Magna International Inc. (NYSE:MGA) Q1 2023 Earnings Call Transcript

Magna International Inc. (NYSE:MGA) Q1 2023 Earnings Call Transcript May 5, 2023

Magna International Inc. beats earnings expectations. Reported EPS is $1.11, expectations were $0.85.

Operator: Greetings, and welcome to the Q1 2023 Results Call. [Operator Instructions]. As a reminder, today’s call is being recorded Friday, May 5, 2023. Now I would like to turn the conference over now to Louis Tonelli, VP, Investor Relations. Please go ahead.

Louis Tonelli: Thanks, Tommy. Hello, everyone, and welcome to our conference call covering our first quarter 2023. Joining me today are Swamy Kotagiri and Pat McCann. Yesterday, our Board of Directors met and approved our financial results for the first quarter of ’23. We issued a press release this morning outlining our results. You’ll find the press release today’s conference call webcast, the slide presentation to go along with the call and our updated quarterly financial review all in the Investor Relations section of our website at magna.com. Before we get started, just as a reminder, the discussion today may contain forward-looking information or forward-looking statements within the meaning of applicable securities legislation.

Such statements involve certain risks, assumptions and uncertainties and 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. Please also refer to the reminder slide included in our presentation that relates to our commentary today. And with that, I’ll pass the call over to Swamy.

Swamy Kotagiri: Thank you, Louis, and good morning, everyone. I appreciate you joining our call today, and let me jump right in. There are some notable takeaways to highlight before getting into some of the details. Organic sales grew by 15%, outperforming weighted production by 8% driven by growth across our portfolio. Our strong Q1 operating performance reflects strong earnings on higher organic sales. We are raising the lower end of our adjusted EBIT outlook by 60 basis points based on the strength of these results and targeted actions to reduce expenses and optimize our cost structure. We are highly focused on executing our strategy and remain confident in our ability to meet our long-term growth and margin outlook. Given our sales growth of about $8 billion in the next 3 years, particularly on new program launches, we are investing in the business and expect CapEx to sales ratio to normalize by 2025.

Our CapEx outlook is unchanged at for 2023. In the quarter, we issued 1.6 billion of debt to finance our pending acquisition of Veoneer Active Safety and we plan to be back in our target leverage range by the end of 2024. And our successful debt offering was done while maintaining our investment grade rating and strong investor interest despite a challenging market environment for debt issuance in Q1. As you all know, our global economy continued to experience some interlocking challenges, including higher inflation rising interest rates, geopolitical risks and slowing economic growth, which continue to have an impact on our industry. We have remained focused on driving operational improvements working with our customers to recover inflationary costs and executing on our strategy to deliver long-term value.

Let me share some of these specific operational improvements and where we have intensified our actions, giving us confidence in achieving not only this year’s outlook, but our plans beyond 2023. We have undertaken a number of actions to mitigate the short and midterm macroeconomic pressure we are facing, including the consolidation and restructuring of some corporate functions, manufacturing footprint optimization and repricing of some programs that are underperforming our expectations. At the same time, we have and continue to intensify actions that are core to our daily business, including automation activities. In fact, about 15% additional productivity has been identified, including a possible 120 automation installations over and above the planned 70, all to be completed within the year.

Additionally, our corporate enterprise-wide global purchasing initiative that started last year is helping reduce direct component pricing, freight optimization and overall supplier management, among other things. We are starting to see traction here. And finally, smart factory initiatives with a digital ecosystem implementation, which include leading indicators, analytics and higher levels of automation, all aimed at achieving higher productivity levels are all well underway. We expect these initiatives to help us achieve our 2023 outlook and will be key to expanding long-term margins. Now looking at our sales in Megatrend Areas that are increasing per our plan. Sales for these product areas were just under $1 billion combined last year. And are expected to roughly double to just under $2 billion this year, double again by 2025 and be up to $7 billion by 2027.

Photo by Matthijs Waanders on Unsplash

We — these products have a sales CAGR of around 50% in the period from 2022 to 2027. The pending acquisition of Veoneer is expected to add meaningful growth on top of that. As the sales growth continues, our roughly 900 million of engineering spending in these areas is expected to be relatively flat over our outlook period. Given that these product areas are reaching an inflection point, and we are beginning to leverage our engineering spend to the point where we expect these businesses to be profitable by 2025. We recently announced a few key product wins contributing to our growth in these areas, including ClearView Vision Systems on the Ram 2500 and 3500 heavy-duty models battery enclosures business on General Motors, EV pickups and SUVs and eDrive systems for a Europe-based global premium OEM, just to name a few.

We are expecting overall growth for Magna of around $8 billion from 2022 to 2025. This is partially driven by the record business awards we achieved in ’22, which were 30% above our 5-year average. This high-growth cycle is driving the near-term capital investment. Our CapEx to sales ratio is expected to decline to historical levels of low to mid-4s by 2025. Just as a reference point, we exceeded a 5% threshold during other periods of growth in 2016 and ’17. More than $1 billion of our expected capital investment over the next 3 years, including about 500 million this year alone is to build on a strong position in battery enclosures. A market position that we believe we can maintain over the long term and generate strong returns from investments across multiple program life cycles.

And it’s important to point out that we continue to win business across our core product areas as well, including seed complete assemblies on GM’s EV pickup trucks at Orion Assembly engineering and complete vehicle assembly for INEOS, automotive offload EV and smart access power door systems on a Ferrari program. Lastly, before I pass the call over to Pat reflected in our ongoing commitment to operational excellence is the recognition we received from our customers. Typically, Magna receives more than 100 launch and quality awards from various global automakers around the world each year. Most recently, General Motors recognized Magna with a total of 8 awards. Seven supplier of the year awards and on overdrive award. We were one of only 2 suppliers to win both awards and the only supplier to win 6 or more in a given year, and we have done it for 3 consecutive years.

With that, I’ll pass the call over to Pat.

Pat McCann: Thanks, Swamy, and good morning, everyone. As Swamy indicated, we delivered strong first quarter results coming in ahead of our expectations. Now comparing the first quarter of 2023 to the first quarter of 2022. The consolidated sales were 10.7 billion, up 11% compared to a 3% increase in global light vehicle production. EBIT was 437 million. While EBIT declined 120 basis points to 4.1%, it was up 40 basis points from the fourth quarter of 2022. Adjusted EPS came in at $1.1 down 13% year-over-year, in part due to a lower tax rate last year. And free cash flow used in the quarter was 279 million compared to 99 million in the first quarter of 2022 and in part reflecting higher capital spending to support our strong growth.

During the quarter, we paid dividends of 132 million and we are raising our sales outlook as well as the low end of our EBIT margin range. Let me take you through some of the details. North American light vehicle production was up 8% and Europe was up 7%, while production in China declined 5%, netting a 3% increase in global production. Our consolidated sales were 10.7 billion, up 11% over the first quarter of 2022. On an organic basis, our sales increased 15% year-over-year for an 8% growth over market in the first quarter or 5% growth over market, excluding complete vehicles. The increase was primarily due to higher global vehicle production and complete vehicle assembly volumes, the launch of new programs and price increases to recover certain higher input costs.

These were partially offset by the impact of foreign currency translation, lower sales due to the substantial idling of our operations in Russia, net divestitures and normal course customer price givebacks. Adjusted EBIT was 437 million and adjusted EBIT margin was 4.1% compared to 5.3% in Q1 2022. The lower EBIT percent in the quarter reflects about 80 basis points of nonrecurring items. The most significant of which relates to lower net favorable commercial items and a warranty accrual. About 70 basis points of operational items, including inefficiencies at a BES facility in Europe, which we highlighted beginning in Q2 of last year, which impacted us by about 40 basis points in Q1 and higher program-related engineering spend and launch costs.

Partially offset by productivity and efficiency improvements at certain facilities. In addition, higher net input costs impacted us by about 60 basis points. These items were partially offset by earnings on higher sales and higher equity income. Interest expense declined slightly, reflecting a make-whole payment made last year to early redeem debt as well as increased interest income earned due to higher current rates. Our adjusted income tax rate came in at 21.6%, largely in line with our 2023 expectations but higher than Q1 of last year. Net income attributable to Magna was 319 million compared to 383 million in Q1 2022, reflecting lower EBIT and higher tax rate, partially offset by lower interest expense and minority interest. Adjusted — diluted EPS was $1.11 compared to $1.28 last year.

The decrease is the result of lower net income, partially offset by fewer shares outstanding. The reduced number of shares outstanding primarily reflects the impact of share repurchases during or subsequent to Q1 of 2022. Turning to a review of our cash flows and investment activities. In the first quarter of 2023, we generated 568 million of cash from operations before changes in working capital while we invested 341 million in working capital. Investment activities in the quarter included 424 million for fixed assets and a 101 million increase in investments other assets and intangibles. The 424 million in CapEx was higher than 238 million in Q1 of last year due to additional investments we are making in our business to support growth. Overall, we used free cash flow of 279 million in Q1.

We also paid 132 million in dividends in the quarter. Our balance sheet continues to be strong. At the end of Q1, we had 5.9 billion in liquidity, including over 2.4 billion in cash. We completed several debt transactions this past quarter. This debt will be used primarily to fund the acquisition of Veoneer Active Safety, our capital spending program included in Megatrend Areas and to refinance our euro debt set to mature this year. Currently, our adjusted debt to adjusted EBITDA is 2.19 times. Excluding cash we are holding to pay down our euro debt, our ratio is 2 times. As Swamy said earlier, we anticipate a return to our target leverage ratio of 1 to 1.5 times by the end of next year. Next, I will cover our updated outlook, which incorporates slightly higher-than-expected vehicle production in both North America and Europe as a result of better production in Q1.

Our assumption for production in China is unchanged from our previous outlook. We also assume exchange rates and our outlook will approximate recent rates. We now expect a stronger euro and slightly lower Canadian dollar for 2023 and relative to our previous outlook. We are increasing our expected sales range, largely reflecting the higher North American and European production in Q1 as well as the higher euro. We are increasing the bottom end of our adjusted EBIT margin range, we are now at 4.7% to 5.1%. As Swamy indicated, the increase reflects our better-than-expected Q and actions undertaken to reduce expenses and optimize our cost structure, partially offset by an increase in launch-related spending for 2023. As a result of increasing the ranges for our sales and the low end of adjusted EBIT margin, we’re also raising our range for net income [indiscernible] to Magna.

And our interest expense, equity income, tax rate capital spending and free cash flow expectations are all unchanged from our last outlook. In summary, we had a strong operating performance in the first quarter. Once again, we outgrew our end markets by 8% on a consolidated basis and 5% excluding complete vehicles. We’re taking additional steps to reduce our expenses, optimize our cost structure and improved margins. As a result of our strong Q1 and incremental cost optimization actions, we are raising the low end of our EBIT margin outlook expectations for the year. We are determined to deliver on our outlook, but recognize there’s plenty of work ahead, particularly with respect to input cost recoveries from our customers. We are laser-focused on execution.

Finally, we expect to close the Veoneer Active Safety transaction in the second quarter and remain highly focused on the integration of this business. Thank you for your attention, and we’ll be happy to answer your questions.

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Q&A Session

Operator: Thank you very much. Once again, if you would like to register your questions on the floor on your telephone or to potentialh requesth — if your question has been asked, I’d like to draw your restoration is the 3. One moment, please, for your first question. And we’ll get to our first question on the line from John Murphy with Bank of America. Please go ahead.

Operator: We’ll proceed with our next question on the line is from Adam Jonas with Morgan Stanley.

Operator: We’ll get to our next question on the line is from Peter Sklar with BMO Capital Markets. Go ahead.

Operator: We’ll get our next question on the line is from Tom Narayan with RBC. Go ahead.

Operator: We’ll proceed with our next question on the line is from Itay Michaeli from Citi. Please go ahead.

Operator: We’ll get to our next question on the line is from Colin Langan with Wells Fargo. Please go ahead.

Operator: I will proceed with our next question on the line is from Dan Levy with Barclays. Go ahead.

Operator: Our next question on the line is from Michael Glen with Raymond James. Go ahead.

Swamy Kotagiri: And the payback is — with a strong payback.

Operator: Thank you very much. And Mr. Kotagiri, there are no further questions at this time. I’ll now turn the call back to you for any closing remarks.

Swamy Kotagiri: Thanks, Tommy, and thanks, everyone, for listening in today. I’m happy with the progress in the first quarter, but a lot of work ahead of us. It’s just the beginning, and we feel confident with our progress and in our long-term strategy. Thanks. Have a great day.

Operator: Thank you very much. And that does conclude the conference call for today. We thank you for your participation as you disconnect your lines. Have a good day, one.