Magna International Inc Q2 FY2023 Earnings Call

Greetings and welcome to the Q2 2023 results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference, you need to reach an operator, please press star, zero. As a reminder, this conference is being recorded Friday, August 4, 2023. I would now like to turn the conference over to Louis Tonelli, Vice President, Investor Relations. Please go ahead.

Thanks. Hello everyone, and welcome to our conference call covering our second quarter 2023. Joining me today are Swamy Kotagiri and Pat McCann. Yesterday, our board of directors met and approved our financial results for the second quarter of ’23 as well as our ’23 outlook, our updated ’23 outlook. 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 the presentation that relates to our commentary today. With that, I’ll pass it over to Swamy.

Thank you, Louis. Good morning everyone. I appreciate you joining our call today, and I’m happy to kick off today’s call with an update on our progress, and following a financial update from Pat, I look forward to answering your questions. Before diving into the details, let me walk you through some key highlights. We successfully completed the acquisition of Veoneer Active Safety during the second quarter, solidifying our position as a global leader in active safety. There is a lot of excitement and energy around Magna as a result of this acquisition. Our organic sales grew by 17% year-over-year, surpassing the rate of production by 5% excluding completed vehicles and 3% including completed vehicles. Our second quarter showcased strong Q2 operating performance with high organic sales contributing to robust earnings. These results represent a significant improvement both year-over-year and compared to the first quarter of this year. We have raised our 2023 sales, adjusted EBIT margin, and adjusted net income outlook ranges for 2023. This upward revision in our EBIT margin range demonstrates solid operating performance even with the inclusion of Veoneer Active Safety, which is launching significant new business over the next 18 months. We are highly committed to executing our strategy and remain confident in our ability to achieve our long-term growth and margin outlook, and we continue to win business across all product areas which supports our go-forward strategies. It is important to note that the industry has seen some positive developments, including reduced supply constraints, stronger and more stable production schedules, and resilient order sales in a number of markets; however, the global economy continues to face some interlocking challenges, including continuing elevated inflation, higher interest rates, geopolitical risks, and slowing economic growth. These challenges are impacting our entire industry. In North America, there are concerns about upcoming OEM labor negotiations when union contracts expire in September, which may have short-term impacts on production. Rest assured, efforts to contain costs and improve our margins remain a top priority for us. This is being achieved through ongoing operational improvement initiatives, recovering costs from our customers, and executing flawless launches across Magna. Earlier this year, we estimated about $100 million of incremental input costs net of recoveries over 2022. Based on our initiatives together with improvements in market prices for energy and certain commodities, we now expect to mitigate about half of the incremental net input cost. We also continue to take proactive measures in various other areas. We have executed or initiated consolidation, restructuring and cost containment activities at different levels across the company. We are engaged in ongoing commercial negotiations with our customers to recover costs, transitioning to various index programs and address pricing on challenging programs. At the same time, we continue to intensify our efforts in areas that are core to our daily business, including hedging activities and our enterprise-wide global purchasing initiative. Automation installations in smart factory initiatives with a digital ecosystem implementation are also well underway. Lastly, I’m pleased to report that our underperforming European BES facility is tracking to our expectations supported by a number of these initiatives. All of these efforts are yielding positive results, enabling us to generate strong earnings on our sales growth and reinforcing our confidence in delivering on our expectations for margin expansion in the coming years. In early June, we successfully completed the Veoneer Active Safety transaction, and I would like to thank all those involved for their efforts. This transaction has expanded our active safety portfolio by incorporating complementary products, customers, geographies, engineering and software resources. The response from both the acquired business and our existing active safety unit has been overwhelmingly positive. There is a great deal of excitement surrounding the immense potential of the combined business. The business is on track with expectations as outlined when we announced the acquisition, including being neutral to earnings before purchase price amortization in 2024. We hit the ground running and are fully dedicated to ensuring a smooth integration and realizing the $70 million in synergies identified at the outset. We are excited to share more insights about our combined active safety business and to update our 2025 outlook to reflect the acquisition during our upcoming virtual investor event in early September. We continue to execute our strategy aimed at accelerating our growth in mega trend areas. Recently, we were awarded the battery enclosure for Ford’s next generation F-150 Lightning EV pickup truck. To support this exciting new program, we are adding capacity in Tennessee. This award further strengthens our competitive position in the rapidly growing market for battery enclosures. In power train electrification, we are actively supporting our customers with a combination of components and systems. We are proud to have recently won an award for our first-to-market modular standalone decoupling unit for electric vehicles. The innovative unit contributes to an increase in electric drive range by up to 9%. We have already begun launching this product on multiple vehicles of a German-based premium OEM. We recently announced a long-term supply agreement with Onsemi. This agreement allows Magna to integrate silicon carbide-based technology into our future e-drive systems. The advanced technology will enhance our ability to deliver better cooling performance as well as faster acceleration and charging rates, which contribute to improved efficiency and increased EV range. These activities highlight our commitment to driving innovation and positioning ourselves as a leader in the rapidly evolving field of electric mobility. Our success in winning business across all product lines continues to drive growth. In addition to securing the contract for the battery enclosure, we were pleased to announce that we have also recently been awarded the frame and seats for the next generation F-150 Lightning. The seating award represents yet another complete seat program for pickups in North America following our previous seat award for GM’s pickup trucks to be produced at Lake Orion. We were also recently awarded the replacement vehicle assembly business for the iconic Mercedes Benz G-class. This award allows us to maintain our 40-plus year history as the exclusive producer of this off-road vehicle. We produced over 45,000 G-class vehicles in our Graz, Austria facility in 2022, bringing our lifetime total to over half a million. The next generation G-class is expected to launch in 2024 and continue to run towards the end of the decade. We were awarded significant new fascia business on multiple programs from a Europe-based global OEM. We will supply the OEM’s assembly plant in North America from an existing exteriors facility beginning in 2026. With that, I’ll pass the call over to Pat.

Thanks Swamy, and good morning everyone. As Swamy indicated, we delivered strong second quarter earnings and free cash flow both above our expectations. Now comparing the second quarter of 2023 to 2022, consolidated sales were $11 billion, up 17% compared to a 15% increase in global light vehicle production. EBIT was $603 million and EBIT margin increased 170 basis points to 5.5% and was also up 140 basis points from the first quarter of 2023. Adjusted EPS came in at $1.50, up 81% year-over-year, and free cash flow used in the quarter was $7 million compared to $52 million generated in the second quarter of 2022, in part reflecting our higher capital spend to support record program awards in 2022. During the quarter, we paid dividends of $129 million and in addition to raising our sales outlook, we increased our adjusted EBIT margin and earnings outlook. Let me take you through some of the details. North American, European and Chinese light vehicle production were up 14%, 13%, and 21% respectively, netting to a 15% increase in global production. Our consolidated sales were $11 billion, up 17% over the second quarter of 2022. On an organic basis, our sales also increased 17% year-over-year for 3% growth over market or 5% growth over market excluding complete vehicles. The sales increase was primarily due to higher global vehicle production and complete vehicle assembly sales, the launch of new programs, price increases to recover certain higher input costs, and the acquisition of Veoneer Active Safety on June 1, net of divestitures. These were partially offset by the impact of foreign currency translation and contractual customer price give-backs. Adjusted EBIT was $603 million and adjusted EBIT margin was 5.5% compared to 3.8% in Q2 2022. Our focus on operational excellence and performance on cost initiatives helped drive strong earnings on higher sales. This was partially offset by the impact of the acquisition of Veoneer Active Safety. Adjusted EBIT margin was also positively impacted by about 25 basis points of net operational items, including productivity and efficiency improvements at certain facilities and higher tooling contribution, partially offset by higher program related engineering spending and launch costs, and higher equity income which benefited margins by about 10 basis points. EBIT margin was negatively impacted by higher net input costs, primarily lower scrap prices and higher labor costs, partially offset by lower costs for energy, commodities and freight, which combined to about 45 basis points, and non-recurring items which subtracted about 5 basis points. Interest expense increased primarily reflecting the senior notes issued in the first quarter, increased borrowings and higher interest rates, partially offset by higher interest income. Our adjusted effective income tax rate came in at 21.8%, largely in line with our 2023 expectations but lower than Q2 of last year, and adjusted net income attributable to Magna was $430 million, up 77% over the second quarter of 2022, reflecting the higher EBIT and lower tax rate partially offset by higher interest expense and minority interest. Adjusted diluted EPS was $1.50, up 81% compared to Q2 of last year. The increase is a result of higher net income and fewer shares outstanding. The reduced number of shares outstanding primarily reflects the impact of share repurchases during and subsequent to the second quarter of 2022. Turning to a review of our cash flows and investment activities, in the second quarter of 2023, we generated $879 million in cash from operations before changes in working capital. We invested $332 million in working capital, primarily reflecting the higher sales in the second quarter of 2023. Investment activities in the quarter included $502 million for fixed assets and $96 million for investments, other assets and intangibles. The $502 million capex was higher than $329 million in Q2 of last year to support our record program awards in 2022. Overall, we used free cash flow of $7 million in Q2, better than we had anticipated. We also acquired Veoneer Active Safety for $1.48 billion and paid $129 million in dividends in the quarter. Our balance sheet continues to be strong with major credit rating agencies recently reaffirming our ratings. At the end of the second quarter, we had over $4.6 billion in liquidity, including about $1.3 billion in cash. Currently our adjusted debt to adjusted EBITDA ratio is 2.19 times. Excluding approximately $400 million in cash we are holding to pay down our euro debt set to mature later this year, our ratio would be 2.08. These ratios are tracking better than our previous expectations as a result of our improved operating results. We anticipate a reduction in our leverage ratio by the end of this year and a further decline through 2024. Next, I will cover our updated outlook, which incorporates slightly higher than expected vehicle production in both North America and Europe, mainly as a result of better production in Q2. Our assumption for production in China is unchanged from our previous outlook. We also assume exchange rates in our outlook will approximate current rates. We now expect a slightly stronger euro and slightly lower Canadian dollar and renminbi for 2023, relative to our previous outlook. We have increased our expected sales range largely reflecting the acquisition of Veoneer Active Safety, higher North American and European production in Q2, as well as the higher euro. As a result of our strong performance so far in 2023 and expectations for continued operational execution partially offset by higher costs to launch new programs, we have also increased our adjusted EBIT margin range. This is despite the short term 20 basis point impact from the Veoneer Active Safety acquisition. We are increasing our equity income range mainly reflecting lower spend and expected commercial items. As a result of increasing the ranges for our sales and adjusted EBIT margin, we are also raising our range for adjusted net income attributable to Magna. Our capital spending outlook has increased to reflect the Veoneer acquisition in line with our previous expectations. Our interest expense and tax rate remain unchanged from our previous outlook. In addition, free cash flow expectations are unchanged, even after incorporating Veoneer Active Safety for the last seven months of 2023. Note that beginning in Q3, Magna’s adjusted EBIT will exclude the amortization of acquired intangibles, the most significant of which is associated with the Veoneer Active Safety acquisition. In summary, we are pleased with our strong operating performance in the second quarter. Once again we outgrew our end markets by 3% on a consolidated basis and 5% excluding complete vehicles. We continue to win new business across our portfolio, supporting our go-forward strategy and, largely as a result of our continued strong execution, we are raising our earnings outlook for the year. Thanks for your attention. We’d be happy to answer your questions.

Thank you. Our first question comes from John Murphy with Bank of America. Please go ahead with your question.

Good morning everyone and thank you for your time. My first question is about the quarter. We saw significant volume increases compared to last year, but there was also an improvement in schedule stability, which allowed for better planning. Swamy, while the growth in volume is crucial, how significant was the stabilization in schedules and how should we view that as we move forward with the business?

Good morning John. For sure, both of them, but I think if I had to prioritize, if you look at all the initiatives that we’ve been talking about, they play a bigger role in getting the flow-through that we would expect. But definitely the stabilization of production schedules is what helps those efforts in a big way, right, to get to the bottom line and get the intended effect of all the activities that we are going through. The big variable would be the stable production. Obviously the increase in the high volumes helped, but the important thing is once you get the higher volumes, can I get the flow-through the way we expect, so definitely it helped both of them this time.

I have a follow-up question regarding the battery enclosure business for the F-150 Lightning. It's positive that you're also acquiring the frame and seats, but I'm curious about the relationship between the frame and the battery enclosure. How connected was the bidding process for these components? To what extent does the battery enclosure contribute to the overall structure of the truck, and does this position you favorably for future opportunities with other trucks, potentially including other non-unibody structures?

John, I’ll answer the question from a Magna perspective, and we talked about highly integrated systems and the value that Magna brings when we look at not individual components but more how we bring things together, and I think this plays a role. I won’t comment specifically on the architecture of this vehicle because I don’t think it would be right for me at this point, but that expertise of knowing the frame, knowing the body enclosures and the whole vehicle definitely comes into play. As we look forward, we see in some cases, like you talked about, a framed vehicle with a separate enclosure today, but as you go to the next iteration, there is definitely a thought process of how you can get the synergies for structural performance for safety and efficiency and so on. So us being in the program now on actually multiple truck programs, I think definitely gives us a big advantage in not only addressing what’s needed today but taking this product line and evolving into the future.

If I could sneak just one last one in, commercial discussions with your automaker customers seem to be a little bit more amicable and conciliatory than they have been in the past. Is that a correct interpretation, and has something changed here where they are partnering a lot more on cost sharing, particularly as costs are inflating, or is it more just more of the same and you guys are just doing a better job with these discussions?

It’s a challenging situation, John, but I believe we have experienced a tough six months. The reactions and interactions have been mixed, but I can assure you we are fully committed to it. This involves not just one person but a whole team collaborating across finance, sales, commercial, and operations. The entire organization is focused on this issue. I can’t fully capture the amount of effort that goes into this in just a few sentences. However, I can say there is a willingness to engage in discussions in various formats. Some of these discussions are tougher than others, but they are essential for us. While the conversations may be challenging, I would say they are reasonable.

Thank you. Our next question comes from the line of Tamy Chen with BMO Capital Markets. Please proceed with your question.

Hi, good morning. Thanks for the question. First, wanted to talk about Veoneer. I saw you’ve given the impact it had on your guidance. Could you just talk a little bit more about how you expect that to trend through the year, and you’re expecting it to breakeven before the incremental amortization next year. Could you just remind us the steps or the path for the business to get to that next year?

Good morning Tamy. I’ll give you a few key points and Patrick can jump in. As we said, we closed the transaction. Happy to say that we hit the ground running on the integration efforts, and I think I could summarize by saying that we are comfortable with what we talked about when we did the acquisition announcement. Some of the facts that we talked about at that time, 2023 sales about a billion dollars, and we said it would have a 20 basis point impact on consolidated EBIT margin. Capex was roughly around $100 million. EBITDA positive in 2023. We expect the $70 million in synergies by 2025 - I think we are tracking very well and there could be tailwinds going forward. EBIT neutral in 2024 ex-PPA, and a little bit more color on 2025 impacts, we should be able to do that in our virtual investor day update coming up in September.

Okay. Can you talk specifically, though, about next year, the business going to EBIT neutral from now being a drag? Can you just outline some of the steps to get there?

Good morning Tamy, and congratulations on your new role. When you think about the Veoneer business, it’s quite similar to our existing electronics business, and they’re experiencing rapid growth, so really the driver of what’s happening is a combination of two things. One is a lot of their launch costs are being incurred this year and they’re going to continue through next year, but what’s happening is as that business launches, it’s driving a lot of contribution margin, and that’s going to benefit as the volumes ramp. To be honest with you, that’s really the inflection point we’re seeing in their business, and it’s similar to what we’re seeing in our business and that’s what’s going to drive the dollar growth and the margin improvement.

Thank you for the clarification. I’d like to ask about the strong performance in your Cosma business, particularly the EBIT margin exceeding 8%, which we haven't observed since early 2021. You've highlighted various positive factors this quarter, but could you elaborate on what specifically propelled the strong performance and the sequential growth in Cosma? Additionally, there was an underperforming plant that you mentioned earlier. Could you provide more detail on that and whether you have largely overcome that challenge? Thank you.

Tamy, from a Cosma perspective, like you said, we’ve seen those types of numbers before, and we discussed the production stability, having the volumes coming back up, ticking back up, and all the initiatives in combination, it’s really good execution on higher sales is one, and kind of operational improvement in a couple of facilities. You touched on the BES facility that we had issues with, and it’s tracking. The predominant factor, as I discussed previously, was the efficiency hit that we were having and therefore had to outsource capacity, and so I’m happy to say now that we improved our efficiency, so the capacity opens up, and we are able to bring back work, which obviously helps. I would say it’s on track and continuing to make progress as we had discussed towards the end of 2024. One other thing would be comparing to 2022 Q2, it would be factors from Russia that are not there, and some of it is also commercial resolutions in the quarter, including retro from that goes back into the previous part of the year, but also want to mention that there is some benefit going forward on a run-rate perspective. I would say those are the combination of things that led to the expected strong performance, just in BES but specifically in Cosma.

And Tamy, you mentioned Cosma, but yes, it’s all of BES. I think a chunk of it is Cosma, but we have our exteriors business in there as well.

And there were some commercial items. Tamy, when you think about where we’re pushing for recoveries, we’re pushing for commercial recoveries as well, and when we talk commercials, it’s cancellation claims, low volume claims, so some of that benefit did come through in the quarter, and part of it was retro, as Swamy mentioned.

Okay, got it. Thank you.

Thank you. Our next question comes from the line of Chris McNally with Evercore. Please proceed with your question.

Thanks so much, team. Just wanted to follow up on the last set of questions on body. If we look at the implied second half versus Q2, where you put up the impressive margins, was there any particular price that was taken in Q2 that was retroactive? Some of the suppliers are talking about looking at first half margins, for example for divisions, because of the timing of some of these price recoveries, and then as a follow-up, how do we think about pros and cons or headwinds-tailwinds for body in the second half?

Good morning, Chris, or good afternoon to you. You're absolutely right. When considering the commercial items and the inflation recoveries, some of these negotiations throughout the year end up being retroactive. Therefore, there are some retro recoveries in the second quarter related to the first quarter and a bit from 2022, but mainly, it concerns the first quarter as we move ahead. It's reasonable to say that our margin in the BES segment will peak in the second quarter before normalizing within the guidance ranges during the second half of the year. However, I want to emphasize that while there is a commercial aspect, the real driving force here is the increase in volumes and the execution of that volume growth, as that is what is improving performance.

And keep in mind, H2 versus H1, we do see volumes down, so that’s just regular seasonality, that volumes and sales would be expected to be down.

No, that makes sense. One of the things in the analyst community we’re dealing with is the suppliers are being appropriately conservative, but basically by your implied production, you have the second half down compared to the first half, while forecasters have slightly up, so that makes sense. If we focus on margins in seating, it looks like it’s starting to turn a corner, and seating has been a persistent low margin area. You had some of the BMW business that came on with different margin characteristics. Are we turning a corner, and do the European volumes that are improving actually start to really help here, which have been a drag for several years?

Hi, good morning Chris, or good afternoon, as Pat said. I think we talked about the mix issue that they have had in seating, right, that was disproportionately impacting us, and as the volumes are coming back and the mix is becoming more normalized than lopsided, we are starting to see those effects come through. But I also have to give a lot of credit to the seating team on how they’re being part of this overall initiative that we are looking at and starting to see the impact of that, whether it’s some of the digitization efforts, some of just block and tackle type things that we’re going through. We also talked about some of the wins in the truck segment in North America and some actual discussions on existing non-performing programs. It’s a combination of all of this that we are seeing the effect, just not today but I think we are very optimistic about what we could see in the coming years in seating.

Okay, great. I’ll hold back on the ADAS and the radar questions. Look forward to the event in September. Thanks so much.

Thank you.

Thank you. Our next question comes from the line of Mark Delaney with Goldman Sachs. Please proceed with your question.

Good morning. Thank you very much for taking my questions. I believe last year, Magna’s mega trend revenue was about a billion, and I think you guided it to approximately double this year and then to reach about $4 billion in 2025, excluding Veoneer Active Safety. Given some of the volatility that’s been happening with some of the EV plans from certain OEMs, I’m curious if you could give us an update about how you’re tracking in those mega trend areas relative to the prior targets.

Good morning Mark. I would say to answer your question, looking at what we know today obviously in terms of take rates and so on and so forth, we are tracking to what we had talked about. You mentioned the numbers - it’s roughly about $4 billion in 2025, right, but as you said, it’s very early days of electrification. I think we all know that it’s a secular trend for sure, and it’s here to stay, but the real trick is in predicting the trajectory. That’s something that we all have to wait and see. We’re taking all the tools in the toolbox to look at how can we have that flexibility and how can we pivot, how can we look at different programs and so on and so forth. But overall, whether it’s electrification or ADAS, I think we are tracking to the numbers that we talked about.

That’s helpful. Then in terms of the margin improvement opportunities, you talked a little bit around commercial negotiations already. Slide 9, though, mentions re-pricing underperforming programs as one of the margin opportunities, so I just wanted to understand that dynamic specifically if possible and to have a better sense of how broad-based these underperforming programs are. Is it isolated to a few or is that a wider initiative, and any color you can share on your progress and how likely you think it is that you’ll be able to restructure some of those programs? Thanks.

Mark, I wouldn’t call it wider. It’s actually very, call it a granular look, which is a normal process. It’s very targeted, very granular, very deliberate. We are looking at programs as they come towards the end of a program, right, end of production cycle. There are some where there is replacement coming through, there are some line extensions that come through. We look at all of these opportunities, and sometimes it changes scope on the project. We are looking at everything out there to see how do we effectively re-price and get the economics to where they really need to, which meet our financial hurdles, and I can definitely say we have had success in some of these cases and some are still ongoing discussions.

Thank you, I’ll turn it over.

Thank you. Our next question comes from the line of Tom Narayan with RBC. Please proceed with your question.

Hi guys, thanks for taking the questions. First one is could you remind us what your D3 U.S. exposure is? Just asking, it may help us understand maybe how we should think about potential strike locations.

I would estimate that approximately 75% of our business in North America falls within that area. We have shared this information previously, but I don't have the specific figure at hand right now.

Okay, and any further information on that?

North American business.

The North American business.

Any breakout of the three OEMs?

I can get that for you, Tom. I don’t have it at my fingertips.

Okay, no worries. Then the other one is we’ve been hearing about some EV slowdown chatter, specifically with legacy North American OEMs. It’s coming up in a lot of these supplier calls. Just curious if you’re seeing this or if this is impacting your EV business more near term, or if you’re seeing anything there.

Yes Tom, good morning. This is Swamy. The EV business is still in its early stages and just starting to take off. With around 2 million vehicles, it's more about how we position ourselves with the right programs and approach each one thoughtfully. That's what's important. If you look back two or three years, our tone was different, and today it's evolved. We need to adopt a calmer strategy, and as I’ve mentioned, we believe at Magna that this trend is here to stay. Our focus is on managing the transition effectively.

Okay, thanks. Then lastly, if I look at the two segments I think were pretty interesting in Q2, B&S very strong, and then P&V maybe a little bit lighter than maybe some folks expected, but then you raised sales forecasts for both. I know things can be kind of lumpy from quarter to quarter. Just curious about Q1 sustainability in these two segments in H2 - clearly you’re expecting an improvement in P&V, and how should we think about these two segments Q2 versus H2? Thanks.

Yes, I think we touched on some of the factors that contributed to the strong BES contribution, right, and we kind of see that going forward. There is no reason for us to think any different, given there is no other major disruption or some industry-wide thing. We are starting to see, like I said, the efforts on all the initiatives that we have in place and stability in production and increasing volumes. The P&V, as you mentioned, really the net input costs were a headwind year-over-year in the first half. The acquisition of Veoneer Active Safety negatively impacted Q2, and we talked about a few things in the first quarter which was a warranty item, there was net negative commercial items in Q2, and some higher engineering costs that were associated with the launch of the program. Operationally it’s good, all of this, call it one-timers were lumped in the first half of the year, so we see going forward, if you exclude those things, a better run rate.

Yes, excluding those items, the pull-through in P&V for the quarter is actually quite good.

Got it, okay. Thanks a lot.

Thank you. Our next question comes from the line of Colin Langan with Wells Fargo. Please proceed with your question.

Great, thanks for taking my questions. Just at a high level if I look at the guidance first half to second half, you have sales down 600, and that’s with Veoneer, which I assume means it’s over a billion in first half-second half, but EBIT up, so what are the major puts and takes that get that up? I assume also that the guidance doesn’t include any sort of factor for UAW disruption.

Morning Colin. Regarding your question about the variance between H1 and H2, specifically about Magna consolidated results, you're correct that we haven't accounted for any potential UAW disruption. Swamy addressed many of the points, but to summarize our outlook for H1 compared to H2, we anticipate that recoveries will be stronger in the second half than in the first half, which aligns with our initial projections for the year. Additionally, there were specific events in the first half that are not expected to reverse; for instance, Swamy mentioned the warranty issue we faced in Q1, along with some commercial settlements from the second quarter that positively affected us, with some impact retroactive to Q1 and a portion into Q2. Moving forward, we continue to see stabilization in production schedules, which benefits us. However, it's important to emphasize that operational improvements require time to take effect. When we implement strategies, it takes a while to roll them out across our divisions, and we experience acceleration as we progress. For example, Swamy highlighted our improvements in the underperforming division in Germany, which reflects the sequential progress from H1 to H2. Moreover, the acquisition of Veoneer will contribute about a billion dollars in sales in the second half, although it will impact margins negatively by approximately 20 basis points, which is a downside.

Got it. Any color on the change in adjusted EBIT now excluding amortization? How big of a factor will that be, and then I wasn’t really sure - I think you didn’t include it as an adjustment in Q1/Q2, but for the rest of the year it will be an adjustment, so does Q1/Q2 eventually get restated to exclude amortization too, and will that be driving some of the comparisons we’re looking at?

We’re still working through the impacts and it will take a little bit of time to refine that calculation, but our estimate on an annual basis is about $60 million, so about 30 in the back half of the year.

And Colin, that’s preliminary. That’s part of the reason we’re excluding it at this point. But just the basis for why we’ve done it, you’re correct - going forward, we’re going to exclude it, and what we’re excluding specifically is acquired purchased intangibles, the amortization of such amounts. It’s not regular increments, and the reason we’re doing it is effectively we’re trying to improve how we manage our businesses. We have an existing electronics business roughly the same size as the acquired entity, and we want to evaluate their performance and execution on an apples-to-apples basis, so that’s why we’ve made the decision to exclude it. The other factor was, from an investor's perspective, if I were in your position, I would want to be able to evaluate how Magna’s electronics business is performing versus our peers, and we did an analysis to ensure we’re consistent with our peer group in that regard.

Just one quick follow-up - is the $60 million estimate only for Veoneer? I think the 10-K mentioned there would be around $90 million of amortization this year, so does that also need to be considered to ensure I'm comparing apples to apples?

We’re discussing the amortization of acquired intangibles. I'm not sure what the 90 you mentioned refers to. If you're looking at the cash flow statement, there are other amounts included in that 90.

But the approximately $60 million is Veoneer Active Safety.

Okay, so that will be the full year charge going forward. $60 million will be pulled out of the special items.

Approximately, once we’ve finalized the purchase accounting.

Okay. All right, thanks for taking my questions.

Thank you. Our next question comes from the line of Dan Levy with Barclays. Please proceed with your question.

Hi, good morning. Thanks for taking the questions. First, wanted to go back to this theme of first half to second half, and specifically wanted to focus on complete vehicles, where I think your guidance is implying the business to be almost breakeven, very slightly positive, a significant deceleration versus the first half. Maybe you can just talk about some of the puts and takes on what’s happening in the complete vehicles in the second half, and does this change the way we should think about the out year forecast for complete vehicles?

Good morning, Dan. I’m taking a moment to respond. When considering our complete vehicles business, several factors come into play. One factor is the specific products being produced at any given time. In the first half of the year, we were still manufacturing the BMW 5 Series, which has now concluded, and we are currently in the process of launching the Fisker program. More generally, in a European business like Steyr, there's a notable difference in profitability between the first and second halves of the year. We haven't altered our expectations for the complete vehicles business for the entire year. While we experienced some positive engineering results in the first half, those were already accounted for, and as we move into the second half, we are still aiming for our anticipated gross margin. It’s a lengthy response, but I don’t foresee anything unusual for the second half that we need to consider. It’s simply about launches and planned downtime.

I mean, we started the year at 1% to 2%. We’re at 1.6% to 2.1%, so all in we’re actually increasing our outlook in complete vehicles.

I understand that we typically avoid viewing the quarter in isolation due to seasonality. However, regarding the second half, can you clarify if it is primarily influenced by the launch of new programs, or are there timing issues related to input costs?

No, it’s related. If you think about what happened, it’s primarily the launch, the planned downtime that you have through the summer, and then you have another downtime through the December period.

And we’ve expected that throughout the year.

Which is every single year.

Okay, all right, so that’s an expected thing we should extrapolate going forward?

Absolutely.

Okay, great. Thank you. Second, Swamy, a question on your vertical integration efforts in EVs. Historically in EV, setting aside LG, you were mostly focused on the drive unit and you’d outsourced motors and inverters. Can you just talk about the supply agreement with Onsemi? Is this a foray into making your own inverters or is this just a partnership to get inverters from a third party?

Yes, I think Dan, we talked about it a little bit over time in terms of the building blocks and what are some of the key pieces to get to the full e-drive system. Even before the LG JV that you mentioned, we made inverters and we had the capacity to do that between Magna Power Train and Magna Electronics group. We’re just taking one step forward when we talked about Onsemi, just looking at whether it is silicon carbide or other technologies, just the overall power electronics strategy, how and what should we be doing. So it is just part of that overall strategy. We always had the ability to do inverters, now we’re just doing it collectively in our LG JV, so this is just further vertical integration to bring value-add into the system.

Great, thank you.

Thank you. Our next question comes from the line of James Picariello with BNP Paribas. Please proceed with your question.

Hi everyone. Could you please provide the intangibles amortization amount for legacy Magna from last year? I know it's a small figure, but I would like to have that number for reference.

Yes, we’ll have to get back to you, James, because it is immaterial. It wouldn’t be a big number. If you think fundamentally, we haven’t done an acquisition of a technology company, so we haven’t experienced this situation where you have such a significant amount of acquired technology intangibles, and that’s really what’s driving the $60 million Louis was referring to. But we can get back to you with the exact number, but it’s not material.

Understood. Then just on Veoneer, it looks like the guide shows a billion in revenue and, based on the 20 basis points of margin dilution impact, about $30 million to $35 million operating loss for the seven months. If we annualize that for Veoneer, we’d be looking at $1.7 billion in revenue and approximate $60 million operating loss. Just curious if you could bless the thinking on the annualized run rate for Veoneer here.

Yes, I think maybe there are two things to consider that you can add to it. I think when we bring all of this stuff together, there are synergies in terms of how we look at platforms, and how we look at coordinated efforts on some core projects, some purchasing initiatives, so I think it’s better, maybe in my opinion, to look at run rates going forward from the combined entity rather than look at each one separately. Hopefully we’ll be able to give some color when we talk in September, but all of this would be included when we come back, as we’re doing all bottoms-up, the business planning process and will be included when we come out and talk in 2024.

Okay, that’s helpful. Can I just slip one last one in? Louis, in the second quarter, was there any retroactive material recovery tied to the first quarter in the second quarter numbers, particularly in the body exteriors and structure segment? Thanks.

Yes, so I think we talked about this earlier, James, so I’m not going to repeat everything, but the short answer is yes.

Okay, you just can’t quantify it?

No.

Thank you. Our next question comes from the line of Brian Morrison with TD Securities. Please proceed with your question.

Good morning. I have a housekeeping question as well. Pat or Swamy, in the prepared comments on net inflationary costs, you said something to the tune of an incremental $100 million for 2023 and you’d recover half of that. Can you just clarify what the net exposure is now? I know you started the year at $680 million, you made progress in Q1, you did an update on scrap and energy, but start with the 680 and update what’s baked into your new guidance and maybe break down what’s labor and what’s commodity, please. I think labor was about $200 million of your previous forecast.

I think the 680, let me break it down, was the 530 coming from 2022, incremental 100 plus the 50 in scrap. That’s how we came to the 680. We’re looking at the movement in some of the commodities, energy and all the other initiatives that we are working through, we said that 100 is now 50 and the scrap, which was 50, is now 25. I don’t know if we can get into the details of how much is labor and how much is the breakdown. It gets combined in terms of all the efforts that I talked about, so it’s very difficult to exactly quantify how much and where. We can say that labor is the sticky part and we continue to look at optimizing that going forward, not just from a restructuring today perspective but as we are launching this business into ’24 and ’25, how do we manage it. We have to have so much hiring, so the question is how do you level or normalize what we have now and look at optimizing the hiring, but at the same time protect the programs and the launches, so it’s a little bit of a complex set of variables that we are going through. I don’t know, Pat, if you want to add any color to that?

No, I have nothing to add. Thank you.

That’s helpful. I just want to clarify this 30 basis points of margin improvement excluding Veoneer; how much of that is due to inflationary impact? It seems like that could be about 10 basis points, is that correct?

Sorry, I’m reaching for a calculator here.

It’s $75 million, right?

Yes, it’s probably 10 to 13 basis points, Brian.

Thank you, Pat. Regarding the underperforming BES facility where progress is being made, you mentioned tracking around half of the 35 basis points, which corresponds to about a $140 million loss from last year. How much of that recovery do you anticipate for this year? Is it still projected to be half, with full recovery by 2024?

That’s correct.

Great, thanks very much for your time.

Thanks Brian.

Thank you. If there are no further questions, I will now turn the call back to Swamy Kotagiri for closing remarks.

Thanks everyone for listening in today. As you heard from us, we are happy with the continued progress in the second quarter, but we are already looking ahead to keep our focus into the remaining part of the year and launching not just ’23 but ’24 and ’25 and keep the progress going. We look forward to providing an update on the progress of our strategy during our investor event next month. Hoping to see you all there. Have a great day. Thank you.

Thank you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.