Magna International Inc. (NYSE:MGA) Q1 2024 Earnings Call Transcript

Magna International Inc. (NYSE:MGA) Q1 2024 Earnings Call Transcript May 3, 2024

Magna International Inc. misses on earnings expectations. Reported EPS is $1.08 EPS, expectations were $1.28. Magna International Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by, and welcome to the Magna International First Quarter 2024 Results. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Finally, a reminder that this conference is being recorded. I would now like to turn the conference over to Louis Tonelli, Vice President of Investor Relations. Please go ahead.

Louis Tonelli: Thank you, operator. Hello, everyone, and welcome to our conference call covering our first quarter 2024. 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 2024. 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, 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 our reminder slide included in our presentation that relates to our commentary today. With that, I’ll pass it over to Swamy.

Swamy Kotagiri: Thank you, Louis. Good morning, everyone. I appreciate you joining our call today. Let’s jump right in. There are some notable takeaways from the quarter that I would like to highlight before getting into some of the details. We are pleased that our Q1 results for sales and earnings, excluding fiscal impairments, came in ahead of our expectations. This was in part due to our continued operational excellence activities, which are on track to collectively contribute about 75 basis points to margin expansion over the next two years. We are maintaining our adjusted EBIT margin outlook for 2024 despite the negative impact of assuming no additional Fisker Ocean production and lower sales on program delays and mix.

Our operational excellence activities, continuing efforts to contain costs and commercial recoveries are all expected to contribute to this. And we issued $400 million of senior notes in Q1 to refinance debt coming due this quarter. We expect to be back into our target leverage range during 2025. So far this year, we have experienced more stable production schedules relative to what we experienced in recent years. This is contributing to improved operating results. We anticipate a relatively flat vehicle production environment over our outlook period, particularly in our key markets of North America and Europe. As a result, our continued content growth is contributing to our higher sales. As we said earlier this year, inflation continues, in particular, for labor.

However, we have been working hard to mitigate cost increases, including ongoing discussions with customers for additional recoveries. Lastly, our customers continue to evolve their electrification strategies, particularly in North America. We are assessing the potential impacts on our sales, earnings, capital and free cash flow and are working with our customers to optimize investment and capacity plans. We’ll continue to update when we have more clarity on major impacts, if any, to our business. It is important that I provide an update on our current status for the Fisker Ocean program. Production of the vehicle is currently idled. Our current outlook issued today assumes no further production. Consistent with disclosure, we provided in our annual information form, this assumption reduces our 2024 sales by about $400 million and impacts our adjusted EBIT margin by about 25 basis points.

We fully impaired our operating assets and warrants in the first quarter totaling $294 million. We have $195 million in deferred revenue associated with the Fisker contract that could offset the $294 million in asset impairments that cannot be recorded in Q1. This amount will be recognized in income as performance obligations are satisfied or upon termination of the fiscal contract manufacturing agreement. In order to mitigate the impact of the lower sales on this program, we recorded additional restructuring costs of $22 million in the quarter. We continue to monitor the situation, and we’ll evaluate opportunities to further mitigate the impact on our business. Overall, we expect to offset the adjusted EBIT margin impact from this item through actions taken and strong execution across the company.

I would like to comment on how we are proactively managing to address challenges and further improve our financial performance. Our operational excellence activities are on track to contribute about 75 basis points of improvement over the next two years. In addition, input costs, which were expected to be a 30 basis point headwind to EBIT margin this year has been reduced to about 25 basis points now. We are optimizing engineering spend which is expected to be down about $50 million from our February outlook. We are lowering our capital spending outlook to the $2.4 billion to $2.5 billion range, and we are continuing restructuring activities to optimize our footprint. As a result, our leverage ratio is on track to be back in our target range during 2025.

We have a continuing focus across Magna on margin expansion and free cash flow generation. Electrification remains an important industry trend although the take rates are uncertain in the short and midterm. Our EV strategy with respect to customers, programs and regions in which we want to participate is both, targeted and deliberate. And as you’ve heard us say for many years, we are quoting business based on our volume assumptions, not our customers. With all this in mind, we continue to win business and advance our position in electrification. We have been awarded specialized eDrive business to support one of our customers’ high-end vehicle platform. This primary rear drive system delivers for 700 kilowatts of power and exceptional performance, reflecting our expertise in electric powertrain system engineering and integration.

Lastly, before I pass the call over to Pat, I want to highlight recognition received by Magna, which I am very proud of. Magna was named at 2024 Automotive News PACE Award winner, one of only thirteen winners for our integrated driver and occupant monitoring system. We also received PACE pilot recognitions in seating for our EcoSphere 100% melt-recyclable foam and trim; and in exteriors, for our Modular & Scalable Active Grille Shutter Assembly. Magna was the only company to receive both a PACE award and multiple recognitions for PACE pilot innovations to watch. And 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 five awards across four product areas. This brings our total to 30 GM Supplier of the Year awards over the last five years. With that, I’ll pass the call over to Pat.

Pat McCann: Thanks, Swamy. And good morning, everyone. As Swamy indicated, we delivered solid first quarter earnings ahead of our expectations, excluding the Fisker impairments. Recall that we indicated on our February call that we expected our 2024 earnings to be lowest in the first quarter of the year. Now, comparing the first quarter of 2024 to the first quarter of 2023. Consolidated sales were $11 billion, up 3% compared to a 2% increase in global light vehicle production. Adjusted EBIT was $469 million. And adjusted EBIT margin was up 10 basis points to 4.3%. Adjusted EPS came in at $1.08, down 6% year-over-year primarily due to interest costs, but ahead of our expectations. And free cash flow used in the quarter was $270 million, compared to $279 million in the first quarter of 2023.

During the quarter, we paid dividends of $134 million. We also raised $400 million to repay debt coming due later this quarter. More importantly, with respect to our outlook, as Swamy noted, we are maintaining our adjusted EBIT margin range and lowering our capital spending range. Let me take you through some of the details. North American light vehicle production was up 2%; and China was up 11%; while production in Europe declined 2%, netting to a 2% increase in global production. Breaking down North American production further, while overall production increased 2%, production by our Detroit-based customers declined 3% in the quarter. Our consolidated sales were $11 billion, up 3% over the first quarter of 2023. On an organic basis, our sales increased 1% year-over-year for a minus 1% growth over market in the first quarter, but plus 2% growth over market, excluding Complete Vehicles.

Once again, negative production mix in North America unfavorably impacted our year-over-year sales growth in the quarter. Our sales increase was primarily due to the launch of new programs, higher overall global vehicle production the acquisition of Veoneer Active Safety and increases to recover certain higher input costs. These were largely offset by lower complete vehicle assembly volumes, the impact of foreign currency translation and normal course customer price givebacks. Adjusted EBIT was $469 million, and adjusted EBIT margin was 4.3% compared to 4.2% in Q1 2023. The higher EBIT percent in the quarter reflects approximately 40 basis points of operational items, the most significant of which relates to our operational activities, including improved results at underperforming operations, 30 basis points of nonrecurring items, the most significant of which are lower warranty and a gain on the sale of a noncore equity method investment.

These items were partially offset by higher net input costs, in particular for labor, which approximated 20 basis points and volume and other items, which collectively impacted us by about 40 basis points. These include acquisitions, which came in at lower margins than the corporate average; lower earnings on lower assembly sales, including as a result of the end of production of the BMW 5 Series, net of higher earnings on higher component and system sales as well as transactional foreign exchange gains. Interest expense increased, reflecting net debt raised last year as well as higher market rates on the new debt. Our adjusted effective income tax rate came in at 21.5%, essentially in line with Q1 of last year. Net income was $311 million compared to $329 million in Q1 2023, mainly reflecting higher adjusted EBIT, offset by higher interest expense and minority interest.

Adjusted diluted EPS was $1.08 compared to $1.15 last year. Turning to a review of our cash flows and investment activities. In the first quarter of 2024, we generated $591 million in cash from operations before changes in working capital and invested $330 million in working capital. Investment activities in the quarter included $493 million for fixed assets and a $125 million increase in investments, other assets and intangibles. Overall, we used free cash flow of $270 million in Q1. We continue to return capital to shareholders. We paid $134 million in dividends in Q1. Our balance sheet continues to be strong with investment-grade ratings from the major credit rating agencies. At the end of Q1, we had over $4 billion in liquidity, including about $1.5 billion in cash.

Currently, our adjusted debt-to-adjusted EBITDA ratio is up 1.83, excluding excess cash held to pay down debt coming due this quarter. We anticipate a reduction of our leverage ratio, and we are on track to be within our targeted range during 2025. Next, I will cover our updated outlook, which incorporates slightly higher-than-expected vehicle production in China, while our assumptions for production in North America and Europe are unchanged from our previous outlook. We also assume exchange rates and our outlook will approximate recent rates. We now expect a lower euro and Canadian dollar for 2024 and a slightly higher RMB all relative to our previous outlook. And as Swamy mentioned earlier, we are assuming no more production of the Fisker Ocean.

We are reducing our expected sales range, despite this, we are maintaining our EBIT margin outlook, reflecting our operational excellence efforts to contain cost and obtain commercial recoveries. We have increased our expected tax rate for 2024 from 21% to 22%, largely reflecting a change in the mix of earnings towards higher tax jurisdictions. As a result of reducing the range of our sales and the higher expected tax rate, we are reducing our range for net income. We now expect capital spending to be in the $2.4 billion to $2.5 billion range compared to approximately $2.5 billion in our February outlook. This mainly reflects revised program spending. And our interest expense, equity income and free cash flow expectations are all unchanged from our last outlook.

Let me walk you through the change in our sales outlook from February to now. As we mentioned earlier, we have assumed no future production for the Fisker Ocean. Consistent with our previous communications of the 2024 impact, this reduced sales by about $400 million. We have received updated information on the amount of directed content on the new Mercedes G-Class assembly programs, which has reduced sales by about $400 million. Recall from our February outlook that we expected no dollar impact related to the sales change. Our updated FX rates resulted in about $200 million of lower sales and the remainder, including reduced active safety sales, partially offset by other amounts netted to about $200 million in lower sales in our outlook. In summary, we had solid financial performance in the first quarter, ahead of what we had expected, excluding the Fisker impairments.

We are on track with our operational excellence activities and are taking further actions to mitigate impacts from lower expected sales. As a result, we are maintaining our adjusted EBIT margin outlook for 2024. We’re also lowering our capital spending expectations for the year, and we are assessing the impacts of OEM electrification plans on our business in order to optimize investments and capacity plans. All in all, a solid start to 2024. Thanks for your attention, and we are more than happy to answer your questions. Operator?

See also 15 Most Competitive Countries in Europe and 20 Best Korean Skincare Products of 2024.

Q&A Session

Operator: Thank you. And as mentioned, the floor is now open for questions. [Operator Instructions] And your first question comes from the line of John Murphy from Bank of America. Please go ahead.

John Murphy: Hi, good morning, guys. Just a couple of quick ones. First, on Power & Vision, the margins dropped pretty dramatically sequentially. I guess they’re flat to slightly down year-over-year. And I think we’ve kind of gotten comfortable as we’re exiting last year traveling maybe in the 5% to 6% range and maybe some upside over time. Was there anything specific or unique that happened in the quarter there? And how should we think about those margins as we progress through the year and maybe even beyond? Because I think it was 2.6%. It’s far lower than we were at least modeling. Maybe we got something wrong.

Swamy Kotagiri: Hi, good morning, John. This is Swamy. From the P&V sector perspective, there are a couple of things to note. First of all, fundamentally and basically everything good. No surprises there other than what we talked in terms of volumes a little bit here and there. There is one specific program, which starts cadence in the second quarter and towards the second half of the year, which starts kicking in. The engineering spend decreased cadence starts also from the second quarter moving forward. Some recoveries on tooling and insulating recoveries as the programs launch also comes in the later part of the year. All said, just to give a little bit more color the way you asked and maybe helps modeling. As you look at the numbers today that we are showing for P&V is about 2.5%.

It’s going to be definitely more than double as we see, and we are expecting in the second quarter and going forward. So that’s the step change that we have planned, and we see going from this quarter into second quarter and onwards.

John Murphy: Okay. That’s very helpful. And then just another question around the battery structures business. Obviously, there’s pushing down and to the right and a lot of EV ramp launches and volumes. I’m just curious if you could talk about sort of the state of that business if there’s been any significant change in your expectations potentially maybe even a slowdown in the capital deployed for that to be more measured with what might actually be happening in the market.

Swamy Kotagiri: Yes. That’s a very good question, John. I think as we’ve always said, wherever possible, we have always looked at phasing in capital, that was one. Second thing, looking at volumes that are our own set of assumptions rather than just take what is given. The third thing we mentioned last time is in some cases, customer partially or fully funding capital. As you know, tooling is a normal course of business, but in specific programs on some of these products and programs. We have been asking and successful in some cases to get the customer to fund the capital partially or fully, all of those things help us mitigate. But on top of that, as we said, we are looking at just the overall – whether it’s investment in capital or on the engineering spend we continue to look at it, and that’s the reason for the guide on saying that the 2.5% is more in the range of 2.4% to 2.5%.

And as you know, there is a lot of volatility in volumes and how they’re looking. So as we get a little bit more clarity, we’ll continue to scrub the capital number even further. The engineering guide, we are able to say that we are reducing $50 million now, and we see that path, and we continue to scrub that even further.

John Murphy: Okay. That’s very helpful. Just one other follow-up. On the $195 million of deferred revenue that you’re carrying that should flow through at some point in the future. Pat, is there cost that will come in with that deferred revenue? And how should we think about that potential benefit over time? And is that kind of it now that you’ve kind of taken these charges for the Fisker Ocean?

Pat McCann: Yes, that’s correct, John. So effectively, we’ve written off 100% of our Fisker assets. So what’s left is the deferred revenue and depending on how the future plays out, that deferred revenue come through income with no cost associated.

John Murphy: Is there an expectation as to – will that be like over a couple of quarters? Or will that hit in one quarter? I’m just curious how that will roll because that’s obviously it could be pretty meaningful to EBIT.

Pat McCann: It really depends on Fisker themselves, John, and how they move their business forward. It’s really too early to tell. That’s why under the accounting rules, we’re not able to take it until we have clarity from Fisker themselves.

John Murphy: Okay. All right, thank you very much.

Pat McCann: Thanks, John.

Operator: Your next question comes from the line of Tamy Chen from BMO Capital Markets. Please go ahead.

Tamy Chen: Hi, good morning. Thanks for the question. Just wanted to go back on the Power & Vision. So it sounds like this quarter, just some timing of those items. I’m just thinking going forward, Swamy, I know you said in Q2 should be at least double, probably more than Q1. But should we think of them going forward will be kind of at that level? Or the timing of things like recoveries from launches could still cause some quarter-to-quarter volatility on the margin for Power & Vision?

Swamy Kotagiri: Good morning, Tamy. I think you summarized it, the significant step change happens from Q1 to Q2, and we expect improvement from there. But if the volumes change or there is launch deferment from the customers and so on, that’s an extraneous event, right? And that could create some. But as we see in our plan today, it’s a more smoother cadence from second quarter with improvements into the third and fourth.

Pat McCann: Tamy, keep in mind, our outlook for Power & Vision for the year is unchanged rate 5.5% to 6.1%. So you do the math, it implies that pretty good second half as well as a good second quarter.

Tamy Chen: Yes. Got it. Okay. And I just wanted to go back to the holding an EBIT margin, even though you’ve got some of those other puts like, Fisker coming out. I wanted to go back on that. So are you saying versus your loss side, you found additional operating efficiencies? Or is it the customer recoveries or coming in more than you had anticipated the last time you were talking about guidance?

Pat McCann: I think it’s a combination of all of them, Tamy. When you look at a couple of the pieces. So you’re correct. So we did – when you go through the Fisker, the 25% decrementals on the margin holds the offsets when you go through a bunch of them. We have Swamy mentioned, we’re focusing on engineering and that number is coming down, the range about $50 million. That’s part of it. We do have a benefit on inflationary headwinds net. We’re seeing some relief on the energy costs in Europe. It was a hotter summer and we’re also seeing some benefit on the semiconductors. So that’s about a 10 basis point benefit. And then when you have some of the other puts and takes, we have, Swamy also mentioned in the P&V and part of driving that margin to the back half of the year, some of the commercial benefits we’ve negotiated as PL reflected, and that benefit is going to flow through in the back part of the year as the programs launch.

And then the last piece, which is a little bit unusual was the G Wagon pricing at Steyr, we talked at about a 10 basis point impact in February. The bill of materials that we see from Mercedes continues to change and our sales reduction with no EBIT impact is about $350 million. So that benefit on a basis point is 5. And then just more broadly, our focus on CIs and improvements at underperformance is, it’s always been intense, but I would say it’s even more intense with all the changes that we’re seeing in the industry right now.

Tamy Chen: Okay. And how should we think about with respect to CapEx, do you think there’s a possibility to further lower it or it’s difficult just given there’s some – there’s commitment aspects that you can’t change in this provision is kind of what we can expect for most of the year going forward. Thanks.

Swamy Kotagiri: So what you see, Tamy, lowering or bringing the range from a 2.5% approximately to 24% to 25% is based on the information that we have and we continue the efforts. There’s, like you said, some capital that’s already in place. And if there is a change in volumes, it becomes a commercial discussion. It doesn’t mean we stop. But on the other hand, on unlaunched programs with the change in volumes, there would be opportunity, obviously, to bring down capital.

Tamy Chen: Thank you.

Operator: Your next question comes from the line of Mark Delaney from Goldman Sachs. Please go ahead.

Mark Delaney: Yes. Good morning. Thanks very much for taking the question. I guess, first, I’d like to better understand what you’re seeing in terms of customer production schedules regionally. I saw you left North America and Europe unchanged. You took up China but some of the other Tier 1s have talked about recent volatility in Europe. We’ve perfected some of the European OEMs about some more difficult 1Q results. So would love to better understand what you may be seeing regionally, especially in Europe.

Swamy Kotagiri: Mark, I think as you saw, there’s not a significant change in our setup results in volumes, I’ve talked about. We see a change in the mix maybe from one side from to the other, but the overall units, we don’t see a significant change. I mean one program to the other, there is a little bit ups and downs, but we don’t see anything significantly different than what we are projecting.

Mark Delaney: Okay. Thanks for that. And another question for you, Swamy. I’m pleased to better understand how Magna wants to support and sell the new market entrants in the future. Over the last couple of years, there was a lot of focus on maybe selling them for an Apple car. Of course, you had your experience with Fisker. But now we’ve also seen in China, right? We’ve got Xiaomi and Huawei. So what lessons has Magna learned with the Fisker business? And just want to better understand how Magna may try to partner and support those types of new market entrants, wherever they may be globally going forward, be it China, U.S., Europe, et cetera? Thanks.

Swamy Kotagiri: Yeah. As we sit and look back, right, even in the past, the process of how we look at the business, when we take is the same. We look at the viability of the product, the financial strength at that point when we are looking at the customer and just the overall acceptance possibly to the best we can in terms of the product. It’s no different than that. We look at all of those things and assess the risk factors. We still believe, as we look at Steyr and complete vehicle assembly with maybe just not the new entrants, I would rather say is as the market consolidation happens as the transition from ICE to EV happens in a long process. Some of the OEMs are looking at niche vehicles. Some of the regions are looking to enter into new regions.

All of this play into putting the pieces of the puzzle together. That’s how we look at it. It’s no different than how we go about with every program. And we kind of look at some of the terms and conditions, which are very important. I think we talked in some cases, if it’s an offshoot, do we have the guarantees from the parent company and what are the payment terms like all upfront payment of capital number of days for payment and so on. It has been in place. I think it’s – we kind of give a more focused look on some of these companies that might be new.

Mark Delaney: Understood. Thanks for that, Swamy. I’ll pass it on.

Operator: Your next question comes from the line of Itay Michaeli from Citi. Please go ahead.

Itay Michaeli: Great. Thank you. Good morning, everyone. Just on the first question, kind of going back to margins for the rest of the year. I was hoping you can give a little bit more color how you expect total company margin cadence the rest of the year? And maybe just as a point of clarification, is the deferred revenue assumed to be released in this year in the guidance?

Pat McCann: Good morning, Itay. It’s Pat. I’ll cover the deferred revenue one first. So our guidance does not include any impact of deferred revenue. So the way it’s being reflected as it’s on the balance sheet at December of 2024. On the cadence of margins, I think the cadence is, I would say, fairly similar to last year. When you think about what’s happening in the industry, Swamy’s gone through the P&V segment. But when you go by segment, I would say when you look at our BES segment, it’s going to follow the similar pattern to what we have seen last year. We’re seeing it’s fairly consistent first half to second half. We have some improvements, but that’s being driven primarily by recoveries of inflation.

They tend to be collected more in the back half of the year and then also some of the CI activities just as programs launch and get that benefit. When you look at the P&V segment, I think Swamy covered it in detail, but it’s – again, it’s the inflation, they tend to come in the back part of the year, and that explains part of the delta from Q4 of 2023 into Q1 of 2024. And then as Louis said, you can see the benefit as we come into the back part of the year. The other part of it is we – as Swamy said, we do have some commercial pricing that kicks in, in the back part of the year. And then we talked about the $50 million engineering spend reduction. That’s primarily coming through the P&V segment. Again, it sequentially gets better quarter-by-quarter.

And then again, the operational benefits as programs launch. So you see that benefit coming through in the back half of the year. Seating is pretty consistent. And I think on the complete vehicles, it’s a Fisker issue that we’ve discussed.

Swamy Kotagiri: And Pat, I think just to add a little bit more color like we did in P&V. If you look from a Q1 to Q2, typically, we don’t talk quarter-by-quarter. But just to give you a little bit color we see north of 5% going into Q2 and sequential going forward.

Itay Michaeli: That’s very helpful. Thanks for that detail. And just a second question, and apologies if I missed it earlier, but can you talk a bit more about the active safety volume declines assumed in the guidance now? And any changes of your thinking for active safety over the next couple of years? Thank you.

Swamy Kotagiri: Yes. If you just look at the overall going into 2026 and 2027, I would say it’s not a material change. The volume change or the revenue change that we talked about in the short term in 2024, 2025 is really related to program ramp trajectory being a little bit slower. Significantly that is one. And some of the deferred launches, I would say, is the second aspect. And the third one is the in-sourcing of programs more specifically related to China. And as we look at that, we are obviously looking at the offset in terms of engineering and other spending in that specifically in ADAS, but generally in P&V to keep our focus on getting to the megatrend profitability going forward.

Itay Michaeli: That’s very helpful. Thank you.

Operator: Your next question comes from the line of Joseph Spak from UBS Securities. Please go ahead.

Joseph Spak: Thanks so much. I guess to start, Swamy, you talked about some restructuring. We’ve seen a number of other suppliers also begin to really restructure, particularly more in Europe as the volumes there. It seems like they’re going to be potentially structurally lower. So, I was wondering if you could just spend a couple of minutes talking a little bit more about how you feel about your footprint maybe very specifically in Europe also and how you’re going to evaluate going forward restructuring opportunities?