Tamy Chen: Thanks, good morning. First question is, I guess, on the low end of your ’24 EBIT margin guidance, I mean, it would imply a very modest year-over-year improvement of ’23, which had a number of headwinds, which is cost inflation, the underperforming BS facility, unstable production schedules and, of course, the UAW strike. So I’m just wondering, can we just go back to what assumptions you’ve got in there for the low end of the range? Like are you baking in just a degree of conservatism?
Patrick McCann: Good morning. Tamy, I don’t think it’s conservative. And I think we have a well-balanced build plan. There’s a fair amount of volume uncertainty and inflation continues to be a headwind. The one part you do have to consider is the impact of the G-class repricing. So the G-Class at Steyr is a new contract that’s launching in 2024. And effectively, what’s happened with all the inflation, their bill of materials has increased. So we have higher revenue and exactly the same higher cost of sales, who are dollar margin neutral, but you have a drag that’s impacting us by about 10 basis points just on that one program alone. So I think just the starting apples-to-apples would be a 10 basis point difference. And then you’d start going through.
We burn a flat volume scenario. We do have some negative mix and then we have headwinds again also on scrap sales. So I think when you put them all together, I think a couple of things to think about is last year, we were at a 100 basis point spread. We’ve tightened our gap because we feel more confident in our plan. And yes, the 10 basis points. I think it’s a pretty balanced plan, Tamy.
Tamy Chen: Okay, I see. And on the continuing cost inflation at this point, do you expect you could still realize some additional recoveries from customers? Or are we sort of in a different environment versus last year with respect to recoveries from the OEM?
Swamy Kotagiri: Yes. I think, good morning, Tamy, we talked about inflation in some of these topics still as continuing headwinds. Last year, we talked about a $100 million magnitude and as of November, we said we were going to negate that with various activities, including recoveries, and we achieved that. And this year, we have embedded inflation in terms of labor. Some things have trended down, like energy and so on, but there is some stickiness on some of the product still commodities, I mean including labor. So it’s going to be a combination of recoveries as well as definitely our continued efforts on operational excellence.
Tamy Chen: Okay. Got it. And one last question here. Back on the customer-funded CapEx that you’ve highlighted for ’24, the $100 million. So is that a new thing or you’ve had that and you just highlight it now? And is that the only one in your ’24 CapEx guidance that’s customer funded and so you just calling that out? Thanks.
Patrick McCann: It’s a new program that was awarded, Tamy. And previously, you would have just shown it as a subsidy under the old rules. But effectively, what’s happened more broadly when you think about the commercial issues, we went to the customer and said, they wanted our support. And we said, we need your support to do that. And that scenario, what we did was we looked at it on a cash basis. And you have some crazy accounting happening, but on a cash flow basis, it’s — you have higher CapEx and you have higher deferred revenue and in 2024 were cash neutral. So we didn’t look at the account, we didn’t — we looked at the business decision, which was — it’s a good program, it’s a good customer and the customer is paying for the capital, and we had the open space. So we took on the program.
Tamy Chen: Okay. Thank you.
Swamy Kotagiri: I think, Tamy, just to add to that, it’s not normal for customers to invest in capital. They fund and own tooling typically. But this is one of the things that we’ve been considering and working through.
Tamy Chen: Right. I see. Thank you.
Patrick McCann: Thanks, Tamy.
Operator: Our next question is from the line of Mark Delaney with Goldman Sachs. Please go ahead.
Mark Delaney: Good morning. I appreciate you guys taking the questions. With the new outlook for megatrend revenue, can you help us better understand how conservative Magna was with its assumptions around customer build schedules and EV volumes, especially given that some of the North America OEMs have emphasized are going to be flexible on how fast they plan to ramp up their new EV programs?
Swamy Kotagiri: Good morning , Mark, over the last number of years, I would say, going back even six, eight years, we have typically been saying that the global EV market penetration would be somewhere in the low 30s globally, obviously, higher in China, followed by Europe and then North America. I think we still believe it’s in that ballpark. And I also said previously, as we look at program by program, whether it’s EV or not, we tend to have our own viewpoint on the program volumes for revenue calculation purposes, right, to estimate our revenues, although we have to hit the run rates. Definitely, we are weighted a little bit in OEM’s production in North America for the megatrend areas or called the electrification. As that tends to have a decline, we’ll have a negative impact.
And like I said, we’ll do everything to stagger capital, work with the customers, look at modularity in program, both products and processes, but it will have a negative impact. But I think the magnitude of the impact we are seeing on revenue would be a little bit lower than what the market is seeing based on the assumptions we made before. But this is something that we need to watch continuously and be agile about it. So that’s a long answer.
Mark Delaney: Very helpful. I appreciate all the context and very dynamic situation for you all to deal with. On a related topic, as OEMs are adjusting generally lower their EV build plans, right? There’s perhaps some offset towards hybrid and ice builds. Are you seeing any higher revenue coming from different powertrains? And maybe talk a little bit more to what extent with the ’24 and 2026 outlooks that you gave and have you seen some increased revenue coming from ICE and hybrid vehicles?
Swamy Kotagiri: Yes. I would say, Mark, a vast majority of our capabilities are really agnostic to powertrain, right? But in some cases, like in the powertrain, our DCT or dual- clutch transmission has a package-neutral hybrid option that we are currently producing with three OEMs. Too early to say like how the dynamics or the volumes are playing out. We also have eDrive capabilities that can support high-voltage hybrids. And as you would remember, their JV can supply electrification components like motors and inverters that also apply for the hybrids. So in some cases, we are on both platforms, both ICE and EVs, for example, on Seating. But that dynamic, we have to see how it goes. But on 2027, looking out, I would still say the targets that we have provided in terms of the megatrend areas, we feel comfortable that we are still on track.
Mark Delaney: Thank you.
Operator: Our next question is from the line of Tom Narayan with RBC. Please go ahead.
Tom Narayan: Thanks for taking the questions. A couple of little housekeeping one. Slide 31, that’s the segment outlook or guidance for 2024. Seating top line is coming down in ’24. Just I’m sure — I think you may be explained that, apologies if I missed just curious what’s going on there. Then on complete vehicle, thanks, Pat, for talking about the G-Class repricing, that’s explaining the margins coming down despite top line, your revenue going up — are there any other things we should be aware of explaining that dynamic in ’24 for complete vehicle? Thanks.
Patrick McCann: Good morning, Tom. I think on the seat, let’s go through it firstly. So if you look at the Seating piece, the volume decline is effectively mix. We have — the way a seating business works is you have dedicated jet facilities. And one of our programs in North America, the volumes from the customer is down on a year-over-year basis. That’s the primary driver in the seating space. On the Magna Steyr piece or the complete vehicle piece, the volume is up, as I mentioned, because of the G Wagon primarily. And then within there, there’s also a little bit of — that’s the majority of the reduction. But we also have — we had some commercial benefits in 2023 that we don’t expect to recur. And there’s a little bit of amortization related to some of the warrants or some of the engineering on the Fisker program that that’s rolling off.
