Magna International Inc Q2 FY2020 Earnings Call

Greetings and welcome to the Second Quarter 2020 Results. During the presentation all participants will be in listen-only mode. After which we will conduct question and answer session. As a reminder, today’s call is being recorded Friday, August 7, 2020. Now, I would like to turn the conference over to Louis Tonelli, Vice President, Investor Relations. Please go ahead.

Thanks, Tommy. Hello, everyone and welcome to our second quarter 2020 conference call. We will have formal comments today from Don Walker, Swamy Kotagiri and Vince Galifi. Yesterday, our Board of Directors met and approved our financial results for the second quarter ended June 30, 2020. We issued a press release this morning for the quarter. You will 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. As we review financial information today, please note that all figures discussed are in U.S. dollars unless otherwise noted. We have included in the appendix reconciliations of certain key financial statement lines for Q2 2020 and Q2 2019 between reported results and results excluding unusual items. Our quarterly earnings discussion today excludes the impact of unusual items in these periods. Don will comment on restructuring we recorded in the second quarter. 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. And now, I will pass the call over to Don.

Thanks, Louis. Good morning. I hope everyone is staying safe and healthy wherever you are today. Before I start, I want to reiterate that the health and safety of our employees remains our top priority at Magna. We have been reintegrating employees back into our plants and offices using our protocols, assessment tools and guidance documents. It was a monumental exercise to plan, coordinate and implement the resources as a company and as an industry, and I believe we responded extremely well to the challenge caused by the pandemic including being a leader for other industries to follow in terms of safe and successful operational restarts. During the second quarter of 2020, our most significant markets of North America and Europe experienced year-over-year declines, both in percentage and absolute volume terms that far exceeds the worst quarters that we saw during the great financial crisis more than 10-years ago, and the worst decline that I have experienced in my 40-years in the auto industry. The industry environment has been improving off these lows, vehicle sales and production levels in our key regions were better sequentially in May and June as governments around the world started to ease lockdowns and as auto sales began to recover. Vehicle sales trends continued upward in July and we expect a significant improvement in our sales from the first half to the second half of the year. Nevertheless, the general view of the industry is that the production trend line over the next few years will be lower than previously anticipated. This prompted us to initiate and in some cases accelerate the timing of restructuring plans to right-size the business to align with our updated expectations for the midterm. Across the company we have been taking difficult but necessary actions to strengthen our business for the future. We recorded a 168 million charge in the second quarter substantially related to this restructuring. As expected for the second quarter, our sales reflected the severe production decline following 58% compared to Q2, 2019. As a consequence, we posted our first operating loss on a normalized basis since 2009. However, underlying the discouraging results are a few encouraging elements. Our detrimental margin associated with COVID-19 was about 22% reflecting our efforts to reduce and defer discretionary costs. We conserved additional cash by reducing capital spending, and we expect the actions we undertook in the quarter to lead to an improved cost structure and margins going forward. At the same time we continue to invest to secure a future and to ensure that we can successfully execute in all upcoming launches. While we remain in relatively uncertain times, we are confident that we have the balance, the leadership and the right operating structure to allow us to remain nimble and responsive to whatever the future holds in the short and long-term. Lastly, I want to comment on an important recognition from our largest customer. In late June General Motors recognized Magna with six 2019 Supplier of the Year awards, the most ever for a supplier in a single year. The Supplier of the Year awards recognize GM's best suppliers that consistently exceed expectations creating outstanding value or introduce innovations to the company. Magna won Supplier of the Year awards across our system segments for our mirrors, driveline systems, truck frames, fascias and seating systems as well as an innovation award for our freeform seat trim technology. I'm very proud of these accolades as they recognize our ability to provide solutions to the many challenges faced by our customers. With that, I will pass the call over to Swamy.

Thanks, Don. Good morning, everyone. I'm happy to report that we were able to achieve safe and orderly restarts in all of our operations around the world. Plant closures varied widely with most plants shut down for several weeks. Overall the mood and morale at our plants upon return to work has been positive. With respect to our restarts, capacity utilization in both China and North America are getting close to where we thought we would be at the beginning of the year in this timeframe. Europe is lagging behind these two regions, largely reflecting the softer vehicle demand environment compared to China and North America. While we have seen a number of delays, and a few program cancellations from our customers at this point, we don't expect these to have a significant impact on our business growth relative to the market over the next couple of years. One of the concerns we had a few months ago was the status of our supply base. We noted on our Q1 call that we were working closely with our suppliers to ensure a safe and timely restart. While we continue to track a number of suppliers, we have mitigation plans in place and to this point, have experienced no major supply base issues impacting our operations. Our operations have been able to manage the transition to a new normal. Our Smart Start Playbook has been an excellent foundation and has become standard operating procedure. The protocols put in place have been well received and adapted by our plant employees. We have been able to manage the production ramp up without significant disruption to our production efficiency. However, we are not stopping there, a team of varying backgrounds from across Magna looks ahead to develop recommendations on how operations could be adjusted to stay prepared, especially if a second wave hits or this becomes a seasonal illness. The team closely examines what may need to be done in our global operations over and above our current Playbook and incorporated these into regular operating modes and policies. We are staying prepared to keep our employees safe and protect our business. While our leadership team was addressing the short-term needs of the business, we were also looking and planning much further ahead at what our company, industry and society may need in the future. We continue to monitor ongoing trends and potential new trends. I believe Magna has the structure, people, technology building blocks, and investment strategy to remain a leader in mobility. Lastly, I want to announce that Sherif Marakby has joined Magna as Executive Vice President of Research and Development. Sherif will manage all aspects of Magna's innovation and new product development strategy and related activities. He has been in the automotive and technology industry for 30 years and comes to Magna from Ford Motor Company where he held a variety of Product Development and Engineering leadership positions. He has extensive experience in electrification, having led the full team in developing battery electric vehicles and hybrid electric vehicles. Sherif also served as President and CEO of Ford Autonomous Vehicles LLC, and was on the Board of Directors for Argo AI, Ford's self-driving technology partner. Additionally, he spent time with Hoover as Vice President of Global Vehicle Programs, leading the integration of their autonomous software into production OEM vehicles. We are really happy to have Sherif as part of our management team. I will now pass the call over to Vince.

Thank you, Swamy. And good morning, everyone. I will provide a fairly high-level summary of our quarterly results today. Rather than go through a lot of detail, including on our segment results, which you can find in our MD&A, particularly meaningful given the severe sales declines, I will spend some time addressing what our outlook implies about the second half of this year. As Don mentioned, we experienced the worst year-over-year decline in vehicle production that we can recall during the second quarter of 2020. Global vehicle production declined 42% year-over-year, but more significantly defined 70% and 59% in North America and Europe, respectively, our most important production markets. We estimate that COVID-19 related shutdowns negatively impacted our second-quarter results and sales in particular by approximately 5.5 billion and our adjusted EBIT by approximately 1.2 billion. This represents a detrimental margin of approximately 22%, reflecting strong cost control across Magna's operations. We have included in our appendix a breakdown of estimated COVID-19 related sales and detrimental margins by segment. In addition, equity income was negatively impacted by the COVID-19 related shutdowns. Our second quarter total sales were 4.3 billion, a decline of 5.8 billion or 58% from the second quarter of 2019. In addition to the COVID impacts, our sales in the second quarter of 2020 were negatively impacted by the end of production of certain programs, currency translation, which was a $76 million headwind and net customer price concessions. On an organic basis in Q2, our regional sales in North America, Europe and Asia, each outperformed vehicle production in their respective markets. However, as a result of the regional production mix, our organic sales underperformed the change in global vehicle production in the quarter. Recall that we far outperformed global production in Q1 in part due to significantly lower production in China, where Magna is relatively less represented. On a weighted basis, our organic sales slightly outperformed global production. Adjusted EBIT decreased 1.3 billion to a loss of 600 million sustainably reflecting the decline in global vehicle production due to the COVID-19 related shutdowns. Also contributing to the decline in EBIT was lower tooling contribution in the quarter compared to the second quarter of 2019, higher engineering costs in our ADAS business including retroactive social tax costs, net provisions for customer claims in the quarter and higher net warranty costs. These were partially offset by lower spending for electrification and autonomy, favorable assembly program mix and the benefit of cost-cutting initiatives in our complete vehicles segment. Our tax recovery was booked at a 16.9% income tax rate compared to 23.5% of pretax income. In the second quarter of 2019, the tax recovery was lower than our typical tax rate, primarily as a result of an increase in losses not benefited in Europe. Net loss attributable to Magna was 511 million compared to income of 509 million in Q2 of 2019 reflecting the lower EBIT, higher interest expense and the impact of the lower effective tax recovery rate. Diluted loss per share was $71 for the quarter compared to EPS of $59 last year. So the time reflects the lower net income and the negative impact of 7% fewer shares outstanding. We estimate that the lower tax recovery rate cost us about $0.15, assuming a tax rate of approximately 24.5% that we expected when we last provided an outlook in February. Now I’m going to review our cash flows and investment activities. During the second quarter of 2020 we used 1.2 billion in cash for operations, representing a 2.2 billion swing from the second quarter of 2019. 1.2 billion of the change is a result of reduced earnings due to the lower sales. 934 million as a result of an increase in non-cash working capital. You may remember from the first quarter that given the COVID related shutdowns and our corresponding sales decline, we generated cash from working capital in the quarter when we normally invest working capital through the first half of the year. We said on our Q1 calls that we expected this to reverse as we restarted production at various facilities around the world. Customer payment delays, the payout of our 2019 employee profit-sharing plan, recoverable wage subsidies and a shift from a tax payable to a tax receivable balance, which all aggregated to about 500 million together with the ramp-up of production represented most of the change in non-cash working capital in the quarter. However, we expect to recover much of our working capital investment by the end of this year. The late customer amounts were collected shortly after the second quarter. Investment activities amounted to 243 million, including 169 million in fixed assets and 72 million in investments, other assets and intangible assets. Free cash flow was negative 1.5 billion in the second quarter. In addition, we returned 216 million to shareholders in the quarter through the payment of dividends. Despite the significant use of cash in the quarter, our balance sheet remains very strong. At the end of the second quarter, our liquidity stood at 4.1 billion, including over 600 million in cash. In June, we completed an offering of 750 million of 10 years senior unsecured notes during interest at 2.45%. This debt raise provides additional financial flexibility at a very low rate at a time when debt markets were highly receptive. Our adjusted debt to adjusted EBITDA at the end of the second quarter stands at 2.35 times. As anticipated this is above our target range given the severe decline in EBITDA particularly in the second quarter. We will likely stay above the target range in the short-term but expect the ratio to normalize back in range in the second half of 2021. Yesterday, our Board approved the second quarter dividend of $0.40, reflecting our collective confidence in our liquidity and our future. Now, let me turn to our outlook, which we reestablish this quarter. As always, our outlook is based on a set of vehicle production assumptions. Compared to other years, there is a higher degree of uncertainty surrounding future production, given risks associated with consumer demand, increasing COVID-19 infection rates, supply chain or other production challenges and other factors. If actual productions vary significantly from our assumptions, our results may also vary significantly. Rather than repeat the outlook already in our press releases, I will make a few observations regarding our implied second half outlook in comparison to the second half of 2019. Vehicle production is expected to be down approximately 5% and 10% in our key markets of North America and Europe respectively. Overall, we are also expecting global vehicle production down approximately 11%. We believe our expected second half analytics stack up well, particularly given these production declines. Our total sales range implies sales at worse down 9%, and best 2%. Our EBIT percentage range implies an EBIT dollar range of about 1.05 billion to 1.25 billion, compared to 1.15 billion in the second half of 2019. And our free cash flow range for 2020 is between 200 and 400 million, implying a range of 1.3 to 1.5 billion for the second half of 2020 compared to last year's very strong second half of 1.45 billion. Lastly, comparing this outlook to our February outlook, we now expect second half detrimental margins to be under 20%. This solid outlook reflects the combined actions we are taking across our business to mitigate the impact of the current environment we are facing. Thanks for your attention this morning. We would all be pleased to answer your questions at this time.

Thank you. And we will get our first question on the line from John Murphy of Bank of America Merrill Lynch. Please go ahead.

Good morning, guys. And thanks for the outlook. It is very helpful. And my first question, Vince, is we look at this performance in the quarter, a detrimental margin of 22% was impressive, but getting to just down 20% in the second half of the year is obviously even better. And I'm just curious, as you are looking at this first, any actions that you think might be sticky as the world normalizes, which means any earnings might be a little bit better than expected as the world normalizes? And second, sort of in the same vein, we think about incremental on these upside overtime, are they going to near these new detrimental or could they potentially be higher and how would we think about incremental as sales and production actually start rising presumably in 2021?

Yes, John, it is a really good question. It is kind of difficult to answer that in isolation I think you got to consider a whole bunch of things. You know I think when you look at the restructuring actions that we took in Q2 or commenced in Q2 and they are going to wrap up by the time we get to the end of the year, most of them, I think what you are seeing in the second half of the year, is the benefit of some of those actions already impacting positively our detrimental margin. But we don't get to the true benefit of all those activities until we get into 2021. So, we will continue to see that mixed cost structure reduction helping us in 2021. You know I think if you look longer term, and you start thinking about what happens overall volumes and how fast do they grow, and in what regions and what happens to the incremental margins going forward. You know, at some point, you are going to be approaching average margins as a business grows at a significant rate. That is why I think you can just answer that question in isolation. You have got to look at all the factors, sort of what regions are you growing? How fast are you growing? What is your absolute level of growth in sales. But, I think when you look around the organization and you think about our culture, which we don't talk a lot as much as we should. Our decentralized operating system with our general managers focused on what they need to do to run their plant efficiently, what costs is required and what costs can they take out and you kind of put that all together and makes a pretty significant difference in our overall results.

Okay. That is helpful. And then just the second question, Don as you look at the environment for new contracts or the bidding environment from your customers. I'm just curious, what the pace of activity is maybe normalizing as everybody kind of working through the crisis and hopefully, getting back up and running and also thinking just about launches in the near-term for some - in your backlog. Just curious if there is anything more disruptive than sort of two to three months, delays from COVID as things were down on the launch side of earnings, sort of near-term issues or maybe even opportunities.

For the most part people worked pretty effectively through the down period. There were some delays where you couldn't get people in for physical testing. So what we are seeing a few program delays from the customers, most of them are relatively short. There has been a couple of cancellations. We are not talking about them, the customers can, none of the big programs we have got. The discussions ongoing on winning new contracts, a little bit of a delay, but not particularly. So I was pleasantly surprised that we were able to keep on top of our launches. We just went through a quarter reviews globally. Don't see any unusual spike and sort of running up against concerns on new launches. So in pretty good shape. Swami, you are probably closer than I am in certain of your area. So you got any other comments there?

No Don, I think you covered it pretty much, small delays here and there, but nothing that I would say material that would affect the business going forward or the launches that are ongoing right now.

Yes we talked about in general, the move towards electrification is pretty consistent with what we saw before. I think the timing on level two, level 2.5 continues, that is a big market spending and on the levels three, four and five have certainly slowed down when everybody was trying to conserve cash. But I think the customer still has to be awarding contracts so they can hit their launches. So not no big, huge delays there.

And keep in mind, to the extent that we have contents on the old program that gets expanded, that really mitigates the potential loss of business from launches that are delayed.

Got it. And then just lastly, real quick on acquisition opportunities. I know the leverage might be a little bit higher than your target range, but just curious what is out there, have there been any new opportunities that have availed themselves because of the stress and sort of what does the landscape look for you guys? And what are you looking at most specifically as you kind of go through the funnel of opportunities.

I don’t want to comment on anything specifically, obviously, but generally - unless there is a huge second wave that we don't anticipate, we went through a cash position I think would have been difficult to try next year in vague and as was addressed distress situation during the downtime -for the downturn. We are continuing to look at things more in technology areas where we want to add some capability. We can have the ability to, we continue to pay the dividend, we stop the buyback and we should be back to pretty healthy from a cash flow standpoint going forward. So we have the ability to move on some with we think it is expected prices - comments specifically, but we are continuing to look at pretty carefully what technologies we want to grow and where we want to be located around the world.

Good morning. Question on the detrimental margin of 22% in the quarter. As you know, there were various government subsidy programs in regions where they subsidize wages and other programs as well. Was that a meaningful amount and would that have had a positive impact on the detrimental margin or were those subsidies at Magna would have received relatively minor?

Peter, good morning, it is Vince. In terms of the amount of subsidy that we booked, particularly in Canada, probably higher than what we were anticipating. As you know, there was some progress in Canada where we were encouraged to keep people on our payroll, even though they weren't working. So, we are incurring costs that we otherwise wouldn't and had to reimburse them from the government. So, that kind of a net zero to us. So I think if you back all that out. And you look at the benefit of the government programs on our detrimental margin, it is really not significant at all. Obviously a share amount of recoveries is larger, because, as I said, inactive employees that we brought back on payroll, but didn't really have a significant impact on overall detrimental. Recall that when you start looking at the bucket of – I look at detrimental margins from an operational standpoint, then I look at the costs of inactive labor, government support. And then the other part we have got in all that is the cost of PPE in the quarter. It is kind of hard to get an exact number. We are probably of those $35 million of additional PPE costs in the quarter, some are going to be obviously, reoccurring with masking and sanitation fluid. Part of it is one time. But you kind of look at that other bucket of costs that are pretty well - of zero, Peter. The big change when I look at detrimental margin has just produced sales and cost of producing those sales, including SG&A and other related costs.

Okay. And, Vince, like you touched on this a little bit in a previous question, but like your detrimental margin was 22% in the quarter, but in your guidance, like you are guiding for detrimental margin of under 20%. So I'm just wondering why it is not the same on the way up, as on the way down or just being too precise, it is really the 22% and 20% are really the same thing?

I think about it, Peter, as it is an improvement. You remember, last quarter we talked about, kind of for the last nine-months of the year, we thought the low 20%. I think when you look at even Q1 and Q2 on reduced sales and reduced EBIT, we are running about 22% detrimental, a little higher in Q1. But I think in total about 22%. And how we came up with that number is, we looked at our outlook we gave in January, which is where we think we are going to be and we looked at the reduced sales as a result of COVID in Q1 and Q2 and the loss operating income and that is a 22%. When you go to the second half of the year, again, we are looking at the reduced sales compared to where our outlook was in January. So, sales are down because volumes are down and EBIT is down and detrimental on that is going to be less than 20%. So, if there was no change in our cost structure, that detrimental would be around 22%, because we have taken some action to right-size the business, we are seeing the benefits of that, by way of a reduced detrimental margin.

Okay. And then lastly, Vince, can you just, based on your guidance, Magna is going to be back to profitability in the second half generating good free cash flow. Can you comment on the NCIB and what your thinking is in terms of resuming the share buyback?

Yes, Peter. Yes, it is a topic of discussion at every Board Meeting in terms of capital structure and levers and kind of what we want to do with the balance sheet and opportunities we have and so on. You know from my perspective and the Boards and the rest of the Management team supportive. I still think there is some uncertainty with respect to where volumes end up for the balance of the year, we expect to generate some pretty significant amount of cash flow. I prefer just point in time to kind of step back from the buyback, let's get through this year, let's look at our business plan. Where volumes sort of shake out next year, and then we can think about starting to resume the buyback in 2021. Now, again, you know we want to get through the quarter and things look a lot different and I have a more positive view on things and our actions could change. But that is our thinking at this point in time.

Hey, morning, guys. Just to clarify on the second half guide, which is, of course, appreciated. So, the implied back half, you are looking at 650 million lower sales. I think the comment was just made that that drops through at a 20% to 22% detrimental. Also that is 150 million in loss to EBIT for the back half and then we get back to flat year-over-year driven by the structural savings. Is that a fair assessment?

Yes, so, I think if you look at the slide deck that we posted, you are looking at EBIT - the mid-range of our implied outlook is the same as 2019, because our range is 1.05 to 1.25. On overall sales, depending on where it could be about flat. So, yes, if you look into 2021 and we still need to do our business plan, what we are going to get incrementally in 2021 is the benefit of the restructuring we are doing in 2020. So that should be accretive, you know there is going to be a whole bunch of other things taking place in 2021. Yes remember some of the things we talked about at the beginning of the year, we are focusing on underperforming operations, we are expecting some contribution from that. We are expecting some contribution from reduced engineering costs on the three advanced ADAS programs that we are working on and so on. So there is a lot of moving pieces into 2021, but certainly the restructuring activities we are taking in 2020, will continue to benefit us in a bigger way in 2021.

Great. Thanks so much and great results, guys. Maybe the first question, some of the questions already been answered. If we think about some of the problems of 2019, some of the issues you had around seating, the innovative contracts, Getrag in China. Could you talk about maybe a little update about how many of those have we actually cycled through the benefit. It looks like probably on TV that you have gotten some of the fee issues back from the contract. But just maybe an update, if there is more savings or improvements to come, particularly Getrag in China, where that is a multiyear sort of recovery.

Well, I think the first thing you got to remember, Chris, is that the level of capital intensity by segments is different. So you are going to have a different detrimental and incremental as sales move around. In our commentary as well as if with the kind of gone through our MD&A. There are some items that are impacting segments that are not COVID related. If I think about our body exteriors and structures group, I would say there are probably a couple things that kind of stand out, couple things just balance each other out. But last year was a heavy launch year for this group, and there was some more tooling contribution last year and there was this year. So, that is the negative, if you look at a year-over-year basis, I'm not looking at sequentially, not at year-over-year. We did talk about some provisions for some customer claims. And we have the plus and minus every quarter, they are more significant than what they would typically be and they are sitting in our body exteriors and structures group. So, that is a negative, which is going to impact overall, detrimental margins. In our power and vision group, when I think about kind of detrimental other than COVID. We talked about social security taxes, difference in our view on consultants and some other employees or independent contractors, and we have looked at provision for social security taxes, which amounted to about $15 million in the quarter, which is reflected in our power and vision group it is our electronics group. So, that is one thing that impacted us and warranty was a little higher this quarter versus the prior year quarter. I think exceeding an equity income. What you are seeing is some continued progress on some of the underperforming operations and when we were struggling last year, an action plan was put in place, even with this volume we are seeing some improved performance, which is what we are expecting and what the team is focused on that. I think that covers some of the kind of unusual type items that are impacting detrimental, that is just the focus everyone is having on cost structures across the organization, which is having a positive impact on profitability.

Got it. Just to clarify, on the restructuring efforts, the 168 million charge in the quarter, is that something that possibly continues through the second half or is that a charge that reflects the entire effort possibly, potentially?

I think it is substantially all there. There is going to be some costs that are going to trickle into Q3 and Q4 depending on when we are going to be able to recognize them from an accounting perspective, but the bulk of it - substantially all of it has already been reflected in our accounts in Q2. Remember some of that spending is not going to take place until later, but we have been able to recognize that costs in our financials for the second quarter.

Great. Thanks for Good morning, everyone. I just want to go back to the longer term margin question. I mean, it looks like the second half guidance implies that you kind of get back to 2019 margins on a still fairly lower revenue base. And I think you mentioned additional restructuring benefits and other potential tailwinds next few year. So, as we think about the big picture, did you think the earnings power of the company has increased to this downturn that when if we do get back to your prior 2022 revenue objectives, whenever that might be that the margins could end up being higher than what you originally thought.

Yes. I don't know if Vince wants to comment on it. I guess one of the things we have been working on we are looking at world-class manufacturing is - I don't think we are going to be getting a lot higher margins on our traditional business there, pretty well where they are. As we bring new technologies to market that when we can usually get higher margins and we have been spending a lot of money in the electronics area, in the powertrain area, as well as a lot of other new products. That is where we are particularly pleased to see the number of awards we won from General Motors, because it is fairly representative of what we are offering to a lot of customers that they are recognizing innovation and execution. So margins can be affected by our cost of non-quality and getting a lot of non-value-added costs out of our Company. And we have been working really hard on that. So there is a lot of moving pieces, but I think we are making good headway on our cost manufacturing initiatives.

Yes, Itay it is Vince. I think as you assuming you get back up, when we get back to same volume and same sort of revenue couple of years given what IHS is thinking about overall global production volumes. Our mix of business, I got to believe would be different than what we thought just in January. But I sit back and think of it your question and what I saw happen in the organization is certainly right-sizing the company for what we see in the short mid-term from a cost perspective. But the relentless focus on world-class manufacturing and the time that the plants were down, I think gave us an opportunity to reflect on things a little harder, a little differently. I think there are processes and costs that we took out that probably would have come out at some point down the road, but those have been all sorts of accelerated and taken out. So I think that is an incremental, but how that kind of matched up to when revenue sort of come back. Again what our mix of businesses, what programs we got awarded, what new programs we are working on. I mean, those all come into play and I just don't have the visibility right now to venture a couple of years out.

Thank you, good morning everyone. Thanks for taking my question. I would like to drill down a little bit more on the complete vehicle two, we went from a 2.4 adjusted EBIT last year to a 4.7 this year. Revenue from the segment was down almost 50%, but you went from 43 million to 44 million on the adjusted EBIT. Can you kind of characterize for me, please, you talked a little bit about the favorable mix. You talked about the fixed cost recovery. You talked about cost reduction in the group. That 44 million on that much of a drop in revenue. Can you talk a little bit about where most of that came from? Is this something that was all cost reduction driven, and then partially the fixed costs? Or is it more of the fixed cost recovery that and a mix that drove that?

Yes, I would say that the biggest impact is going to be through this is you have got mix is probably the most significant impact on us. And that is a trim levels and types of vehicles that are being produced and the amount of contribution that we have on that. I would say followed by some of the cost saving initiatives. What is a little more challenging and I have got a summary here to try to figure this all out is. The impact of some of the fixed costs arrangements that we have with our customers. So you going to have sales coming down. And we have got fixed cost recoveries so you think margin would come down, or profit would come down more than it actually has. And that is because of the support we have under those fixed cost recovery contracts. But Richard, keep in mind, when the sale starts to go up, you also see the fact that you have a fixed cost recovery that you don't have that operating leverage. So those are the factors that are impacting us and we keep on talking about is like there is been some more engineering work that this group has been doing in particularly over the first half of this year. Margin years a big part of and working from home, and we have seen some efficiencies in the results of that. So, that all contributed to the growth and profitability and growth in margin percent and Magna Steyr in Q2 of 20% and Q2 of 2019.

Okay. Great, thank you. That is helpful. And then on the other segments on the detrimental. Pretty much good performance there across the Board everything under 30%. But seating dropped from the 30s in the first quarter of 2018 in the second quarter, and body exterior, structures stay fairly constant or in the mid-20s. But then power envision just about doubled from 15 to about 28. And I recognize that seating is more of a less capital intensive business. On a high level basis, just looking at the different segments and given the entrepreneurial spirit of the company, I mean, this seating performed better in the second quarter because of the individual plants doing more cost cutting versus the other segments, or can you kind of just go through what is the difference there between the segments that drove the kinds of performance there?

Well, I think the first thing you got to remember Richard is that the level of capital intensity by segments is different. So you are going to have a different detrimental an incremental as sales move around. In our commentary as well as if with the kind of gone through our MD&A. There are some items that are impacting segments that are not COVID related. If I think about our body exteriors and structures group, I would say there is probably a couple things that kind of stand out, couple things just balance each other out. But last year was a heavy launch year for this group, and there was some more tooling contribution last year and there was this year. So, that is the negative, if you look at an a year-over-year basis, I'm not looking at sequentially, not at year-over-year. We did talk about some provisions for some customer claims. And we have the plus and minus every quarter, they are more significant than what they would typically be and they are sitting in our body exteriors and structures group. So, that is a negative, which is going to impact overall, detrimental margins. In our power and vision group, when I think about kind of detrimental other than COVID. We talked about social security taxes, difference in our view on consultants and some other employees or independent contractors, and we have looked at provision for social security taxes, which amounted to about $15 million in the quarter, which is reflected in our power and vision group it is our electronics group. So, that is one thing that impacted us and warranty was a little higher this quarter versus the prior year quarter. I think exceeding an equity income. What you are seeing is some continued progress on some of the underperforming operations and when we were struggling last year, an action plan was put in place, even with this volume we are seeing some improved performance, which is what we are expecting and what the team is focused on that. I think that covers some of the kind of unusual type items that are impacting detrimental, that is just the focus everyone is having on cost structures across the organization, which is having a positive impact on profitability.

We are not providing details by in terms of improvements in the back half by segment, Richard. Sorry.

Thanks for squeezing me in. Guys could you just give an update on Getrag in terms of what you are seeing from the hybrid transmission product, and as we think about a lot more fully electric product coming to market, will that have some implications for customer demand on the hybrid side?

Yes, Vince. I think, talking about the NAV credits and how China is looking at it in terms of including hybrids in the credit side, I think it will be a positive influence we believe. In addition to that E-Drive and looking at DHD is going to the hybrid dual clutch transmissions and the product of the DHD in the future. We see that as a positive trend for the product line in China. When I say that for transformations, whether it is the JVs or overall in general for the product line of transmission for us.

You will recall it Michael, at our Investor Day we talked about a couple of programs in Europe on the HDT side. So it is going well.

Okay well I appreciate everybody dialing in this morning. It has been a very interesting year to say the least. And Q2 is a complicated quarter from a standpoint. But overall, I'm fairly optimistic. We have had some - continue to have good activities and good results in our innovation activities both in the product and the process for making good headway in a world-class manufacturing, reduced number of losing divisions and launch concerns. We have continued with the big priorities and the company, sustainability is a big push from the company or diversity inclusion activities. The restarts gone extremely well, we talked about the launches seemed to be going well. We have had to make some tough decisions, but that business we will be getting some payback on that. So overall, I'm really happy with the efforts and the cooperation we saw throughout the company in a very difficult time trying to keep people safe and comfortable working, also in the execution of everything we are doing. So, I'm really looking forward to seeing what the future brings in the area of new mobility, whether it is new customers or new products or new revenue models. So, thanks everybody for tuning in and hope you have a great day.

Thank you very much everyone. That does conclude the conference call for today. We thank you for participation. You may disconnect your line. Have a good day everyone and be safe.