mcnally: Is that the best way to phrase the sort of the revenue mix and you get some of that back.
Chris Mcnally: In 2006.
Chris Mcnally: Alright short answer yes, that's right I think you summarized it pretty well.
Large part or a significant part of our revenue comes from the <unk> and we see as I said.
Sure.
Chris Mcnally: Disproportionate production compared to the overall North America.
Chris Mcnally: That's having an impact.
Chris Mcnally: And Thats, where we continued productivity CBS.
Chris Mcnally: And the mix volume production at best we are in commercial discussions coming to play.
Chris Mcnally: But we are also continuing to look at it Chris.
Chris Mcnally: Chris.
Chris Mcnally: No.
Speaker Change: Could we get some of the work we did a lot of in sourcing as we flex.
Speaker Change: Capacity is EV sphere, changing working with customers and Thats, where it really showed up in terms of the margin expansion are keeping the margin despite that.
Speaker Change: That revenue drop in 'twenty, four and continuing into 'twenty five.
So I think that leads to the margin question in 'twenty six and.
Speaker Change: Trying to see how realistic sort of a 120 140 basis points year over year.
Speaker Change: Almost 30% Incrementals would be some of that.
Speaker Change: Because thus.
Speaker Change: Those profitable programs come back, but one of the ones the segments I wanted to dive into was.
Speaker Change: For body Youre talking about an 8% to eight 7% margin I mean, essentially the highest margin you would you would ever have.
Speaker Change: Could you walk us through.
Speaker Change: You already gave the power and vision comments. Thanks, so much.
Speaker Change: Yes.
Dan Levy: Good morning, Dan.
Dan Levy: So at the mid point, yes, we are in the range of about $8 five at the midpoint. So when you look at the Delta really it's being driven almost entirely by a sales increase of our sales are increasing about $1 3 billion.
Dan Levy: On the sales piece that Incrementals you work through the math, it's in the range of the low Twenty's, which we would have seen historically.
Dan Levy: You have to remember what we're seeing it as well as the continuous improvements that with all the.
Dan Levy: The blocking and tackling at the divisions, all the corporate initiatives and just driving it whether it's purchasing our factory of the future that's adding to it as well but the.
Dan Levy: The reality is if the sales come we're going to execute against those sales thats the biggest driver of the margin.
Dan Levy: Excellent. Thanks, so much.
Dan Levy: Our next question will come from the line of Joe Spak with UBS Securities. Please go ahead.
Speaker Change: Thank you Pat maybe just.
Speaker Change: Two quick housekeeping ones and then I have a.
Speaker Change: Your picture question for Shlomi, but.
Speaker Change: On the 25 free cash flow I, just want to make sure I have the pieces here right because.
Speaker Change: The EBIT is down about 200 million year over year.
Speaker Change: Sort of in line with I guess, what you are guiding free cash flow down at the midpoint Capex is down more so the delta.
Speaker Change: As some of the cash restructuring you mentioned and working.
Speaker Change: What is that how we should think about it.
Speaker Change: Exactly I think the other Delta is we do have an increase in depreciation. So we're guiding at the EBIT level. So there is depreciation increase as well so our EBITDA <expletive>.
Speaker Change: Deterioration is not as high as EBIT.
Speaker Change: But those are the type of the others.
Speaker Change: The other just a quick housekeeping one I know you mentioned nothing.
Speaker Change: Tariffs does that include.
Speaker Change: Some of the potential tariffs on metals like steel and can you just remind us your exposure there.
Speaker Change: We have no our guidance that we're giving this morning has no reflection of contemplated tariffs whatsoever as far as the.
Speaker Change: The steel and aluminum.
To be honest with you Joe it's hard to figure out what they are even going to apply to two at this point, so I think I'm going to be.
Speaker Change: Give you an answer you don't want to hear was we're going to have to wait and see how this plays out and Joe I think we have their team in place that.
Speaker Change: That is working through every detail and this is the same key I should say that has gone through a similar exercise in 2017 and 18. So the playbook is in place, but until there is more details of how this is going to be implemented we cannot act on it but you are right.
Speaker Change: Okay, and then Swamy just.
Speaker Change: As I review the guiding principles you lay it out and in particular, the pillars of portfolio management and capital allocation you mentioned.
Speaker Change: Target in these growth markets.
Speaker Change: But also you mentioned exiting business that don't align them.
Speaker Change: I'm just curious given all the volatility and.
Speaker Change: The dynamic nature of this industry that we're going through right now do you see yourself more as a buyer or a seller of assets.
Speaker Change: When you broadly talk about about exiting a business don't align with our portfolio criteria is that purely from a product perspective.
Speaker Change: Or are you also considering.
Chris Mcnally: Some of the customer exposure because the Chris's question earlier.
Chris Mcnally: Youre pretty overweight some customers and I'm wondering whether you'd consider exiting some businesses that might allow you to redeploy capital with.
Chris Mcnally: Other customers that might potentially be.
Faster growing customers.
Chris Mcnally: So it's a broad question and I'll try to parse it into pieces.
Chris Mcnally: Uh huh.
Chris Mcnally: The first part I think when we say growth.
Chris Mcnally: And by that is whatever the product we have we should have a relevant market position.
Whether you look at our costs our X two years.
Chris Mcnally: Any of this core businesses, we really have.
Chris Mcnally: Okay, great position in the market.
Chris Mcnally: No.
Chris Mcnally: Carlos capability and technology that is.
Chris Mcnally: Wanted by the customers see that in terms of wins and so on so there are elements of the market not being fragmented having stable.
Chris Mcnally: Profit pools I would say is the important thing there. So that's one piece.
Chris Mcnally: Your second part of the question.
Chris Mcnally: If you just look back indexes to you of Magna.
Chris Mcnally: Over the period that I was showing data for the last 14 years, we have spent roughly $20 billion.
Chris Mcnally: Investments to grow our business and about net of divestitures $2 billion in M&A right.
Chris Mcnally: So phenix would give you a viewpoint there. So I've said this in the past and I'm going to repeat we did the <unk> acquisition. We are digesting these feel pretty comfortable with what we have.
Chris Mcnally: So I would say except for any small tuck ins that would make sense.
Chris Mcnally: We are really focused on everything we just talked about you are looking at every penny every time.
Chris Mcnally: A lot of focus on taking our manufacturing expertise to the next level. Some of the initiatives that I talked about and we have started seeing that in D. C. A lot more potential going forward.
Chris Mcnally: But we're not taking divestitures off the table right.
Chris Mcnally: We have done.
Chris Mcnally: In two years, which we account for as fragmented retail data if P&C.
Chris Mcnally: So we continue to look at that so more importantly divestiture of southern knock off the table.
Chris Mcnally: In terms of the customer mix I think we are being able to consistently grow the CPE, but we look at that more importantly, China.
Chris Mcnally: The market's growing at roughly 5% I would say Louis and we've been growing at 15%.
Chris Mcnally: Also there we see a mix change right. When we started kind of material growth in China 15 years ago. It was primarily focused on international Oems.
Chris Mcnally: But now as we stand today, 60% of our business in China is with the Oems a handful right really five six Oems.
Chris Mcnally: And that is even if you consider a style or it might be $1 60.
Chris Mcnally: 60 range.
Chris Mcnally: And in the next three four years, we almost see.
Chris Mcnally: Our revenue in parity with the split.
Chris Mcnally: You see in the China market. So that's kind of it's a long answer but that's how we're looking at it.
Chris Mcnally: Overall.
Chris Mcnally: <unk> business.
Chris Mcnally: Okay. Thank you appreciate it.
Speaker Change: Our next question comes from the line of Tom Narayan with RBC capital markets. Please go ahead.
Tom Narayan: Hi, Thanks for taking the questions that swamy.
Tom Narayan: First one is just the one segment that I guess, we havent gone over ceding 2025 outlook does seem to be some decremental sir.
Tom Narayan: Just maybe double click on that and then I have a follow up.
Tom Narayan: Yeah.
Tom Narayan: I think as we look at the seeding we ended at three 8% and if you look at the high end operating it's pretty close for 2020.
Tom Narayan: Operationally, it's been a very good and stable place.
Tom Narayan: Some of it.
Tom Narayan: It's because of the incremental input costs.
Tom Narayan: Don't add up on the EBIT side.
Tom Narayan: Some of it is the program mix, where the volumes are lower.
Tom Narayan: Affecting us.
Tom Narayan: But if you look at just the overall drop in revenue proceeding to the drop in EBIT.
Tom Narayan: Unable to.
Tom Narayan: So reduce the decrementals right compared to the historical norm.
Tom Narayan: So it's really the input costs and.
Tom Narayan: Volume story their operational needs in a very good place.
Speaker Change: Okay and then my follow up it's really a follow up to Joe's question.
Speaker Change: And in the past you have said all options are on the table not taking divestitures off the table and it seems like that that you were saying.
Speaker Change: You are looking to be in businesses you have.
Strong market share one thing maybe.
Speaker Change: I mean folks want to know better is the synergies between your business lines is that something you also take into account.
Speaker Change: And the reason why we're asking all this is we've had a couple of tier one suppliers announced sales or spins in.
Speaker Change: If you would look at your guys' sum of the parts. It would appear to have a lot of us that trade.
Speaker Change: Trading at a discount to where the.
Speaker Change: Some of the parts, where your stock is so just love to hear more maybe on on how you think about divestitures and the synergies right now between Europe business segments. Thanks.
Speaker Change: Yes, I think there's a ballot.
Speaker Change: And trying to keep call it the operational agility at the divisional level.
Speaker Change: Whether it's purchasing whether some of these initiatives that I've talked about in purchasing.
Speaker Change: Or if you look at.
Speaker Change: The factory of the future and the operational initiatives, we are talking when.
Speaker Change: When we talk about a unified named space or we are talking about standardizing the operational visibility getting automated material momentum getting smart automation.
Tom Narayan: Tom doing at one place, let's say you do a pick and place operation.
Speaker Change: Inspection, we do one one.
Tom Narayan: Use case, and then we have <unk>.
Tom Narayan: <unk> 90 of this across the company, which can be implemented fairly quickly. So there is quite a bit of that.
Tom Narayan: In addition to that if you look at our group our corporate structure.
Tom Narayan: We look at standardization and we look at.
Tom Narayan: Bringing any of these initiatives and roll it across the it doesn't have to be Reengineered. Every time. So there is a lot of synergies there but that said.
We're not going to lead that.
Tom Narayan: <unk> relative product line should be in Mag, Mount or not right.
Tom Narayan: As we are running we have to always look at the best possible way to get the synergies.
Tom Narayan: If there is a compelling case like we did in interiors and we had talked about the P&C as an example, we look at it.
Tom Narayan: And I think the other <unk> have to considered Tom like when you start talking about the operations and the customers.
Tom Narayan: SG&A synergies are significantly smaller mentioned purchasing but there's public company costs.
Tom Narayan: Revenue opportunities and then theres the whole area of tax planning. So it's something that's on the back of our mind, but that creates.
Tom Narayan: Margin expansion opportunities that we've seen over the past as well so.
Tom Narayan: Just consider that in your modeling.
Tom Narayan: Okay. Thank you.
Speaker Change: Our next question comes from the line of Brian Morrison with TD Cowen. Please go ahead.
Brian Morrison: Okay. Thanks, very much I appreciate all the color on the questions so far.
Brian Morrison: I know that it was difficult to answer the question with respect to tariffs on aluminum and steel, but just in terms of broad based tariffs I know theyre not factored in your guidance is very difficult to answer but.
Brian Morrison: Ian has talked about potential to move production or the flexibility to move production what flexibility do you have with respect to <unk>.
Brian Morrison: Addressing potential broad based tariffs and or what contingency plans have you or could you put in place in order to mitigate the potential exposure.
Brian Morrison: Yes, Brian I think you said it right. It's really an industry issue that you have to figure out how to solve holistically and not in isolation, what I mean by that is the policymakers.
Speaker Change: Oems the supply base in the ecosystem.
Brian Morrison: To figure out a solution together.
Brian Morrison: We are having significant dialogue with all the constituents, obviously a lot more with our customers.
Brian Morrison: At the table. We started these discussions let's say December timeframe.
Brian Morrison: We have a footprint in Canada U S and Mexico.
Brian Morrison: To the extent, we are able to work with the customers to see what they are thinking in terms of various levers.
Brian Morrison: We are there, but I can tell you one thing.
Brian Morrison: For a supplier to absorb this magnitude that they are talking about is really unrealistic untenable right.
Brian Morrison: So we have to have many discussions we're having those discussions but to the extent where.
Brian Morrison: The Oems are going to look at shifting managing in the short term, yes, we will do our best strength, we have the footprint in all three areas. We are looking at that and we'll continue to look at that but all said and done you know the industry well enough. This is not a switch that can be turned on and off in a short term.
Brian Morrison: So I believe.
Brian Morrison: This is going to be disruptive right, we're going to see a longer shot Scott Thompson.
Yes.
Brian Morrison: Moving up and down on volumes.
Brian Morrison: Rich Assembly plan does what.
Brian Morrison: As an industry, we have dealt with this in terms of chip shortages in COVID-19 and so on and so forth, we're not looking forward to that but.
Brian Morrison: Is there.
Brian Morrison: And we have to work through this but it's going to be disruptive for sure.
Brian Morrison: The magnitude of accountants.
Brian Morrison: About is implemented for the industry overall.
Thank you.
Speaker Change: Our next question will come from the line of James Pickerel yellow with BNP Paribas. Please go ahead.
Hi, everybody.
Speaker Change: Just a question on the seating business. If we look at the if we exclude complete vehicles look at the midpoint of your 2026 targets relative to your 2024 results Alright. The segment that does stand out is CD and.
Speaker Change: And that revenue and margins.
Speaker Change: Just slightly lower than where you finished in 'twenty four or so.
Speaker Change: That is a business that stands out something is structurally less positive than your other two tower vision our body exteriors. So can you just speak to what those net headwinds are comparatively and is there.
Speaker Change: Is there any in sourcing is there in sourcing are you seeing the in sourcing by Oems.
For seating in Europe in particular thanks.
Speaker Change: Good morning, James.
Speaker Change: Great question, I think I answered a couple of things related to seeding one was really the input costs being higher.
Speaker Change: And from 'twenty four 'twenty five.
Speaker Change: Our normal cadence and then one on the two programs that are seeing the volume dropped the third point I think with.
Speaker Change: With the business that is there.
Speaker Change: There is an EV mix platforms there right.
Speaker Change: The volumes are not hitting the plant volumes, we are seeing that negative impact on seating.
Speaker Change: But I think in the past we've also talked about one program.
Speaker Change: Which was underperforming and we have also said that program ends.
Speaker Change: Towards the end of 'twenty six.
Speaker Change: The replacement program is that the right metrics and that starts flowing in.
Speaker Change: 2016% to 27% predominantly that can be a step change that will.
Speaker Change: Impact the margins positively in seating.
Speaker Change: To the last part.
Speaker Change: I don't see as structural.
Speaker Change: The efficiency operationally, it's a it's a good business.
Speaker Change: The mix is pretty high in North America, and pretty significantly in China.
Speaker Change: Europe is a little bit weaker, but again I don't think its a structural issue.
Speaker Change: In this business.
Speaker Change: Alright, and then.
That was helpful. And then my follow up is just on complete vehicles, which what's the future for for this business.
Speaker Change: Quoting activity pipeline potential.
Speaker Change: Chinese domestic Oems wanting a footprint in Europe.
Speaker Change: Just any color there and then just any feedback or color on the LG powertrain JV, how that's faring and what the trajectory of what the outlook is there. Thanks.
Speaker Change: Yes.
From a from the question on CBA I think correcting the team has really done a good job.
Speaker Change: We're getting the cost structure to where it needs to be right given what the end of program. So third BMW last year.
Speaker Change: Ending up at <unk>. This year and we are looking at that hurt us with Brian does that for next year. So that team has really been various islands addressed.
Speaker Change: Address the cost structure there.
Speaker Change: We continue to have conversations with various Oems, including the Chinese Oems both.
Speaker Change: Call it normal.
Speaker Change: Production, but also some <unk> discussions.
Speaker Change: That are on the table.
Speaker Change: So.
Speaker Change: You know this business has been lumpy in the past rates and with all the capacity and the transformation that's happening in the industry, it's been a little bit more rocky, but we see a good path.
Speaker Change: In the outer years from the Chinese Oems, but also from I would call it.
Speaker Change: Sure.
Speaker Change: Existing pump more OEM.
Speaker Change: Oems with history.
Speaker Change: You had another question James.
Speaker Change: LG.
Speaker Change: I think from a cadence of the product and the business in LNG JV.
Speaker Change: It's pretty good.
Speaker Change: The pressure that you see today is predominantly because of what's happening in the EV market right.
Speaker Change: From a product perspective from customer interaction and visa.
Speaker Change: Visibility to programs and winning is as we had expected.
Speaker Change: Thanks.
Speaker Change: Our next question will come from the line of Colin Langan with Wells Fargo. Please go ahead.
Colin Langan: Oh, great. Thanks for taking my questions.
Colin Langan: So I hate to ask a basic question, but I'm a little surprised by how large the FX headwind is a $2 billion, that's like 4% to 5% of the sales decline actually it.
Speaker Change: The majority of your headwind what is really driving that and any color maybe on the sensitivities if rates change to kind of.
Colin Langan: What we should be tracking.
Colin Langan: Good morning, Collyn I think just on the FX, it's primarily being driven by two currency devaluation.
Colin Langan: Really the U S dollar strengthened against the bucket of currencies, but it's relative.
Colin Langan: Relative to the Euro we see it as a significant decline from 24 into current rates.
Colin Langan: The Euro is down at about 103, and then the other area. So you see the numbers we have for sales and then the other area. We have a significant foreign currency devaluations of the Canadian dollar and the Canadian dollar and city just south of 70 right now so again significantly below.
Colin Langan: And those are those are two big revenue generating regions for Magna.
Colin Langan: Okay.
Colin Langan: And then I just wanted to go through slide 26 to make sure I understand the broader buckets.
Colin Langan: The work.
Colin Langan: FX is about $2 billion I guess that would convert.
Colin Langan: That's embedded in one of those lines above average margins and then normal decrementals around 'twenty on the sort of core business, that's down roughly $1 billion outside of FX and then.
Colin Langan: So that those headwinds are going to be offset by operational and engineering because those are like 100 million each something like that are those the right sort of buckets that we should be thinking about trying to size those.
Colin Langan: Those bars on the walk.
Colin Langan: I think when you look at the FX as we said, it's about $1 5 billion.
Colin Langan: A headwind.
Colin Langan: The pull through on that number is not significant on the EBIT line. Because this is where you have all CBA operations in some of the lower margin products. So I would say, it's going to be below.
Colin Langan: The corporate average on the CVA business coming down because of the <unk> and whatnot again, you could see the margins.
Colin Langan: At that level. So again, so when you when get back into what's left of the let's say $1 billion of sales decline I would say.
Our corporate average it varies by segment, but you are probably in the range of.
Colin Langan: 15 to.
Colin Langan: To 2000 22022.
Colin Langan: Okay, and FX was one and then and then you ask.
Colin Langan: Correct and you offset it with.
Colin Langan: Operational performance commercial.
Colin Langan: And lower warranty and whatnot.
Colin Langan: Okay, Great alright, thanks for the clarification.
Colin Langan: Our next question comes from the line of Mark Delaney with Goldman Sachs. Please go ahead.
Mark Delaney: Yes, hi, good morning, Thanks, very much for taking my questions starting with another one on the customer exposure you spoke about the progress you've seen in China, and having 60% of your revenue in that region with the domestics maybe.
Mark Delaney: Maybe you could elaborate on what that might mean for how big China will be for Magna going forward and as you think about the outlook you provided for 25, and 26 and some better growth in China what percent of revenue would you expect to come from China in the future.
Mark Delaney: Okay.
Mark Delaney: Okay.
Mark Delaney: So I think Mark we're just looking for the exact number but our sales right now are just north of $5 billion in China, and we're expecting them to grow.
Mark Delaney: Just at a $6 billion range so.
Mark Delaney: 1 billion increase.
Mark Delaney: Strong growth at about 20%.
Mark Delaney: Okay.
Mark Delaney: One.
Speaker Change: $5 $6 24, sorry, Louis has the exact numbers and there were just growing north of six by 26, 6% Okay.
Speaker Change: Thanks for that Pat and then.
Speaker Change: He was also hoping you could elaborate on what's contributing to the lower net engineering spend over the next few years, how much of that is adjusting for the timing of when megatrend opportunities maybe larger in.
Speaker Change: We are reevaluating your spend.
Speaker Change: Better time with with with those markets.
Speaker Change: She might be from some of these other factors you were speaking about like restructuring.
Speaker Change: Just on this topic of the net engineering spend.
Speaker Change: Does this signal any potential change in how you're trying to run certain product lines or businesses and you've chosen to optimize more of a margin growth going forward. Thanks.
Speaker Change: Yes.
Speaker Change: So I think Mark I can just on the number side of it.
Speaker Change: Our view was we came out and from our guidance last year, we expect it to reduce engineering spend in the range of about $500 million of a three year period 'twenty four 'twenty five 'twenty six we executed.
Speaker Change: In the range of about 124, and the balance of the 400, you are expecting and planning on executing and 25% 26 as far as the change in approach I think it's more.
Speaker Change: Clarity.
Speaker Change: Where the products are going and where we're at in that spend so it's similar to our battery trade spend the engineering, where we have a lot of our core spending behind us and now we're into situations, where the engineering is going to flex up or down more based on business Awards.
Speaker Change: To your question are we.
Speaker Change: Giving up growth because of this that's not the case, we have a good opportunity that's going to meet our return thresholds for quoting new business, we're going to quoted and will flex up as needed.
Speaker Change: And something else will give on the other side.
Speaker Change: It's basically balancing our whole portfolio within that and then also within magna as a whole.
Speaker Change: I just want to point out the engineering spend at the gross number so that I mean, if the engineering comes down there may be some recoveries that also goes down so the net may not be as impactful as that you still have a net decline as well the key point is we.
Speaker Change: Again.
Speaker Change: I'd like to say that it's not a cut in capital or and smearing. It is actually putting efficiencies in place.
Speaker Change: And with the operational excellence activities, we've been able to make it more efficient and.
Speaker Change: And there is volume reductions coming with customers, we've been able to take discretionary capital pullback and where the expansions are not coming because of the volumes are not there we pulled back on that right. So I don't think we are doing any of this at the expense of profitable growth.
Speaker Change: Thank you.
Speaker Change: We will take our final question from the line of Michael Glen with Raymond James. Please go ahead.
Michael Glen: Oh, Thanks, good morning.
Pat McCann: Just one for me it Pat.
Speaker Change: Item on your cash flow statement the increase in investments.
Speaker Change: Other assets and intangible assets are you able to give us some guidance for that figure.
Speaker Change: <unk> 2025, and can you just remind us what some of the big buckets are in.
Speaker Change: In that line item as well.
Speaker Change: Yes.
I'll give you the description of what's been more first the biggest bucket by far is customer.
Speaker Change: Dedicated assembly lines.
Speaker Change: Where it's there.
Speaker Change: We don't treat it as capital because technically they own it.
Speaker Change: It's effectively assembly lines that they own we pay for it upfront and we were tougher.
Speaker Change: For the.
Speaker Change: Price.
Speaker Change: Most of that is a quasi guaranteed number Michael so its not treated the same as capital to lower risk item.
Speaker Change: And we've been running at an elevated level.
Traditionally we would see that number 300 range and I think we're expecting that to normalize back into 325 years and beyond.
Speaker Change: Okay. So that number is going to be down quite a bit next year as well.
Speaker Change: Correct.
Speaker Change: Okay.
That was it from me thank you.
Speaker Change: Okay perfect. Thanks.
Speaker Change: And that will conclude our question and answer session and I will now turn the call back to you as Swamy go to Gary for closing remarks.
Speaker Change: Thanks, everyone for listening in today.
Speaker Change: You have seen in the data we remain.
Speaker Change: Laser focused on executing on our outlook, including margin expansion capital discipline free cash flow generation and both getting back within our target leverage ratio and increasing returns of capital to shareholders. We remain highly confident in the magna's future and being able to deliver to the outlook.
Speaker Change: Have a great day. Thank you.
Speaker Change: This concludes today's meeting thank you all for joining you may now disconnect.
Speaker Change: [music].
Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].