Q4 2024 Magna International Inc Earnings Call
Thank you for watching!
Regina: 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's fourth quarter and year-end 2024 results and 2025 Outlook webcast and conference call. All lines have been placed on mute to prevent any background noise.
Regina: After the speaker's remarks, there will be a question and answer session.
Regina: If you'd like to ask a question during this time, simply press star, then the number 1 on your telephone keypad.
Speaker Change: To withdraw your question, press star 1 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, and welcome to our conference call covering our 2024 results and our 2025 outlook.
Joining me today are Swami Kotagiri and Pat McCann.
Speaker Change: Yesterday, our Board of Directors met and approved our financial results for the fourth quarter of 2024, as well as our 2025 financial outlook.
Speaker Change: We issued a press release this morning outlining both of these.
Speaker Change: You'll find the press release, today's conference call webcast, the slide presentations go along with the call, and our updated quarterly financial review, all in the investor relations section of our website at magna.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 State Harbor Disclaimer.
Swami: Please also refer to the reminder slide included in our presentation that relates to our commentary today. With that, I'll pass it over to Swami.
Swami: Thank you, Louis. Good morning, everyone. I appreciate you joining our call today and let's jump right in.
Swami: Overall, I was pleased with our 2024 operating performance relative to our initial 2024 expectations, as we once again navigated a challenging industry production environment.
Swami: Highlights include strong launch execution and continued traction on operational excellence activities.
Swami: Successful efforts across the company to secure commercial recoveries largely related to delays, lower than expected volumes, and cancellations associated with EV programs.
Swami: Ongoing restructuring actions to right size our business and lower our fixed cost structure have started to show results for margin expansion and are expected to further benefit future years.
Swami: A disciplined effort resulting in reduced capital and discretionary costs compared to our expectations at the start of 2024.
We ended 2024 with solid Q4 results.
Swami: As you can see from the slide, they performed well for the quarter, and more importantly, for the full year.
Swami: In the fourth quarter of 2024, our sales increased 2% year-over-year to $10.6 billion for a 2% weighted growth over market.
Swami: EBIT margin increased 120 basis points and adjusted EBIT increased 23%.
Swami: EPS was up 27% year-over-year to $1.69, and we generated over a billion dollars in free cash flow well ahead of 2023.
Pat will take you through the specifics on the quarter.
Swami: For the year, sales of $42.8 billion were essentially level with 2023, despite lower volumes in our two largest markets, North America and Europe.
Swami: EBIT margin increased 20 basis points to 5.4% and EBIT increased 4% to over 2.3 billion.
Swami: EPS for 2024 was down slightly versus 2023, while free cash flow increased $849 million in 2024.
Swami: Our team achieved several noteworthy accomplishments in 2024. With respect to our financial performance, we outgrew weighted global vehicle production despite negative production mix at some of our largest customers.
Swami: We grew our sales in China by 15%, well ahead of the China market, reflecting our approximately 60% exposure to fast-growing domestic OEMs in China.
Swami: We improved margins year-over-year in each operating segment, reflecting our focus on cost controls and margin expansion.
Swami: And we returned $746 million to shareholders through dividends and share repurchases.
Swami: Other noteworthy accomplishments on the innovation front, we continue to win program awards across our business based on our pipeline of technologies.
Swami: and over the last 10 years, they have won seven automotive new Pace Awards. In 2024, specifically, we've won both Pace and Pace Pilot Awards.
Swami: We continue to execute on our operational excellence activities, which contributed about 40 basis points to margin expansion this past year, with a further 75 basis points combined expected over the next two years.
Swami: Our efforts in operational excellence and innovation are recognized by our customers. Last year, we received 109 customer awards in recognition of quality and operational performance.
One reason why we continue to win business.
Swami: Our success is enabled by our ongoing focus on people development, and in 2024 was the inaugural year of our Operational Management Accelerator Program aimed at identifying and cultivating future leaders from within Magna.
Swami: The first group graduated and a second group started in the program late last year.
Swami: and Magna is regularly recognized as one of the world's most ethical and admired companies.
Swami: As you can see, our team has a lot to be proud of for their efforts in 2024. With that, I'll pass it over to Pat to cover our Q4 financials in more detail.
Pat: Thanks Swami and good morning everyone. I'll start with a review of our Q4 results.
Pat: For the fourth quarter, sales increased 2% to $10.6 billion, adjusted EBIT improved 120 basis points to 6.5%, and adjusted EPS rose 27% to $1.69.
Let me take you through some of the details.
Pat: North America and China light vehicle production increased 2% and 10% respectively, while production in Europe declined 6%, netting to a 2% increase in global production.
Pat: On a sales-weighted basis, light vehicle production was leveling Q4 with the prior year.
Pat: Our consolidated sales were $10.6 billion, compared to $10.5 billion in the fourth quarter of 2023.
Pat: On an organic basis, our sales increased 2% year over year for a 2% growth over market in the quarter, despite negative production mix from lower D3 production in North America.
Pat: The launch of new programs, the recognition of previously deferred engineering review on the cancellation of a complete vehicle assembly program.
Pat: 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: The divestiture of a controlling interest in our metal forming operations in India, the impact of foreign exchange rates, and normal course customer price givebacks.
Pat: Adjusted EBIT was $689 million. An adjusted EBIT margin was 6.5%, up 120 basis points from Q4 2023.
Pat: 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: Higher restructuring costs not called out as unusual and charges related to the insolvency of two Chinese OEMs
Pat: A positive 40 basis points related to higher equity income, mainly as a result of higher net favorable commercial items.
Pat: 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: Volume and other items, which impact this by positive five basis points, reflecting the impact of the UAW labour strike in the fourth quarter of 2023,
Pat: Earnings on previously deferred engineering revenue and costs due to the cancellation of a complete vehicle contract and higher net transactional foreign exchange gains, all partially offset by reduced earnings on lower sales.
Pat: Turning to a review of our cash flows and investment activities.
Pat: Investment activities in the quarter included $709 million for fixed assets and a $207 million increase in investments and other assets in intangibles.
Pat: Overall, we generated free cash flow of $1.031 billion in Q4 compared to $472 million in the fourth quarter of 2023.
Pat: And we continue to return capital to shareholders, paying $133 million in dividends along with $202 million in share repurchases.
Pat: Our balance sheet continues to be strong, with investment grade ratings from the major credit rating agencies.
Pat: At the end of Q4, we had $4.5 billion in liquidity, including over $1.2 billion in cash.
Pat: Currently, our adjusted debt to adjusted EBITDA ratio is 1.77, better than we had anticipated previously.
Pat: Before reviewing our 2025 outlook, I would like to recap how we performed against our initial outlooks over the last couple of years.
Pat: 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: We responded to the lower sales with a number of actions, including negotiating commercial recoveries, accelerating operational excellence and restructuring activities, and reducing capital spending.
Pat: As a result, we exceeded our range for 2024 free cash flow generation.
Pat: We also delivered solid 2023 results relative to our initial expectations in early 2023, with sales, adjusted even margin, adjusted net income, capital spending, and free cash flow all landing within or above our stated ranges.
Pat: Let me take you through the details of 2024 sales and adjusted EBIT margin relative to the expectations we had to start the year.
Pat: 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: Notably, in North America, production by our Detroit-based customers declined 6% compared to what we expected in February 2024.
Pat: In addition, the bankruptcy of Fisker cost us about $400 million in sales relative to our expectations at the start of 2024.
Pat: These were the most significant elements that negatively impacted our results versus our initial outlook.
Pat: 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: modestly higher than expected complete vehicle sales, and a positive impact from foreign exchange translation.
Bye.
Pat: 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: 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: We were able to largely offset the impact of these through self-help activities.
particularly commercial negotiations with our customers and operational initiatives.
Pat: Commercial negotiations were mainly, but not exclusively, associated with EV delays, cancellations, and lower volumes than previously communicated by OEMs.
Turning to our consolidated outlook.
Thank you.
Pat: As always, our outlook reflects both tailwinds and headwinds relative to 2024. In terms of tailwinds, we expect further margin contribution from operational excellence activities, including from continuous improvement activities, optimizing current operations, and factory of the future initiatives.
Pat: We took further restructuring actions in 24 that are expected to benefit the coming years.
Pat: We have insourced business from Tier 2 suppliers to optimize capacity 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, including in our outlook,
Pat: 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: Although inflation is normalizing, we anticipate further net input cost increases.
Pat: 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 an unusually high level of commercial settlements in 2024.
which helped mitigate the impact of EV volume shortfalls.
Pat: We anticipate less volatility from OEM program recalibrations 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.
Thank you for watching!
In terms of key assumptions,
Pat: Our outlook reflects the 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 year-over-year relative to our most important currencies.
Pat: Note that, given the current difficulty in determining the potential outcomes, we have not included any impacts of potential tariffs in this outlook.
Pat: The industry has been experiencing a high degree of volatility related to a number of factors, including EV penetration rates,
Government Policies, Market Share Shifts, and the Overall Macro Environment.
Pat: These have made forecasting more difficult than it has been in the past, so today we disclosed our outlook for 2025 and also updated our 2026 outlook since we had previously provided such detail.
Pat: We expect organic sales growth over market, excluding complete vehicles, to be somewhere between flat and positive 3% over our outlook period.
Pat: From 2024 to 2025, we expect a sales decline, largely reflecting the foreign translation impact of the stronger U.S. dollar.
Pat: Lower light vehicle production in North America and Europe, and the end of production of JLR assembly programs in complete vehicles.
Pat: These are partially offset by the positive impact of new and replacement program launches.
Pat: 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: These are partially offset by lower sales in complete vehicles as a result of lower expected volumes on the BMW Z4 and the Toyota Supra.
Pat: We expect consolidated margins in 2025 to be in the range of 5.3 to 5.8 percent.
Pat: We anticipate a significant positive contribution from operational items, as well as benefits from reduced net engineering spend versus 24, as certain non-program related engineering is behind us.
Pat: Offsetting these are lower expected sales due to lower volumes, 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: 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 improve meaningfully in the second quarter. In fact, Q1 2025 is expected to be lower than Q1 2024.
Pat: We currently expect EBIT in the first half of 2025 to represent roughly 40% of the total year amount, which is more pronounced than we saw in 2023 and 2024.
Pat: Remember, this cadence of stronger second halves is 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: We expect a step up in margins to the 6.5 to 7.2 range from 2025 to 2026. This is largely driven by contribution on higher expected sales, including as a result of new launches,
Pat: A further positive contribution from operational items, including operational excellence activities, efficiency improvements, and the benefit of restructuring actions, partially offset by higher labor costs and a further reduction in net engineering spend.
Pat: We expect these to be partially offset by lower anticipated net favorable commercial items.
Pat: 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: Another way we look at our business is to distinguish our automotive parts and system segments, namely
Pat: BES, P&B, and seating from our Complete Vehicles segment, including engineering, which has a different business model and a sales and margin profile.
Swami: Now, I'll pass it back to Swami to cover our business strategy.
Swami: Thanks Pat. Before I summarize the outlook for 25 and 26 that Pat just walked through, I would like to highlight the guiding principles that have been the cornerstone of MAGNA for many years.
Swami: We have a long-term ownership mentality that starts with a culture of accountability and alignment of interests at all levels of the company.
Swami: We manage our portfolio under a set of criteria and dispassionately assess our product lines in terms of their markets, market positions, and returns.
Swami: We maintain a strong balance sheet to have the financial flexibility to manage through the cyclicality of our industry.
Swami: and our Capital Allocation Strategy entails a long-term balance of investing for profitable growth, together with returning capital to shareholders.
Swami: Regardless of where we are in the cycle or challenges we are facing, these overarching principles govern the way we manage MAGNA for long-term success.
for the past 14 years.
Swami: of the $47 billion that we've both invested in our business.
and returned to shareholders.
Swami: About $30 billion or 65% of that was invested to support our continued growth in EBITDA.
Swami: While there are some periods of higher investment, we typically normalize within two to three years.
Swami: Following a recent period of elevated investment, particularly for battery enclosure assembly capacity to support future EBDUG growth through the ongoing transition of EVs,
We are seeing capital spending and CapEx-to-Sales levels normalize.
Swami: directionally in line with what we have been indicating over the past couple of years.
Swami: Over the same 14-year period, we have returned about 35% or over $16 billion to shareholders in the form of dividends and share repurchases.
Swami: Our fourth quarter dividend has risen for 15 consecutive years, including today's quarterly dividend increase to $0.485 per share.
Swami: Over that time, using our excess liquidity, we have also repurchased almost $11 billion of our shares.
Swami: Looking forward, with the normalization of our capital profile and a leverage coming within our target ratio, we expect to increase capital returns through share repurchases.
Swami: Ultimately, we are driving our business to generate long-term free cash flow for share growth.
Swami: This allows us to continue to reinvest in the business and increase return of capital to shareholders.
Swami: In the last few years, through a combination of industry challenges, including weak historical vehicle production levels in key markets, together with an elevated investment cycle to support the ongoing transition to EVs, has impacted free cash flow.
Swami: However, with recent investments, we are well positioned for an EV transition.
Swami: Our focus on continuous improvement, restructuring, commercial recoveries, and other operational excellence activities.
Swami: Our cost structure is well aligned to the current vehicle production environment.
Swami: As a result, we expect to generate about $3.5 billion in free cash flow over the 2024 to 2026 period.
Swami: Leaving share buybacks aside, this represents strong free cash flow per share. However, we are planning to continue share repurchases with excess liquidity, which would further drive free cash flow per share.
Now, let me summarize our outlook.
Swami: Consolidated sales are expected to decline in 2025, reflecting FX headwinds, end of production of Jaguar programs in complete vehicles, lower industry vehicle production, and negative program mix.
Swami: However, we expect a rebound in sales growth in 2026 based on modestly improved vehicle production and the launch of new programs.
Swami: We expect EBIT margin to expand to the 6.5% to 7.2% range by 2026, largely driven by continued operational excellence activities and lower engineering spend.
and despite very modest production environment.
Swami: Capital spending is normalizing, and CapEx to sales should be mid-4% in 2025 and low to mid-4% next year.
Swami: And we expect another year of strong free cash flow generation in 2025 and further free cash flow growth in 2026 to about $1.5 billion.
Swami: In summary, we ended the year with a strong Q4 result, including over a billion dollars in free cash flow, despite continued industry challenges.
Swami: Operational excellence activities remain an important driver of 2024 margin performance and we expect continued strong contributions in both 2025 and 2026.
Swami: We increased our dividend for the 15th consecutive year and expect continued purchases during 2025.
Swami: And they have a solid two-year outlook, including strong margin expansion and free cash flow generation over that period.
Swami: We remain confident in executing our plan and continuing to drive free cash flow per share growth going forward.
Swami: Thanks for your attention and we'll be 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'll take our first question from the line of Tammy Chin with BMO Capital Markets. Please go ahead.
Speaker Change: understand that better? I mean, what, what are the assumptions for, for that low end that would essentially fully offset your, your controllable?
Good morning, Tammy.
Tammy Chin: You know, I think you remember we discussed about 150 basis points from 23 to 25 approximately. 110 basis points is behind us, and we are on track for the remaining 40 for 25. But in addition, we are looking at 26, and we see a path for about 35 basis points. So to sum it up, another 75 basis points between 25 and 26.
Bye!
If you look at the last year,
Tammy Chin: We were down in sales from the outlook by approximately $2 billion.
Tammy Chin: Structurally, we have made a lot of changes to different activities inside our company. Obviously, from an overall discipline, we have seen the capital lower, we have seen the engineering spend lower. We have done about 40 plants in terms of restructuring, consolidation, or closure.
Tammy Chin: We've also taken up a lot of, we called it operational excellence or factory of the future. We had over 300 implementation, a lot of devices connected, which is giving operational visibility, I would say. A lot of focus on automated material movements, smart automation, which is starting to yield results. We have seen that and, you know, we see a lot of traction and a good path going forward.
Tammy Chin: In addition to that, in terms of commercial recoveries, tough discussions, but in terms of
Tammy Chin: you know, where there were program cancellations, volume reductions. We had had a good success in 2024. We've had conversations with the OEMs. So that's what gave us the confidence to structurally reduce the decrementals, and we saw that result in 2024. And that's the tailwind going into 2025.
Tammy Chin: Even in 2025, when we say the revenue is down, predominantly $2 billion of that is
Tammy Chin: foreign exchange related and, you know, the end of JLR programs with minimal impact on margins, right?
Tammy Chin: 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...
Tammy Chin: Their Detroit 3 and the German 3 customers are down 4 and 7% respectively so
that makes
of our customers and some program makes.
Tammy Chin: expansion. And I think as we've seen with the power vision margin, 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 guidance now for PMV margin this year might have been a bit lower than what was expected a couple years back. So I think if you can just give a bit more color as to the confidence, you feel that now in 26, we're really going to see that PMV margin in particular expand. Thank you.
Speaker Change: Thanks Tami, I'll give some points and Pat maybe you can jump in.
Speaker Change: When we look at 2026, the volume assumptions that we are making are pretty modest increase from 25 to 26, right, and maybe a little bit
and all the cows for us are...
you know, internally developed through looking at
You know, specific programs and customer releases, inventories, run rates.
Speaker Change: Yeah, there is a little bit you have to predict going into 26.
Speaker Change: but we feel it's pretty modest as we see in the current conditions.
You talked specifically about PNV. I think we...
launches that are coming in some of the programs.
Speaker Change: With the cold spending in terms of engineering behind us, we feel pretty confident even looking at the run rate that we saw this year.
Speaker Change: Yeah, I think, Tammy, when I think of the change from 25 to 26, it's similar to 24 to 25.
Speaker Change: From $24 to $25 we have, and I'm talking just magna broadly, and I'll get to POV in a second, but broadly our sales at the midpoint are going to be down about $3 billion. And as Swami said, $2 billion of that is...
Speaker Change: You still have to remember, everything Swami's talking about is offsetting a remaining billion dollar sale decrease. And if you think about our normal decrementals in the 17.5% to 22.5%, that's the math on 24% to 25%.
Speaker Change: From 25 to 26, it flips on its head, and you look at P&V specifically to your question. At the midpoint, we're expecting sales to be up about $1.5 billion, and that's going to float through at historical incrementals. And then on top of it, we should continue to see benefits of the operational improvements that Swami mentioned.
Thank you.
Speaker Change: We'll take our next question from the line of Dan Levy with Barclays. Please go ahead.
Dan Levy: Thank you for taking questions. I think you may have just touched on it, but the outlook from...
Dan Levy: 24 to 25 for power bidding sales that's down almost a billion dollars. Sorry, can you just double click on what, you know, what's going on there and maybe decompose? Are we seeing any, you know, improvements in sort of the core mega trend areas, whether it's ADAS, you know, with V&E or any of the hybrid opportunities there?
PNV perspective, especially powertrain.
Dan Levy: There's a larger exposure in Europe, so if you look at going back to the FX with the dollar strengthening against the euro
Dan Levy: That's almost like $460 to $500 million impact there of the $1 billion. I would say we talked about ADAS being softer in China. We have talked about it in the last few calls with OEMs looking at architectural decisions and pushing out some of the...
Dan Levy: 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.
Dan Levy: Revenue drop in 'twenty, four and continuing into 'twenty five.
Dan Levy: So Robert I think that leads to the margin question in 'twenty six and we're all trying.
Dan Levy: Trying to see how realistic sort of 120 140 basis points year over year.
Dan Levy: Almost 30% Incrementals would be some of that.
Dan Levy: Because.
Dan Levy: Those profitable programs come back, but one of the ones the segments I wanted to dive into was.
Dan Levy: For body.
Dan Levy: 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.
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 eight 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 one 3 billion.
Dan Levy: On the sales piece that Incrementals you work through the math it's.
Dan Levy: It's in the range of the low Twenty's, which we would have seen historically, but you have to remember what we're seeing it as well as the continuous improvements that with all the debt.
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.
Dan Levy: The reality is if the sales come we're going to execute against those sales. That's the biggest driver of the margin.
Dan Levy: Excellent. Thanks, so much.
Speaker Change: 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 an iva.
Speaker Change: Bigger 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: 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 a depreciation increase as well so our EBITDA.
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.
Speaker Change: To be honest with you Joe it's hard to figure out what they are even applied to 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 the team in place that.
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.
Speaker Change: Some of the customer exposure because the Christmas question earlier.
Speaker Change: Youre pretty overweight some customers and I'm wondering whether you'd consider exiting some businesses that might allow you to redeploy capital with.
Speaker Change: Other customers that might potentially be faster growing customers.
Joe Spak: Joe It's a broad question and I'll try to parse it into pieces.
Joe Spak: The first part I think when we say growth what we mean by that is whatever the product. We have we should have a relevant market position.
Whether you look at our costs, our X 10 years.
Joe Spak: Any of this core business, we really have.
Joe Spak: <unk> position in the market.
Joe Spak: <unk>.
Joe Spak: Call it capability and technology that is.
Joe Spak: Wanted by the customers can see that in terms of wins and so on so there are elements of the market not being fragmented having stable.
Joe Spak: Profit pools I would say is the important thing there. So that's one piece.
Joe Spak: Your second part of the question.
Joe Spak: If you just look back indexes to you of Magna.
Over the period that I was showing data for the last 14 years, we have spent roughly $20 billion.
Joe Spak: Investments to grow our business and about net of divestitures $2 billion in M&A right.
Joe Spak: Panic should give you 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.
Joe Spak: So I would say except for any small tuck ins that would make sense.
Joe Spak: We are really focused on everything we just talked about you are looking at every penny every time.
Joe Spak: 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 prudential Glenn plywood.
Joe Spak: But we're not taking divestitures off the table.
Joe Spak: We have done in two years, which we felt was fragmented retail data if P&C. So we continue to look at that so more importantly divestiture of southern knock off the table.
Joe Spak: In terms of the customer mix.
Joe Spak: I think we are being able to consistently grow the CPE, but we look at that more importantly, China.
Joe Spak: Market growing at roughly 5% I would say Louis and we've been growing at 15%.
Joe Spak: 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.
Joe Spak: But now as we stand today, 60% of our business in China is with the Oems a handful right really five six Oems.
Joe Spak: And that is even if you consider this tire it might be 60 range.
Joe Spak: And in the next three four years, we almost see.
Joe Spak: Our revenue in parity with the split.
Joe Spak: As 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.
Joe Spak: Overall.
Joe Spak: Business.
Joe Spak: Okay. Thank you appreciate it.
Joe Spak: Yes.
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 decrementals there.
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 seating we ended up three 8% and if you look at the high end of the range its pretty close for 2025.
Tom Narayan: Operationally, it's been a very good and stable place.
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 a program mix, where the volumes are lower that's affecting us.
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.
Tom Narayan: Volume story, there operational lease 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, yes, you have said all options on the table are 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.
Speaker Change: Strong market share one thing maybe that.
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 announce sales or spends in.
Speaker Change: If you would look at your guys' sum of the parts. It would appear to a lot of us that it's 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 is a balance and trying to keep call. It the operational agility at the regional 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.
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: Our inspection.
Speaker Change: Due on one <unk>.
Speaker Change: Use case, and then we have <unk>.
Speaker Change: 90 of this across the company, which can be implemented fairly quickly.
Great great.
Speaker Change: So there is quite a bit of that.
Speaker Change: In addition to that if you look at our group our corporate structure right. We look at standardization and we look at.
Speaker Change: Bringing any of these initiatives and roll it across so 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.
Speaker Change: <unk> Ltd product line should be in Mac My remark right.
Speaker Change: As we are running we have to always look at the best possible way to get the synergies.
Speaker Change: Yes, there is a compelling case like we did in interiors and we talked about at PNC. As an example, we look at it.
Speaker Change: And I think the other <unk> have to consider Tom like when you start date. So let me is talking about the operations and the customers.
Speaker Change: SG&A synergies are significant so I've mentioned purchasing but there is it.
Speaker Change: Company costs.
Revenue opportunities and then there is the whole area of tax planning. So it's something that's on the back of our mind that that creates.
Speaker Change: Margin expansion opportunities that we've seen over the past as well so.
Speaker Change: Just just consider that in your modeling.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Brian Morrison with TD Cowen. Please go ahead.
Speaker Change: Thanks, very much I appreciate all the color on the questions so far.
Speaker Change: I know that it was difficult to answer the question with respect to tariffs on aluminum and steel, but just in terms of broad base tariffs I know they are not factored in your guidance seems very difficult to answer but.
Speaker Change: Ian has talked about potential to move production or the flexibility in production what flexibility do you have with respect to.
Speaker Change: Addressing potential broad base tariffs and or what contingency plans have you or could you put in place in order to mitigate the potential exposure.
Speaker Change: 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.
Speaker Change: To figure out a solution together.
Speaker Change: We are having significant dialogue with all the constituents, obviously a lot more with our customers.
Speaker Change: At the table. We've started these discussions let's say December timeframe.
Speaker Change: We had a footprint in Canada U S and Mexico.
Speaker Change: To the extent, we are able to work with the customers to see what they are thinking in terms of various levers.
Speaker Change: We are there, but I can tell you one thing.
Speaker Change: For a supplier to absorb this magnitude that they are talking about is really unrealistic an untenable right. So we have to have many discussions we are having those discussions but to the extent where.
Speaker Change: The Oems are going to look at shifting managing in the short term, yes, we will do our best strength, we have the footprint.
Speaker Change: Yes, 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.
Speaker Change: So I believe.
Speaker Change: This is going to be disruptive right, we're going to see a longer shot Scott Thompson.
Speaker Change: Alright.
Speaker Change: Moving up and down on volumes.
Speaker Change: Rich Assembly plan does what.
Speaker Change: 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.
Speaker Change: Russell is there.
Speaker Change: And we have to work through this but it's going to be disruptive for sure.
Speaker Change: The magnitude of accountants that talking about is implemented for the industry overall.
Speaker Change: Thank you.
Speaker Change: Our next question will come from the line of James Picariello with BNP Paribas. Please go ahead.
James Picariello: Hi, everybody.
James Picariello: 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. This segment that does stand out is CD and.
James Picariello: And that revenue and margins.
Just slightly lower than where you finished in 'twenty four or so.
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.
James Picariello: Is there any in sourcing is there in sourcing are you seeing the in sourcing by Oems.
James Picariello: For seating in Europe in particular thanks.
James Picariello: Good morning, James.
James Picariello: Great question, I think I answered a couple of things related to seeding one was really the input costs being higher.
And from 'twenty four 'twenty five.
James Picariello: Normal cadence and then one on the two programs that are seeing the volume dropped the third point I think with.
James Picariello: With the business that is there.
James Picariello: There is an EV mix platforms there right.
James Picariello: The volumes are not hitting the plant volumes, we are seeing that negative impact on seating.
James Picariello: But I think in the past we've also talked about one program.
James Picariello: Which was underperforming and we have also said that program ends.
James Picariello: Towards the end of 'twenty six.
James Picariello: The replacement program is that the right metrics and that starts flowing in.
James Picariello: 2016 to 27 predominantly that can be a step change that will.
James Picariello: Impact the margins positively in seating.
James Picariello: To the last part.
James Picariello: I don't see as structural.
James Picariello: The efficiency operationally, it's a it's a good business.
James Picariello: The mix is pretty high in North America, and pretty significantly in China.
James Picariello: Europe is a little bit weaker, but again I don't think its a structural issue.
James Picariello: In this business.
James Picariello: Alright, and then.
James Picariello: That was helpful. And then my follow up is just on complete vehicles, what's what's the future for for this business.
James Picariello: Quoting activity pipeline potential.
James Picariello: Chinese domestic Oems wanting a footprint in Europe.
James Picariello: 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.
James Picariello: Yes.
From a from the question on CBA I think correcting the team has really done a good job.
James Picariello: We're getting the cost structure.
James Picariello: Needs to be right given what the end of program. So third BMW last year.
James Picariello: <unk> this year and we're looking at the Curtis who program does that for next year. So that team has really been various islands addressed.
James Picariello: Address the cost structure there.
James Picariello: We continue to have conversations with various Oems, including the Chinese Oems both.
James Picariello: Call it normal.
James Picariello: Production, but also some <unk> discussions.
James Picariello: That are on the table.
James Picariello: So.
James Picariello: You know this business has been lumpy in the past right in 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.
James Picariello: In the outer years from the Chinese Oems, but also from I would call it.
James Picariello: Sure.
James Picariello: Existing hospital Oems with history.
James Picariello: You had another question James.
James Picariello: LG.
Speaker Change: I think from a cadence of the product and the business in LNG JV is pretty good.
Speaker Change: The pressure that you see today is predominantly because of what's happening in the EV market right.
Speaker Change: A product perspective from customer interaction.
Visibility to programs and winning is as we had expected.
Speaker Change: Okay.
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: To ask a basic question, but a little surprised by how large the FX headwind is it $2 billion, that's like 4% to 5% sales decline actually.
Colin Langan: 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.
Speaker Change: 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.
Colin Langan: Relative to the Euro we see it as a significant decline from 24 into current rates.
Colin Langan: Europe 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 is sitting 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, I'll 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: I guess thats 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: Those headwinds are going to be offset by operational and engineering, but 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 in the world.
Colin Langan: I think when you look at the FX as we said, it's about $1 5 billion.
Colin Langan: A headwind 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 can 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.
Colin Langan: Our corporate average it varies by segment, but you are probably in the range of 50.
Colin Langan: <unk> 15 to.
Colin Langan: For 2000 22022.
Colin Langan: Okay, and FX was one and then and then and then you asked whether alright, Thank Colin correct and you offset it with.
Colin Langan: Operational performance commercial.
Colin Langan: <unk>.
Colin Langan: Our warranty and whatnot.
Colin Langan: Okay, Great alright, thanks for the clarification.
Speaker Change: Our next question comes from the line of Mark Delaney with Goldman Sachs. Please go ahead.
Mark Delaney: Yes, hi, good morning, and 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.
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: Yes.
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: $6 billion range, so it's a $1 billion.
Mark Delaney: Kris.
Mark Delaney: It's still strong growth at about 20%.
Mark Delaney: 'twenty one.
Mark Delaney: Slide six in 'twenty four sorry, Louis has the exact numbers and there were just growing north of six by 'twenty six takes into okay.
Speaker Change: Thanks for that Pat and then.
Speaker Change: So 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: Reevaluating your spend to <unk>.
Speaker Change: 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: And I guess 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 for margin growth going forward.
Speaker Change: Yes.
Mark Delaney: So I think Mark I can just on the number side of it.
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 the three year period 'twenty four 'twenty five 'twenty six we executed.
Mark Delaney: In the range of about 124, and the balance of the 400, you were expecting and planning on executing in 'twenty five 'twenty six as far as the change in approach I think it's more.
Mark Delaney: Clarity.
Mark Delaney: 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.
Mark Delaney: To your question are we.
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 and.
Mark Delaney: And something also gave on the other side.
Mark Delaney: It's basically balancing our whole portfolio within SME and then also within Magna as a whole.
Mark Delaney: I just want to point out the engineering spend at the gross number. So it's the engineering comes down there may be some recoveries that also go down so the net may not be as impactful as that you still have a net decline as well the key point is.
Mark Delaney: Again.
Mark Delaney: I'd like to say that it's not a cut in capital or and smearing. It is actually putting efficiencies in place.
Mark Delaney: And with the operational excellence activities, we've been able to make it more efficient and.
Mark Delaney: 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.
Mark Delaney: Thank you.
Speaker Change: We will take our final question from the line of Michael Glen with Raymond James. Please go ahead.
Mark Delaney: Oh, Thanks, good morning.
Mark Delaney: One for me it Pat the other item on your cash flow statement the increase in investments.
Mark Delaney: Other assets and intangible assets.
Mark Delaney: Well 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.
Mark Delaney: In that line item as well.
Mark Delaney: Yes.
Speaker Change: I'll give you the description of what's been more first the biggest bucket by far is customer.
Mark Delaney: 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 most of that is a quasi guaranteed number Michael so it's not treat it the same as capital to lower risk item.
Speaker Change: And we've been running at an elevated level.
Speaker Change: 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: So that number is going to be down quite a bit next year as well.
Speaker Change: Correct.
Speaker Change: Okay.
Speaker Change: That was it from me thank you.
Speaker Change: Perfect. Thanks.
Speaker Change: And that will conclude our question and answer session and I will now turn the call back to Swamy go to Gary for closing remarks.
Speaker Change: Thanks, everyone for listening in today.
Speaker Change: As you have seen in the data we remain laser focused on executing on our outlook, including margin expansion capital discipline free cash flow generation.
Speaker Change: And both getting back within our target leverage ratio and increasing returns of capital to shareholders.
Speaker Change: <unk> highly confident in the magna's future and being able to deliver to the outlook 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].