Magna International Inc Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: John Murphy - BofA Global Research - Analyst : Just maybe a first question on the fourth quarter implied, it seems like sales on a year-over-year basis at the midpoint would be about flat and the margin or the adjusted EBIT margin, 6.4% to 6.7%, sort of in light of everything that's going on right now, those are pretty strong implied results. Just curious if there's anything rolling on as far as new business in the fourth quarter and sort of what's the sort of the confidence in what looks like a very good fourth quarter, are there more recoveries coming in? I mean, what's driving this?

Question: John Murphy - BofA Global Research - Analyst : Okay. And then just maybe a follow-up to that. Given the strength of what looks like 6.2% margins in the second half of the year and the great work you guys have done on rationalization. How do you think we should think about sort of -- I want to get into 2025, I'm sure you're not going to give exact outlook there. But Pat, as we think about sort of the walk off point for 2024, given that you're putting up what looks to be very good results in a very tough environment in the second half with the benefits of some of this restructuring, what do you think the correct walk-off point is for margins as we think forward, forget about even saying 2025 exactly, but the basis that we should be thinking of?

Question: John Murphy - BofA Global Research - Analyst : That's very helpful. And just lastly on the CapEx, is most of the pullback year on the battery enclosure and other EV spending? And I mean, how should we think about sort of that commitment to that business, I would imagine it's still pretty strong. But I mean, is there a lower capacity level that you think you might need going forward? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 12:00PM, MG.TO - Q3 2024 Magna International Inc Earnings Call

Question: John Murphy - BofA Global Research - Analyst : Maybe just one last follow-up on that. The payoff pitch on that investment is not necessarily just this next product cycle. It might be many product cycles going forward. Is that a fair statement, Swamy?

Question: Tamy Chen - BMO Capital Markets - Analyst : Pat, I wanted to ask about the starting of your buyback this quarter Q4, and it's a fairly substantial amount to for the next 12 months. It is earlier, I believe, than your previous commentary. So I just wanted to better understand what specifically moved this timeline forward. I think my prior understanding was the big hurdle was your leverage that it needed to be below the 1.5x. I see you're still at 1.93x. So can you just talk a bit about what moved the buyback timeline up quite a bit? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 12:00PM, MG.TO - Q3 2024 Magna International Inc Earnings Call

Question: Tamy Chen - BMO Capital Markets - Analyst : Got it. And just to clarify on that, you don't -- it doesn't sound -- you sound like you foresee any impact or issue to your investment grade rating to pulling back and starting -- sorry, pulling forward and starting the buybacks, no?

Question: Tamy Chen - BMO Capital Markets - Analyst : Okay. Okay. And my other question is on the Power & Vision segment, so it's good to see the margin performance this quarter. It's been a bit of a volatile segment, if I think through the quarters this year? And I'm just trying to put together all the pieces between some of your prior comments about a bit of in-sourcing in China, some OEMs reassessing the entire vehicle architecture. So can you just remind us at this point here, how you're thinking about the trajectory of the business, whether it's sales growth, the margin, anything there would be helpful.

Question: Adam Jonas - Morgan Stanley - Analyst : It's William Taken on for Adam Jonas. I'm just curious if you guys are seeing anything new, whether it's program pushouts or just volatility in this quarter, what you expect into 2025, really anything that you're seeing for 2025 that kind of help catalyze the buyback?

Question: Adam Jonas - Morgan Stanley - Analyst : Got it. That's helpful, guys. And then maybe are you seeing anything new in terms of pricing or mix on the EV side this quarter and in particular, if you're seeing OEMs push for lower pricing as we move into 2025?

Question: Dan Levy - Barclays - Analyst : I wanted to start first with just a question on the implied guidance for Complete Vehicle segment, there is a substantial step-up in the fourth quarter, both in revenue and margins. Maybe you can just give us a reminder what's going on there and the underlying dynamics as you've moved past the Fisker program?

Question: Dan Levy - Barclays - Analyst : And is there any update on filling the idled or vacant capacity?

Question: Dan Levy - Barclays - Analyst : Got it. As a follow-up, I wanted to ask about the recovery. So I understand 3Q is a nonrepeat benefit. But what is the outlook on recoveries going forward? And specifically, and then you talked to this that you've obviously incurred a fair amount of expense tooling validation expense for different programs that have been delayed, volumes coming in far below anticipated. So maybe you can just give the tone and tenor of those discussions and the potential for recovery payments down the line? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 12:00PM, MG.TO - Q3 2024 Magna International Inc Earnings Call

Question: Joseph Spak - UBS - Analyst : It's Alejandra on for Joe. Just sort of following up on the recoveries, Ford publicly talked about sort of supply reimbursements for the BEV program. I was wondering if you could sort of give us some timeline as to when you would expect sort of those recoveries. Is that sort of more of a 2025 event?

Question: Joseph Spak - UBS - Analyst : And can you give us sort of a little more color like how much you were investing for that program and what was built out already? And what's still did not get built out for that program?

Question: Joseph Spak - UBS - Analyst : Okay. And then maybe just as a follow-up. Can you just give us a little more color on what's driving higher sales quarter-over-quarter at the midpoint based on sort of your production outlook for the year, it looks like production would be down a little more. year-over-year in the fourth quarter. Just maybe some puts and takes on to higher sales in the fourth quarter.

Question: Tom Narayan - RBC Capital Markets - Analyst : A question on the buyback on financing the buyback. You mentioned you had $1.1 billion in cash balance, $3.7 billion in total liquidity, potentially more free cash flow coming from lower CapEx. And I know you have that 1.93 leverage coming down to 1.5 or 1.5, just putting all that together, in the event production comes down next year as a lot of folks -- some folks are expecting. How would you seek to finance given all of these different dynamics, would you reduce the cash balance, dip into liquidity, is your thoughts of paying down debt to get to that leverage ratio and the event EBITDA comes down next year, which a lot of suppliers are talking about. Just would love to hear how you think about the different puts and takes?

Question: Tom Narayan - RBC Capital Markets - Analyst : Okay. And the expectation on the better for cash flow that's coming from a combination of potentially lower CapEx and get better EBITDA, right, coming from your, I guess, to the market production assumption?

Question: Tom Narayan - RBC Capital Markets - Analyst : Yes, yes. Right, cost control. And obviously, I'm sure you guys are seeing a lot of the -- your suppliers in the industry. very cautious on '25. There's one OEM customer, which you guys have that's been dramatically cutting production this quarter. And potentially next year, we've heard European OEMs talking about the CO2 cliff on regulatory, which they're worried some of them are trying to shut down plants. I mean, the thinking is that in Europe, your SAAR level, so to speak, could drop to like a $14 million level instead of it used to be $16 million before the pandemic. Now that said, there is a pickup expected in EV sales to meet the CO2 requirements. So it's kind of like this double-edged sword thing, is it a net benefit if EVs recover for you guys, especially in Europe in the event there's a drop in production, presumably that's higher content per vehicle et cetera. How do you think about that kind of disaster scenario production falling off next year if EV picks up next year?

Question: Tom Narayan - RBC Capital Markets - Analyst : Got it. And if I could just sneak in one last one. BES, I know you talked about complete vehicle with the margin uplift in Q4. But it looks like the implied margin for BES for Q4 is the highest and the midpoint, I think, in the whole year. Is that coming from the -- what we were talking about earlier, the pricing with the recovery started from the OEMs? Or is there something else specific going on?

Question: James Picariello - BNP Paribas Exane - Analyst : Just on your industry volume assumption of down 2% for the full year, which largely aligns with IHS, but I assume it's informed by your customer build schedules at this point, right? So could you just provide context on what your level of visibility is for the fourth quarter because I mean there are a few other suppliers that are calling for a 4% cut to the full year, implying almost a 10% decline for this upcoming quarter. So I guess to piggyback off John's first question, how would you handicap your industry volume assumption? And what is that level of backlog? Or unique seasonal timing for Magnus programs that informs this fourth quarter assumption?

Question: James Picariello - BNP Paribas Exane - Analyst : Got it. And then just on the buybacks, and apologies if this was already answered, but with respect to your leverage target, is there a presumption or expectation to trend slightly or moderately above that for a period of time through next year, just so we could get a sense for the bandwidth of that leverage versus your buyback commitment for the next 12 months?

Question: Bruno Dossena - Wolfe Research - Analyst : I was hoping to get some more context on the free cash flow outlook, both near and longer term. So I guess, near term, you're still guiding to $700 million of free cash flow this year at the midpoint. And if my math is right, you -- year-to-date, it's roughly breakeven. So maybe first, you could help us understand the bridge to between $600 million and $800 million of free cash flow in the fourth quarter alone. And then longer term, and I think this is more of a follow-up to Tom's earlier question, but next year, we don't need an exact guide, but we know that next year, could be challenging for no other reason than you're lapping a year where your largest customers are restocking and we know that order books for European customers growing or have been softening. And so I was hoping you could quantify the factors fully in your control, like CapEx, R&D spend and potentially for the restructuring that you could do to expand free cash flow irrespective of the production outlook?

Question: Mark Delaney - Goldman Sachs - Analyst : Just one for me is following up on James' question. I'm just trying to understand Swamy, your comments around the fourth quarter implied revenue outlook. I think you said there were some developments that came out yesterday that maybe you didn't account for in the industry view, but you also described the revenue forecast as prudent. I just wanted to make sure I understood what your message is there? And maybe the revenue view is more bottom-up and based on schedule? And do you still feel confident in that? And maybe something that can impact the industry forecast, but I did want to make sure you weren't trying to say there's some risk to the revenue view to James' question. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 12:00PM, MG.TO - Q3 2024 Magna International Inc Earnings Call

Question: Colin Langan - Wells Fargo Securities, LLC - Analyst : Just wanted to follow up on the quarter-over-quarter walk from Q3 to Q4, sales are -- it looks like about a 44% contribution margin on those higher sales sequentially, which is pretty high. And on top of it, most of the -- pretty much all the growth is actually coming from CVA, which is a lower margin business. So I think you mentioned in BES, there's maybe a settlement coming that's helping. What is driving that sort of outsized underlying contribution margin? And is that sort of a Q4 rate sustainable?

Question: Colin Langan - Wells Fargo Securities, LLC - Analyst : And what is driving the sales softness in P&V?

Question: Colin Langan - Wells Fargo Securities, LLC - Analyst : Got it. And just -- I have a pie back has discussed a lot, but any framing of how we should think about meaningful? Because if I go back to 2018, 2019, you're actually doing over $1 billion a year of buybacks, which is more than your free cash flow. Is this more like $100 million, $200 million a quarter, $400 million, $500 million a quarter? How should we be modeling it as we go forward? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 12:00PM, MG.TO - Q3 2024 Magna International Inc Earnings Call

Question: Colin Langan - Wells Fargo Securities, LLC - Analyst : And 10% by when, the third line when you want to get the time?

Question: Michael Glen - Raymond James Ltd. (Canada) - Analyst : I just wanted to ask one on commercial recoveries and the visibility on commercial recoveries. Is there a scenario where if the industry turns in 2025, the OEMs come under margin pressure, is there a risk that we could see these commercial recoveries rolled back in a meaningful way?

Question: Michael Glen - Raymond James Ltd. (Canada) - Analyst : And then just on inventory levels, I know we read a lot about some concern on inventory levels, particularly across D3, are you seeing any different communication from your customers on inventory levels versus what is being written about in the media?

Question: John Murphy - BofA Global Research - Analyst : I appreciate you sneaking me in for this quick follow-up. Swami, when you talk about these recoveries in commercial sentiments in the second half of this year, really the genesis of those is a result of contracts not working out from a volume perspective, the way the OEM originally anticipated. So effectively, these are kind of hedges, and they wouldn't be occurring if business was going fairly well on those programs. So I mean, you would actually prefer the business to go well, earn the money the way you are planning as opposed to dealing with these settlements, right? Is there kind of an offset here? I just want to understand because I think there's kind of a view that these are onetime and kind of like you guys hit in the lottery. The reality there is a result of things not going right at the OEM level. Is that a fair characterization?