Q2 2019 Earnings Call
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As a reminder, this conference is being recorded Thursday August eight 2019, I would now like to turn the conference over to Louis Tonelli, Vice President of Investor Relations. Please go ahead.
Thanks, Glenn Hello, everyone and welcome to our second quarter 2019 conference call.
We will have formal comments safe and Vince Galifi Chief Financial Officer.
Joining us today, our Swami go to Gary Chief Technology Officer, and President of our power ambitions segment as well as Eric Goldstein and Jim floor was from my IR team.
Yesterday, our board of directors met and approved our financial results for the second quarter ended June Thirtyth 2019.
We issued a press release this morning for the quarter.
You'll find the press release todays conference call webcast. The slide presentation to go along with the call and our updated quarterly financial review all in the Investor Relations section of our website at Magna Dot com.
Before we get started just as a reminder, the discussion today may contain forward looking information or forward looking statements within the meaning of applicable securities legislation.
Such statements involve certain risks assumptions and uncertainties, which may cause the company's actual or future results and performance to be materially different from those expressed or implied in these statements.
Please refer to today's press release for a complete description of our safe Harbor disclaimer.
As you review financial information today. Please note that all figures discussed or a U.S. dollars unless otherwise noted.
We have included in the appendix reconciliations of certain key financial statement lines for Q2, 19, and Q2 18 between reported results and results excluding unusual items.
Our quarterly earnings discussion today excludes the impact of unusual items.
Please note that when we use the term organic in the context of sales movements, we mean, excluding the impact of foreign exchange acquisitions and divestitures.
Beginning this year, we adopted a new lease accounting standard that replaces previous lease guidance under GAAP.
The most significant impact of this new standard on our financial statements, what's the recognition of right of use assets.
At least liabilities for operating leases.
We recognize rather use assets and lease liabilities of approximately $1.8 billion based on the present value of the remaining lease payments over the lease term.
The adoption of the new standard, which has been done prospectively with no. Prior year restatement did not have a material impact on earnings or cash flows.
The new standard is expected to have approximately 140 basis points negative impact to return on invested capital.
Lastly, prior period compared as had been restated to reflect the transfer of certain assets out of corporate and other to the company's operating segments to better reflect the utilization of these assets.
And now I'll call pass the call over to Vince.
Thanks, Louis Good morning, everyone.
Don tenders apologies he is unable to join us today.
Let me proceed with our review.
The second quarter highlights, including Q2 results and outlook.
The signing of a framework agreement for an electric vehicle manufacturing joint venture with an affiliate of the I C as well as customer quality Awards, we received recently.
I will start with the second quarter.
We posted solid second quarter sales and adjusted diluted earnings per share. Despite a challenging global production environment higher costs in our Adas business lower equity income the dilutive impact of divestitures net of acquisitions.
And the negative impact of foreign currency translation due to the strong us dollar.
Overall, our results came in slightly ahead of our internal expectations for the quarter.
On an organic basis sales increased 5% compared to a 6% decline in global vehicle production.
An 11% outperformance compared to production.
Even excluding our complete vehicle segment sales far outpaced vehicle production.
Our slide in the appendix highlights the details.
Operating results in our body exterior substructures parent vision and complete vehicle segments. All came in slightly ahead of our expectations.
While seeding came in a bit below.
Free cash flow was 511 million, bringing our year to date total to 858 million.
We returned 519 million to shareholders through dividends and share repurchases.
And our 2019 outlook is largely unchanged from our previous outlook. Despite further downward adjustments in our full year global vehicle production assumptions.
And includes a slight increase in our free cash flow range.
I will go through the details later in our financial review and outlook update.
A couple of weeks ago, we signed a framework agreement for an electric vehicle manufacturing joint venture in China, but an affiliate of Beijing automotive.
The joint venture will combine Magnus complete vehicle engineering, and manufacturing expertise will be icees local manufacturing marketing and distribution footprint.
The facility has capacity to build up to a 180000 vehicles per year.
The first production of electric vehicles under BJ ABS arc Fox brand is expected to launch in late 2020.
The joint venture will also be capable of offering easy contract manufacturing services to other potential customers.
Magna and B assay previously formed a joint venture to engineer electric vehicles.
That will be produced in this manufacturing joint venture.
Lastly, we have received quality recognitions from three large customers recently.
FCTA named our Magnus seeding unit as or 2018 interior supplier of the year.
Forward honored us with a silver quality World Excellence award for supplying hydro foreign body components in China to third consecutive year, our China team has achieved this aware award.
And GM recognized magnet as a 218 supplier of the year for our Driveline systems technologies. The third time. This business has received this award.
These awards highlight our continued efforts to supply high quality innovative products to our customers.
Now, let me turn to our detailed financial review.
Our consolidated sales were 10.1 billion a decline of 1% from the second quarter of 2018.
Compared to global vehicle production, which declined 6%.
Excluding currency translation.
Which was a 377 million headwind and divestitures net of acquisitions, which reduced sales by $286 million, our organic sales grew 5% year over year.
This was largely due to the launch of new programs, particularly in our complete vehicle segment.
We also delivered organic sales changes better than global vehicle production and each of our operating segments.
Our adjusted EBIT margin declined compared to last year.
We reported 6.7% in the second quarter of 2019 down from 7.8% in Q2 2018, plus slightly ahead of our external are slightly ahead of our internal expectations.
70 basis points of this decline relates to lower margins in our power and vision segment 30 basis points is due to a decline in seating margins and a 20 basis points.
Related to our body exteriors and structures segment, partially offset by 10 basis point improvement in our corporate segment.
I'll get into the specifics of these in the segment review.
Adjusted EBIT declined to 677 million, reflecting higher engineering and other costs in our aid us business.
Higher depreciation a decline in equity income.
Divestitures net of acquisitions, lower scrap steel recoveries and higher commodity costs increased spending associated with electrification autonomy and research and development and higher SDMA, including lower net gains on the sale of assets.
These were partially offset by lower launch costs higher profits and complete vehicles lower sales and earnings last year associated with the fire at Meridian, an automotive supplier, which impacted OEM production.
As well as productivity and efficiency improvements at certain body exteriors and structures facilities.
Equity income declined $24 million year over year to 48 million in the second quarter of 2019.
This related primarily to lower unconsolidated sales, particularly in power envision.
These were partially offset by a write down of inventory and receivables relating to one customer last year and lower warranty costs.
Excluding equity income our EBIT margin declined to 6.2% in Q2 of 2019 from 7.1% in the second quarter of 2018.
Our effective income tax rate increased to 23.5% from 23.1% a year ago, primarily reflecting an increase in our reserves for uncertain tax positions.
A change in mix of earnings, resulting in proportionately lower income earned in jurisdictions with lower tax rates higher accrued tax on undistributed foreign earnings.
And the decrease in equity income.
These factors were partially offset by a decrease in non deductible.
FX losses on balances for which we follow the temporal basis of accounting.
Net income attributable to Magna was $509 million compared to $590 million in Q2 of 2018, reflecting a lower EBIT and higher tax rate, partially offset by lower interest expense and minority interest.
Diluted EPS declined eight cents to $1.59 for the quarter compared to $1.67 last year.
The decline reflects the lower net income partially offset by a 10% reduction in our shares outstanding.
Let's take a look at our segments.
Body of seriousness structure sales were 4.2 billion in the second quarter, a 7% decline from 4.6 billion a year ago.
The decline in sales reflects lower vehicle production in key regions.
A negative impact from foreign currency translation of $120 million.
The end of production of certain programs, including the Chevy Cruze and net customer price concessions.
These were partially offset by new program launches.
The segment's organic sales change was negative 4% compared to global vehicle production, which declined 6%.
Body X years and structures EBIT decreased by 47 million in Q2 2019 compared to Q2 of 18.
Margins declined by 50 basis points to 8% in the second quarter compared to 8.5% and 2018.
This decline reflects reduced earnings due to lower sales lower net gains on disposition of assets compared to last year higher.
DNA.
Higher foreign exchange losses inefficiencies at two plants, we are closing higher warranty costs for scrap steel recoveries and higher commodity costs.
These were partially offset by productivity and efficiency improvements lower launch costs.
Favorable customer pricing resolutions that commercial settlements and lower sales and earnings last year associated with the Meridian fire.
Power envision segment sales declined $389 million or 12% to $2.8 billion from $3.2 billion last year.
This decline primarily reflects divestitures net of acquisitions of $318 million.
Lower vehicle production in key regions.
107 million negative impact from foreign currency translation and net customer price concessions.
Organic sales increased 1% year over year far outpacing the 6% decline in global vehicle production.
Driven by New program launches and increased DCT sales from our European transmissions business.
Power envision EBIT was lower by $98 million and EBIT margins decreased to 7.2% compared to 9.4% in the second quarter of 2018.
This decline primarily reflects higher engineering and other costs in our Ada Es business substantially associated with three programs that will be utilizing new technologies higher depreciation and amortization lower equity income.
The impact of acquisitions and higher spending associated with the electrification autonomy and research and development.
These were partially offset by the divestiture of.
PMC, which ran at margins below segment average.
Excluding equity income EBIT margin declined to 5.4% from 7.4% in 2018.
Seating sales were 1.5 billion up 2% from the second quarter of last year, reflecting the launch of new programs and the acquisition of visa.
These were partially offset by lower vehicle production in key regions, including on certain high content programs. The end of production of certain programs, including the Chevy Cruze, a 49 million negative swing in foreign currency translation.
And net customer price concessions.
Ceding organic sales rose 3%.
Ceding EBIT declined by $34 million to $83 million for the quarter, while EBIT margins declined by 250 basis points to 5.7% from 8.2% and 2018.
This reduction substantially reflects higher launch costs and operational inefficiencies incurred at new facility lower equity income higher commodity costs higher foreign exchange losses, and higher labor and benefit costs.
Lastly, complete vehicle sales rose by $522 million from last year to 1.8 billion, representing a 41% increase.
The increase is primarily due to the launches of the Mercedes Benz G class BMW is at four and Toyota Supra programs as well as the continued ramp up of the Jaguar I pace.
These were partially offset by lower volumes on the BMW five series as well as foreign currency translation, which reduced sales by $111 million.
Organic sales rose by 49% from last year as assembly volumes rose, 28% to approximately 43000 units.
Complete vehicles EBIT increased by $42 million compared to Q2 of 2018.
EBIT percent increase from 1% to 2.4% in the second quarter of 2019 as a result of earnings on higher sales.
Lower launch and other costs and favorable supplier related commercial cycle settlements in the quarter.
I'm now going to review, our cash flows and investment activities.
During the second quarter of 2019, we generated $920 million in cash from operations.
That's an increase of $453 million from the second quarter of 2018.
Investment activities amounted to $587 million, including 328 million fixed assets $152 million in acquisitions.
And $107 million increase in investments other assets and intangibles.
Free cash flow increased by $478 million to 511 million in the second quarter.
We returned $519 million to shareholders in the quarter through the repurchase of $409 million of our stock representing over 8.6 million shares as well as the payment of a 110 million in dividends.
So far in the third quarter, we bought back another 1.9 million shares for $92 million.
This brings our year to date return of capital to shareholders to over a $1 billion.
Our adjusted debt to adjusted EBITDA is 1.19 unchanged from the first quarter, providing continued balance sheet flexibility.
We've made relatively minor changes to our 2019 outlook, we've lowered our assumptions for light vehicle production in each of our principal markets North America, Europe and China.
We've made no changes to our sales ranges for our body and power envision segments.
Modestly reduced our sales range receiving.
For complete vehicle assembly volumes have come down slightly versus previous expectations, resulting in a small change to our sales range.
Our adjusted EBIT margin range has been reduced by 10 basis points and is now 6.6% to 6.9%.
Mainly reflecting a reduction in our seating margins.
Interest expense has been lowered to approximately 90 million from approximately 100 million previously.
Equity income.
The income tax rate and net income attributable to magna are unchanged.
Capital spending has been reduced approximately $1.6 billion or approximately $1.7 billion in our last outlook.
And we have increased our free cash flow expectations to $1.9 billion to $2.1 billion compared to $1.8 billion to $2 billion previously.
Based on previous assumptions, we continue to expect free cash flow in the 2019 to 2021 time period of over 6.5 billion.
In terms of segment margins, we've increased our margin range for complete vehicles.
To 1.7% to 2.2% from the 1.5% to 2% previously.
Our margin ranges for body accessories, and structures and power envision segments are unchanged.
And we have lowered seeding to a range of 5.7% to 6.2% down 50 basis points.
To reflect higher launch costs.
To reflect higher cost to launch new programs lower equity income and the impact of lower sales.
In summary.
Considering the challenging vehicle environment and currency headwinds operating results remained strong.
Organic sales outpaced global vehicle production in each segment.
Free cash flow was 511 million, bringing our year to date total to $858 million, we returned 519 million to shareholders.
And our 2019 outlook is largely unchanged from our may outlook.
With modest sales and margin reductions no change expected in our net income range, an increase in our free cash flow range for this year.
Thanks for your attention this morning.
We're now pleased to answer your questions.
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One moment. Please for your first question.
Our first question comes from the line of John Murphy with Bank of America America Merrill Lynch. Please proceed with your question.
Good morning, guys. This is Alan Smith on for John .
First question, if I look at your full year margin outlook of six six to six nine you put up in the first half it looks like your margins are going to be roughly flattish in the back half of the year versus what's been a typical sequential step down from one hcg wage is this just a function of easier year over year comps from a tough first half or does this begun meaningful progress and traction on some of the operational inefficiencies and excess costs that you've outlined so far this year.
Yes, I think.
I think just a couple of things that are going I think part of it as comps I think part of it is also.
Distribution of sales.
First half and second half.
In terms of cash as I look at that second half of the year.
What we're thinking at the beginning of the year, and where we kind of art today.
Well, we had built into our forecast previously and what we're experiencing continued improvements in underperformance, we're seeing launch cost certainly reduction that.
Benefiting us.
And making no changes really too.
Parent vision, which was a big focus for us in Q2, which allowed us to keep our margin range pretty well intact and.
You know Amy as you look at the the margin range.
And that high.
The top and bottom end by about 1%.
I attribute that essentially active really just a couple of things.
I think the biggest piece of that is seating and I'm sure. We'll have some questions on CD during the call and part of it is just volume reduction, but the rest of our businesses give them with.
You have volumes coming off of a bad.
Pretty well intact.
Yes, I mean, the fire is been launching so we're we're through the launches so thats that have.
Should be stronger going forward.
We have some restructuring activities in the first half the year that we should see some benefit in the back half of the year Theres. Some facilities that have been losing money that were closing so we get some benefit from that so yes, and you've got the just the volume impact. So we have some things that are offsetting just overall seasonality if you will.
Great. That's very helpful. Second question one of the hot topics of discussion among suppliers. This quarter has been pricing dynamics and you cited in the press release, a few times normal customer price concessions on but then in one segment you noted favourable customer price resolutions and commercial settlements can you characterize the pricing environment broadly with your customers are they pushing back on price in any significant way or has your ability to push this down to your supply chain proven more difficult in recent quarters and does the pricing dynamics differ across your segments and products in anyway.
With a lot of questions. There I mean, just in terms of.
Freezing inside of those commercial settlements.
In the course of the year quarter to quarter.
Group by group there'll be ongoing discussions regarding commercial items and sometimes are settled in our favor sometimes or not.
So that was a comment in the Mdna and press release about commercial settlements.
I would characterize generally the pricing environment.
As always challenging and our and our industry customers are always looking for.
The best price.
And the best quality.
Yes, if I kind of look back over this year.
Probably say that the pricing environment is becoming a little more challenging with.
Customers.
Now stepping up focus on.
Price reductions.
That that'll vary.
By customer.
It will vary.
Group by group part of it's going to depend on a number of programs that are.
We are going after or launches.
The other thing I would think that as we talk to our customers I think theres.
More of a willingness to look at ways to optimize our overall cost structure.
Looking at different ways of doing maybe the same thing. So you might achieve an overall price reduction the final product, but if you're able to take cost out of the system, whether it's in our operations are to customers or suppliers.
It could be margin neutral.
Okay and one last question if I may have a longer term, but you mentioned on some of the work that you're doing on power and vision on in the second quarter is there any reason that powering vision can't return to an 8% to 10% margin business over the long term after some of the higher engineering costs for electrification autonomy are worked through and your joint ventures and equity income potentially recover.
So let me do you want to handle that.
Sure Vince, Yes, hi, Amy good morning.
I think we touched upon some product rationalization.
In China, we were talking about the 60 52 50 with direct launch we are talking about the right product features for China.
We continue to see actually an increase demand in Europe .
For DCT family of products, including the.
Hybridized volume of the direct lets transmission.
We continue to see.
Demand on the driveline products will regroup all wheel drive.
I think as we go through the <unk>.
Establishment off the platform. Good comedy says we are going through whether it's in electrification are Thomas.
Yes.
Got it.
I think we will.
Definitely see.
Using this foundation further proliferation in products going forward, both the amount of Jvs in China.
For powertrain products as well as some of our core technology Usiminas.
If I may just a tad.
Some additional just comments.
If you think about our current vision segment and 2019, we talked last quarter about some of the additional costs were three programs.
New technology programs said.
So we are going to impact consolidated margins.
About 40 basis points.
Thats consolidates, a bigger impact certainly on our power vision segment.
And those programs.
Let's start to ramp up and.
21.
Uh huh.
Around 21 timeframe, so as we get through that engineering spend.
Now, let's kind of step up in margins the other thing that.
Is impacting equity income.
Is the investment, we're making electrification for some programs in China with our hospital joint venture and that business starts to ramp up and 21.
So if you kind of fast forward 21, and you move to a more normal spend for our Ada Es business. Some of the heavy electrification spending starts to reduces our overall percentage of sales that should help drive margins in our power investment segment to a more normal level versus where we are today and I would add more broadly we're expecting equity income to be higher in 21 than we are today and some of it is half goes on but as the rest.
Great. That's very helpful color. Thanks for the question.
Our following question comes from the line of Peter Sklar with BMO capital markets. Please proceed with your question.
Okay.
Peter Your line is now open you May proceed with your question.
Hello.
Hello.
Hello.
Oh, Hi, sorry, this is chang filling in for Peter or Im not sure why my line didn't work earlier. So just on contract can you give us an update on the joint venture in China like are the take rates for the DCP is improving.
So I mean, you want to deal with that one yep Yep.
Hi, I think and one of them.
There were a few reasons when we talk about the China and the joint ventures for these products one is the China six impact.
Looking at the OEM plans for the China seeing some obligation.
The the six DCT dry wasn't some engine platforms that had not gone to the China take some obligation and April resign impact.
Besides the normal.
While yume impacts in China.
B as we mentioned last time, we are working through the product rationalization of the 60 to 50.
We are glad to say we are in some advanced positive discussions with a couple of Oems in China.
On these two products and we see a positive outlook on that maybe Windsor Luis if you can add some.
Yes, I would just add you know if you look at our equity income we haven't changed our equity income for the year. So looking at 19, specifically, we're pretty much in line with what we said to up a little bit and power vision, but pretty much in life. What we said previously so it's it's beyond 19.
Okay.
We see that you lower your vehicle production.
All the markets.
I just wanted to understand whats behind that are you seeing in terms of releases or is it more on forecasting service.
Yes, more forecasting services at least on the it's pretty pretty significant both in North America Europe little more severe in China and some of that relates to just what we saw in Q2.
We are more or less in line with where the market is.
Okay ads.
Four we understand our sales and production.
Has the week so like what is your view on the production outlook given obstacles such as Brexit and other uncertainties.
Hey, you beyond 20 beyond 2019.
Yes.
Yes, I think our view today, which obviously will have to.
Fine tuning as we get into our 2020 I look at that.
Well going to be a little bit more softening in.
North America.
Europe as well.
Yes, China is hopefully as bottomed out.
But I'd say from a macroeconomic perspective there is.
Heightened uncertainty with various trade discussions going on in the CLO and something that we're we're monitoring pretty closely and.
I I to the mindset in the organization.
It is.
It's really focused on making sure our cost structure is completely aligned with whatever happens in the market I as I sat through as our executive team sat through.
Our last quarterly review meetings or you know each one of the groups talk to us about how they're preparing for further softening in view of the volumes that that has taken place and yes.
What.
Actions they would do if volumes come off for some trade disputes or so on and so.
Inside.
I think we're.
Prepared.
For things do slow down.
We don't see that right now, but you know were always on guard.
Okay.
Thanks.
[noise].
Our following question comes from the line is Hey, Micheli with Citi. Please proceed with your question.
Great. Thanks, good morning, everybody.
Just wanted to get an update on some of the issues.
Q1 in the Das business, just how are those going.
As well as just how youre feeling about your your win rate within a das a year to date.
Vince if you want to take that.
Yes play Swami yes.
Yes.
You know one of the key things for us.
We are launching the leading edge technology lined our that was one of the things.
And we're also looking at a advanced.
Complex program in terms of the features for the camera based program.
So there was say underestimation in terms of scope of work development testing validation. So that was the fundamental reason, but that said there have been significant steps taken in terms of focus.
Senior management.
You know having focus on the program as we took some significant steps we are looking at hiring to reduce the outsourced engineering.
We had to build a significant team going through this program, but as we go through this we'll hand, the testing and validation infrastructure for the future.
We'll have a good process for the requirement analysis and testing strategy, but we'll also have a foundation for the Lidars going forward and also some significant core software algorithms.
As we go through the.
Process right now are.
Primary focus was on trying to get stability on the program and we see really good progress.
And there is some positive discussions in looking at the optimization.
And none of the.
Optimization has been included in the outlook as we want to get.
Clear stability going forward and so going forward in the next year and a half.
There could be improvements to what's included in the outlook right now.
Thank you. That's helpful. Then just just a one follow up maybe just maybe for Vince I was hoping you could comment on whether you're seeing any signs of stress in the supply chain and also just on on just the volatility in production schedules or whether that's getting more volatile less volatile as you kind of get into the third quarter, how you're trying to kind of deal with that.
Yeah, let me start with sort of volatility I.
I wouldn't if I look at sort of.
Q June he wanted.
Probably say volatility hasn't increased.
As you can tell by kind of even our outlook on the various segments, where no volumes are off a little bit.
Yeah, we're holding sales pretty firm to our previous guidance.
You know with respect to the supply base.
Where we've got a pretty active.
Group in our organization to monitor our supply base.
I see it at any point in time, and there's always a few suppliers on there that.
We are monitoring and Weve got some concerns and we're looking at what our sourcing strategies are.
<unk>.
Probably not elevated deal I think at the end of Q2 versus where we there in the last three or four quarters pretty pretty normal, but we typically have you know a handful suppliers that we've got or are you know antennas up and figuring out what our game plan as if there's some issues there.
[noise].
Very helpful. Thank you.
[noise].
Our following question comes from line of Brian Johnson with Barclays. Please proceed with your question.
Yes, good morning.
Just want to ask a couple of things.
First more housekeeping. So you indicated earlier that the guide was based on external forecasts. There many of our models who are below I guess production.
For China in Fourq, two and some of the other parts companies have guided to.
Continued double digit declines even in Fourq. So just.
Have you thought about that and what your sensitivity to that.
Yes so.
Yes, good morning, Brian offense.
When we look at China.
Our big focus.
Is our top 30 hit us at number at top 30 vehicles in China count for both.
70% of our consolidated sales in that region.
No. Let me remind you in Q1 top 30 vehicles volumes were down 13%.
From it from a year ago in Q2, there were down 18% from a year ago, So some pretty significant reductions.
And if we look at kind of that the second half of this year you know our expectations is that.
Our top three platforms on a year over year basis are going to be down.
19%.
But.
If you compare kind of where we thought we were going to be in the second half.
Last quarter, and where we think we're going to be this quarter for the second half.
Applying has deteriorated we were I would say previously would've thought sort of a decline of 13% were now about 19%. So there's been further erosion in China.
And you know what or top three programs those tough the forecasters and we certainly look at the forecasters, but in all markets and in particular, China. We're also looking at information we have from our customers on our production plans for at least the next quarter or the next six months. So it's a combination of both and that's how we derive our numbers and and really build up our forecast bottoms up based on the platform by platform.
Okay, and secondly in your electric critical joint venture.
Beijing I believe.
Different Beijing is also the partner or Mercedes there so.
Is that potentially future and scope, serving Mercedes in China through that joint venture with Beijing Auto.
Well, you know that the P. JV joint venture its primary focus is to.
Symbol vehicles.
For the I see.
On the electric side.
We have four wall has about 180000.
UNICEF assembly capacity, so to the extent that that capacity isn't being is directly for the JV products, we're going to have the ability to do some contract vehicle assembly for others.
Included a number of customers.
Okay. Okay. Thank you.
Our following question comes from the line at Kevin Chiang would see Ibcs. Please proceed with your question.
Hi, good morning, and thanks for taking my question or just just a couple for me.
I think Vince you mentioned Youve gone through some scenario analyses with.
Amongst the executive team to to get a sense of just various outcomes I'm just trying to get a sense of.
What are you willing to share kind of what you think the range of global production could be in terms of maximum and then secondly, how do you see decremental margins playing out depending on those scenarios.
I mean, if you've seen us be the second year of production declines margins are down from.
Just 50 basis points from where they were a couple of years ago.
How do you see that decremental margins through that scenario.
Through that scenario analysis, you've done.
Yeah, Kevin I mean, your your commentary about margins being down you know 150 basis points recall coming into it you know weather 18, and 19 that we have a pretty big step up and our investment electrification autonomy.
And we've we've covered that off a quarter after quarter comes in.
D. the significance of that as we're ramping up that business. So yeah, I think you've got to take that into account. I think you also have to take into account the increase in the Mega Star business, which operates at below Magna EBIT margins, although a good business, but it operates capital magnate at margins.
So adjusted for that it did to the margin that I don't know what the exact number has but it's not the magnitude you've indicated you know in terms of scenario planning.
You know certainly had in my office have got to.
A bunch of analysts working for me that do a whole bunch of scenario planning, but truthfully if push comes to shop.
We're really counts is that the divisions and at the groups and you know what that decremental margin could be if volumes were off it really depends on the specific platform.
How long or volume is going to be down.
What happens to programs if they get delayed.
The impact on engineering costs, and so on and so on so it is really hard.
To build up a bottoms up analysis on what happens if volumes decline because I couldn't give possibly all the various assumptions the divisions to do something like that what we're concerned as an executive team is that we've got the right mindset in the organization or you know what how are people thinking about if there are in their particular product area and their particular plan what are they thinking about what would their auctions Bay and we're comfortable with what we're hearing from the groups and the divisions that.
People are focused on us.
And Unfortunately, we have cut down our labor force.
So far this year.
And depending on where volumes are we may have to make adjustments as well, we don't spell it out and there's severance costs are in there. It's all part of I view it as part of normal operations.
So yeah, well I think we're ready.
If volumes do change I think we're ready volumes go up as well.
And we got the right mindset in the organization and the only sort of proof Kevin I can maybe give you as you go back to the last significant downturn in the late no nine timeframe, however volumes dropped by a very significant amount.
Primarily.
Generating most of our revenue most of our preference from North America today were better diversified with profitability in North America Europe .
And and China in particular.
And we did pretty good in that last a significant downturn and I don't see anything like that coming at just slight adjustments like there has been over the last couple of years.
We've been able to.
Continue to grow sales so as we've talked about in Q2 of this quarter. Some of that as you know in sourcing what we had previously outsourced some of that is.
You know just taking taking some people out reducing discretionary cost some of that is takeover business. We took over about $1 billion of business in the last downturn and that helped to mitigate the impact. So there's things that we can do things that we have done in the past to mitigate the impact of the declining volumes.
Okay. That's helpful. And then maybe just a housekeeping one from me and I apologize. If you mentioned this in your prepared remarks.
The 1.6 billion of Capex, you're going to you're going to do this or down a little bit from where you're guiding before is that kind of the good is that kind of a run rate we should be thinking about also through 2020 and 2021, when we look out the next three years.
Yeah, well I mean, our previous numbers were roughly in line with where we were when we started the year 1.7, So that's kind of where our baseline and I'm sure. There's always room to look at discretionary spending, but thats kind of that was a baseline to start the year.
Kevin I I I mean, it it can move up and down a little bit, but I I think 1617, it's probably not a bad run rate that you have if you want to model something.
Perfect. That's it for me. Thank you for taking my questions.
Our following question comes from Raymond James Picariello with Keybanc capital markets. Please proceed with your question.
Good morning.
[noise] can you can you just quantify the Ada spending in the quarter I mean, it sounds like your full year outlook related to these costs is unchanged but.
Just curious if you could provide some color on the quarter and then is there any change to the separate bucket of that incremental autonomous electrification spend I believe that was on track for an incremental 70 million this year.
That's right.
Yeah James.
Let me that says to me just give you some color.
Just in terms of I'd say the the overruns on on these three programs. We talked about in May that had the impact was about 40 basis points on adjusted EBIT margin on a consolidated basis.
If I look at the quarter.
City the impact on a consolidated basis was about 40 basis points and.
As I look at Q3, Q4 is probably going to be around 40 basis points.
In terms of.
No incremental easy a navy spending and we had talked about that.
Being about $70 million incremental in 19 versus 18.
That's going to be tracking a little bit lower now you probably around $50 million higher than 2018 levels.
I'd say that the primary reason for that as you know we've got a lot of focus on these three advance 88 as programs that weve talked about and.
Our resources have been shifted to these programs. So there's less spending on some of the other things that we want to get accomplished in the course of the year.
Okay. That's helpful and then on seating.
Hey can you talk about the the launch costs and the new facility inefficiencies that affected the quarter.
You, obviously lowered your margin guidance for the full year.
For the full year. So just curious what the trajectory is for these headwinds through the back half.
And I also saw that Magna is opening up its first seat structures plant in the U.S.
I believe it's an initial award for plug in model early next year. So are you seeing any additional opportunity more broadly within the structures portion of the business.
Given some of the some of the known competitor dynamics out there within that business.
Yeah, just in terms of.
Kinda CD margins.
Mm Hmm.
Maybe.
Let's talk about it a kind of so the year over year and maybe give you some color on.
The second half of the year and if I look year over year on a reported see margins were down but to the half percent.
And I would say that.
Half of that relates to.
Increased commodity costs and a reduction in equity income and reduction in equity income is substantial result of more volumes in China.
The balance of that.
So about half of that 2.5% relates to.
The launch costs and inefficiencies esters and efficiencies in the launch of the BMW apartment.
So it.
Obviously that one program alone.
Had a significant impact on reported margins, but the rest of the business.
We're still tracking prove off track subject to commodity costs.
You know if I think about.
The second half of the here.
We're bringing down.
No margin top and bottom end by about 50 basis points.
I'd say that the.
Yes, the biggest contributor to that just think there is an impact on volumes there.
The biggest impact there is.
Higher than expected from our previous outlook.
Launch cost in that facility.
Does I yeah.
We get through and as we get through 2019 expectations as we should start to see the light at the end of the tunnel by the end of the year. So we'll see some of that margin improvement come back in 2020.
Got it and then the street the seat structures plant Oh, Yeah, just from an opportunity standpoint.
Yes, just generally just in our seating business for you know we've been grown we've been outgrowing the market for years and years and.
In all the markets that we operate.
And we continue to see.
You know opportunities you know how much of that relates to.
Other suppliers or not.
I want to talk about that but we certainly did trend is continuing to be there and were definitely grow in this area.
Yeah.
Okay.
Thanks, guys.
Our following question comes online and Colin Langan, what Youve. Yes. Please proceed with your question.
Oh, great. Thanks for taking my question and congrats on a good quarter.
Any color on the the new easy Assembly plant, China, when what kind of investment will be needed and well well, we actually start seeing results out of those so it sounds like a multiyear opportunity.
Yes, well, what we said was that.
I invest and when we looked at the engineering and the assembly. Thanks remember this two joint ventures, there, we said it'd be under $100 million in total.
For for both of those.
Investments in terms of.
Watching other product, it's kinda start that's expected to start late.
2020, I guess Q4.
You know whether that gets pushed as.
Quarter, So I'm not really sure, but I think you're going to start to see some some impact on on profitability, where do you should be looking at 2021.
Okay.
Can you just remind us the impact year to date.
The tariff and Oh, China and then.
What if there is any impact at all from if there is no less important target for us.
Yeah tariffs in total year to date are about $15 million.
You know, we're estimating kind of run rate and then back half the year on 910 million Bucks.
And there is no impact as far as we can see it from list for.
To.
The Sthree is had some negative impact to the removal of the.
232 in Canada, U.S. has looked like Canada, Mexico has some positive impact they kind of offset each other.
But nothing from those four.
Got it.
Okay, and just lastly, commodity costs have come down a lot, but I know you have some sort off that but the recovery on scrap steel does the net decline they'll help you as you go through the rest of the year with commodity being down much in the quarter or.
Isn't that a awash with a lower scrap recovery.
You know we're.
So far this year, we see some headwinds from from commodity costs.
And we're expecting that for the balance of the year.
The way I would characterize it is that.
You were under some obviously a lot of customer resale programs on steel, but we also have some fixed contracts on an annual by those were renegotiated et cetera that some point late in 2018.
And as a result of the new fixed price contracting our steel costs have actually gone up in that area.
At the same time revenue from scraps come down and that's really resulted in an increase when we call commodity cost increases is really higher steel in certain areas offset our.
And in addition, lower scrap revenue and we expect that to continue for the balance of this year.
Now rate if there's still remains low them as we renegotiate for next year, we should see some benefit next year.
But in terms of this year were fixed on the on some of that steel and the lower reset or yeah lower spot personal.
Got it all right. Thanks for taking my question.
Our next question comes from line of I mean think of vicious.
With Morgan Stanley . Please proceed with your question.
Oh, great much appreciated.
Yeah, you know could you provide an update on you know some of the initiatives around lift and Waymo.
So I mean, you want to handle that one.
Yep.
Oh I didnt.
On a cruise ship with the lift as discussed in terms of food <unk> beverage segment program is proceeding as planned and good.
And obviously, there's some sensitivity around disclosing specific milestones and accomplishments, but Uh huh.
Oh, it's it ends on moving bone hundred employees, they're co located with the lift employees in Palo Alto.
And I think there was some discussion just a clarification live a recently released some data, but it's a very small portion of the data for economic purposes.
But all in all its a moving as planned.
Okay and on the way most side.
Vince you Werent drunk well there.
Putting a piece of it.
I mean, I don't think there's really much to comment on that so I mean, unless you wanted to add some color to that.
No I think again be.
Given the sensitivity of the topic.
As discussed in the last calls.
The program Oh, no we're working with them on the regular printing is proceeding well no again I couldn't give too much details on it.
Okay, and then just a at a higher level you know <unk> in this environment, you're you have a more sort of entrepreneurial approach to how you run the organization, where the plant managers have more.
No discretion and power over how how they choose to operate the their their business. You can you talk about some of the the benefits from that and in in this challenging environment as well as you know some of the challenges that come with.
We're trying to.
You know.
Shift around a priorities in the organization.
And and get everyone on the same page.
Well I think the.
The big benefit is that.
Our general managers and assistant general managers.
Compensated based on bottom line results with a cost for capital in pointing out that in their particular business unit.
Very transparent in terms of what the results are and then monthly now what their numbers are and they know what trigger points yard to deal with all that so they're really close to the action they're closer to anybody sitting in a corporate office in Toronto corporate office, and the trades or somewhere in in Europe trying to figure out what should we be doing at the plant. They see first hand, and they are quick to react. So that is a significant benefit of our operating structure.
You know in terms of shifting priorities.
Yes, you have the entrepreneurial.
Plan itself have entrepreneurial groups.
But there is a lot of coordination and discussion at the senior level of the organization, whether its executive team at Magna are there that the various group presidents on priority, we meet on a very regular basis stock about a whole bunch of things so.
Through those discussions.
We're able to effectively.
Set priorities for the entire organization.
Okay.
Appreciate it.
Our following question comes from the line of Dan Murphy with Credit Suisse. Please proceed with your question.
Hi, great. Thank you hi, good morning.
Wanted to first ask did I hear correctly that you reaffirmed your six and a half billion dollar free cash target from 19 to 21, that's correct.
Yeah at this point based on all of our previous assumptions, we have we have reiterated that number yet.
Okay. So let me, let me ask about that and that comment previous assumption. So obviously your yeah. You know the the end market assumptions are based on end markets that are you know.
<unk> changed somewhat meaningfully I think you have in there a north America Saar of North America production of roughly 17 million. So.
Just just to clarify that said that that's that's it that's six and a half billion is based on those old prior end market assumptions and we could then sensitize that to sort of revised end market assumptions and so that may may change that number is that correct.
Well I think if you look at.
Three here as we sort of had a number of assumptions as we're looking we're looking at production not as opposed to.
To SAR.
So what we had in North America to 2021 was 17 million units productions assume you're you're 22.9 right now in North America. Our latest outlook is 16.6, those a little bit of an increase in.
Europe were 21 for with respect to our top.
Platforms and China.
Yeah, we're at 4.9, and and 2021 based on our previous assumptions were 2.6 for for 19.
Doug obviously those assumptions assume some some.
Significant improvement.
Yeah, we're going to have to go back and get through our business plan and build this all up it's not as simple as just flexing S and the reason I say that.
Just think about 2019, where we started the year with that higher production assumptions in North America, Europe , and China was in bringing those production assumptions down.
Our free cash flow.
Targets actually moved up and that's just a whole bunch of reasons for all of US. So we really got to get through our business plan.
But yes, generally I'd say production is going to be lower that's going to be a headwind. So just too often you can we have elsewhere.
Subject to.
New business, when it's not even a rotterdam.
Okay understood and then Thats, a lower working capital we'd have to look at capital there's lots of factors that you're considering.
Okay, and then as far as the the ER segment dynamics within that that you know free cash flow guidance or have or that that that may change.
How should we think about the interplay between the segments in terms of reaching that because you know I believe if we look at for instance, you know body exterior structures, which doesn't get a lot of airtime. Although it's your largest segment by by wide margin looks like it's increasingly cash flow a capital efficient in generating larger cash flow. So how should we think about the interplay between the segments in where there may be a you know more upside which segments you may lean a little more to generate that extra cash or have better better capital efficiency you, but you don't if you kind of think about our business units.
Let's start with our biggest switches or by Sears and structures group.
Yes.
If you go back over the last couple of years, they've been a heavy user of capital has it put it.
Whole bunch of capacity in place for New business Awards.
And there are a significant launch cost.
We also had some underperformance in some of our operations and our bodies yours and structures group. So what we're seeing in 2019, and we expect to see contributed 20 and 21.
As the benefits of the sales flowing through that capacity that we put in place.
As well as I called self help on the on some of the underperforming operations, where in my formal comments today and ran through my comments I think even in the Q1, that's been contributing to overall improvement and operating performance in that group.
Yeah, we had a I had a call or a question on RCD in our seating margins.
And the impact that just one significant launch as having in 2019.
No.
Expected to turn around as we get into 2020.
And we definitely will be falling dependent again call it improving our overall operations is getting through the launch.
You know I've heard and and vision segment.
Yes, a big contributor that's not going to be.
Volume dependent is our spending on.
Yeah. So on the three programs in both Swami I've made some comments on that and some of the progress said.
And hopefully we're going to make with that.
That program and that program ramping up and 21.
Our Haskell joint venture, where we're investing in start up costs for a pretty significant program in China.
That's gonna start to ramp up as well so again, we're going to see the benefits of all that.
In terms of magnifier.
I guess can be a little bit volume dependent.
Mixed dependent.
But you know some of those programs too early.
Hi, I'm really not going to be that sensitive to kind of more the macroeconomic environment given the premium brands that we're selling too.
So.
A long winded answer to your question I'd say, there's a whole number of things that we're doing in the organization.
That are going to be driving some performance irrespective of volumes.
And obviously.
There'll be some some impacted volumes are down on some of our other businesses.
Understood understood that's helpful and if I could just follow up on a prior comment that was made you notice that you noted that your autonomous electrification spend you were previously looking at 70 million increase this year, but now it's.
Only EUR 50 million.
If you could just explain that a bit more <unk> and it sounded like you're maybe allocating a lot of resources toward some of the other Adas programs, just wonder Stan I would've thought that just given you know where the secular trends are and given you know everything we've heard from other suppliers is that for other players in the industry is that increase in resources only need to increase and not moderate that that's something that you would have sort of maintained regardless and if we think about it you know any potential weakness in that environment, how should that number moderate over over the next few years. Its a weaker environment leasehold are you going to maintain it regardless because these are trends that need to be invested in or would you flex that down.
Yeah, I think you know what.
Got it so I mean I can comment afterwards go ahead.
No I think you did make a comment in the beginning it was more a resource shipped in terms of addressing some of the focused areas. The importance of the program being that we have to stabilize in which we are to get to a point.
The things.
So I think it's a labor model.
A focused approach on hitting some of the key topics that are relevant not just for the programs, but also for the future.
So it's not actually introducing but it's more focused rather than trying to do a couple of other things that we would have done as far as the sensors in terms of camera. The high definition radar the lider their domain controller and the associated software with this continues to be a focus and I don't think there is a.
Shift.
In importance to that at all.
In electrification, we talked about.
The program.
And the product.
Focus that we are having we continue to see actually increase demand in terms of the DCT product.
We continue to see the all wheel drive four wheel drive.
We talked about the electric drives.
So I think the building block approach that we started is paying off and we continue to stay focused on that.
If anything.
The the power electronics software side of things with the property and the right skill.
We continue to ramp up.
And part of that ramp up has been.
Focus on the programs that we have at hand.
But there is a good balance there I think Vince.
Maybe if you have comments.
Thats like somebody they get cover everything I was going to try to deal with this good.
Great.
I could just squeeze in one more just what the European Commission regs coming into effect.
Next year could you just talk to whether there could be.
Upside to your DCT take rates and whether there could be last minute OEM modifications.
To their vehicles to meet those rags, what type of upside there could you just given.
Even in spite of sort of the last minute nature to meeting those regulations and what you're hearing.
Yes, I think Thats a good point I think we are actually.
[noise] not seeing any meaningful impact to the current demands right.
For our VCTS and poor regarded wall repair products, but in some cases, we are actually seeing the increasing request for multiple customers for our BCD products over the remainder of this year.
And if the diesel volume reduction continues.
That has to be compensated by the higher penetration rates of electrified systems.
And with the Magnum products in terms of the DCT. So the flex for disconnect systems, we could have an opportunity there.
Great. Thank you very much.
Mr ton only there are no further questions at this time I will now turn the call back to you. Please continue with your presentation or closing remarks.
Yes. Thank you a sense thanks for listening in today.
All in all a very solid quarter, we continue to be disciplined and adjust our business in the current environment.
Hope you all have a good day.
Thank you.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your line.