Magna International Inc Q3 FY2024 Earnings Call

Thank you for your patience. My name is Kayla, and I will be your conference operator today. I would like to welcome everyone to the Magna International Third Quarter 2024 Results Webcast. I will now turn the call over to Louis Tonelli, Vice President of Investor Relations. You may begin.

Thanks very much. Hello, everyone, and welcome to our conference call covering our third quarter 2024. Joining me today are Swamy Kotagiri and Pat McCann. Yesterday, our Board of Directors met and approved our financial results for the third quarter of 2024 and our updated outlook for 2024. We issued a press release this morning outlining our results. You'll find the press release, today's conference call webcast, the slide presentation to go along with the call, and our updated quarterly financial review, all in the Investor Relations section of our website at magna.com. Before we get started, just as a reminder, the discussion today may contain forward-looking information or forward-looking statements within the meaning of applicable securities legislation. Such statements involve certain risks, assumptions, and uncertainties, which may cause the company's actual or future results and performance to be materially different from those expressed or implied in these statements. Please refer to today's press release for a complete description of our safe harbor disclaimer. Please also refer to the reminder slide included in our presentation that relates to our commentary today. With that, I'll pass the call over to Swamy.

Thank you, Louis. Good morning, everyone. I appreciate you joining our call today. As always, let's jump right in. Let me highlight a few key takeaways before we get into the details of the quarter. We are mitigating industry headwinds, including lower production volumes in each of our core regions, and continue to execute with an adjusted EBIT margin of 5.8%, in line with Q3 2023, despite 4% lower global vehicle production. We expect our adjusted EBIT margin to be in the 5.4% to 5.5% range for 2024. Despite softer-than-anticipated vehicle production in North America and Europe, which has negatively impacted sales, we still expect our adjusted EBIT margin to be within our original 5.4% to 6% range from our February outlook, which highlights effective cost-saving strategies we have executed on. We continue to expect margin expansion in 2024 compared to 2023. Operational excellence activities remain on track to collectively contribute about 75 basis points to margin expansion during '24 and '25. And we are benefiting from our ongoing restructuring activities and the $90 million of reduced gross megatrend engineering spend for 2024. While we are reducing our spend, we maintain confidence in our long-term positioning and ability to reap the rewards of recent investments. We have a continued focus on strong free cash flow generation and capital discipline. We have further lowered our expected CapEx range by another $100 million for a reduction of up to $300 million for 2024, compared to our February outlook, and we are maintaining our free cash flow outlook range at $600 million to $800 million. And we are leveraging the elements within our control, further reinforcing our conviction in our growing free cash flow beyond this year. As a result of this, we are planning to restart meaningful share repurchases this quarter. We continue to focus on free cash flow generation and capital discipline to preserve our ability to return capital to shareholders, while ensuring balance sheet health. Turning to a high-level review of the numbers for the third quarter for 2024 compared to the third quarter of 2023. Consolidated sales were $10.3 billion, down 4%, mainly reflecting lower production in our key markets and the divestiture of a controlling interest in our metal forming operations in India, partially offset by new program launches. Despite the challenging production environment, including Detroit 3 North American production being down 12% in the quarter, we posted 1% sales growth over market. Adjusted EBIT was $594 million, up $17 million from Q2 2024 despite sequentially lower vehicle production in all key regions. Adjusted EPS came in at $1.28, inclusive of approximately $0.10 of net impact associated with the higher income tax rate, which Pat will cover later. And free cash flow generated in the quarter was $174 million, a strong $151 million increase from last year, reflecting continued capital discipline. Our capital discipline and allocation principles remain unchanged. We continue to maintain a strong balance sheet, ample liquidity, and high investment-grade ratings to provide flexibility to invest for the future and manage through downturns. As we continue to invest for profitable growth, we also regularly review and refine our product portfolio to ensure all business lines are aligned with our strategy to be a leading player in relevant markets and to generate value for shareholders. And, as we have for many years, we intend to continue returning capital to shareholders. Following a period of heightened investment, we are focused on returning to a more historical cadence in returning capital to shareholders. Overall, our disciplined, profitable approach to growth has served Magna and our shareholders well over the years and will remain a foundational principle going forward. At the end of Q3, we had about $3.7 billion in liquidity, including about $1.1 billion in cash. We have been reducing our adjusted debt-to-adjusted EBITDA ratio for a peak of about 2.2x in 2023. Currently, our ratio is at 1.93x and we are on a path to returning to our targeted range. When we talk about returning to a normal cadence, a look at the past dozen years provides some context to our capital allocation strategy. Overall, we believe our long-term approach to investing for future value creation and capital returns to shareholders is balanced. Over the 2013 to 2023 timeframe, we invested about $20 billion into our business, almost 90% of which has been capital spending, including for new product areas, programs, and geographies to bolster or establish strong market positions. After a more recent period of investment in battery enclosure, assembly capacity to support the ongoing transition to EVs, our CapEx as a percent of sales is on a path to more normal levels of mid-4% next year and around 4% by 2026. And over the same 2013 to 2023 period, we returned about $15 billion to shareholders in the form of dividends and share repurchases. As you can see, following a period of elevated investment in 2023-2024, we expect our capital allocation profile to normalize, starting in 2025. With our free cash flow generation this year and our confidence in further free cash flow growth beyond 2024, we are optimizing value creation by meaningfully increasing our return of capital to shareholders beyond our consistent dividend policy. Our Board approved a share repurchase plan for up to 10% of Magna's public float, or over 28 million shares. We expect to restart meaningful share repurchases this quarter. The repurchases are in addition to our ongoing quarterly dividend. We believe this capital allocation strategy provides the continued flexibility to both support future growth and further return capital to our shareholders. In summary, we are responding to the volatile operating environment and are focused on margin expansion, free cash flow generation, and increasing return of capital. With that, I'll pass the call over to Pat.

Thanks, Swamy, and good morning, everyone. As Swamy indicated, we continue to mitigate the impact of ongoing industry challenges. Comparing the third quarter of 2024 to the third quarter of 2023, consolidated sales were $10.3 billion, 4% lower than Q3 2023 and in line with a 4% decrease in global light vehicle production. On an organic basis, we posted a 1% weighted growth over market for the quarter. Adjusted EBIT was $594 million and adjusted EBIT margin was unchanged at 5.8%. Adjusted EPS came in at $1.28, down 12% year-over-year, mainly reflecting slightly lower EBIT and higher income taxes, which cost us about $0.10. The higher tax rate was largely related to non-cash foreign exchange losses, including on certain deferred tax assets that are not deductible for income tax purposes. And free cash flow generated in the quarter was $174 million, a substantial increase compared to $23 million in the third quarter of 2023. During the quarter, we paid dividends of $138 million. And with respect to our outlook, we are once again lowering our capital spending range and maintaining our expectations for 2024 free cash flow. Finally, we recognized $196 million of other income from fiscal related deferred revenue as a result of the cancellation of the manufacturing agreement this past quarter. Let me take you through some of the details. North America and China light vehicle production were each down 6% and production in Europe declined 2%, netting to a 4% decline in global production. Breaking down North American production further, while overall production in the third quarter decreased 6%, production by our Detroit-based customers declined 12%. Our consolidated sales were $10.3 billion, compared to $10.7 billion in the third quarter of 2023. On an organic basis, our sales decreased 4% year-over-year for a 1% growth over market in the third quarter despite negative production mix from lower D3 production in North America. The lower global vehicle production and the production of certain programs, the divestiture of a controlling interest in our metal forming operations in India, and normal course customer price givebacks were partially offset by the launch of new programs and increases to recover certain higher input costs. Adjusted EBIT was $594 million and adjusted EBIT margin was 5.8%, in line with Q3 2023. The EBIT percentage in the quarter reflects 75 basis points of net discrete items due to higher net favorable commercial items, including approximately 50 basis points of net unfavorable items in the third quarter of 2023, partially offset by higher net warranty costs and supply chain premiums, partially as a result of a supplier bankruptcy, and 50 basis points of net operational improvements, including operational excellence activities, partially offset by higher net input, new facility, and launch costs. These were offset by volume and other items, which collectively impacts us by about negative 90 basis points. These include reduced earnings on lower sales and lower vehicle assembly volumes, partially offset by the impact of the UAW strike in the third quarter of 2023, and negative 40 basis points related to lower equity income, largely as a result of net favorable commercial items and lower unconsolidated sales in our LG Magna joint venture, partially offset by lower launch costs. Interest expense increased $5 million, mainly due to higher interest rates on the debt refinancing during 2023 and 2024. Our adjusted effective income tax rate came in at 27.2%, significantly higher than Q3 of last year due to unfavorable foreign exchange adjustments recognized for U.S. GAAP purposes and a change in the mix of earnings. Net income was $369 million, compared to $419 million in Q3 of 2023, mainly reflecting lower adjusted EBIT and higher income tax expense. And adjusted diluted EPS was $1.28, including approximately $0.10 associated with the higher income tax rate compared to $1.46 last year. Turning to a review of our cash flows and investment activities. In the third quarter of 2024, we generated $785 million in cash from operations before changes in working capital and invested $58 million in working capital. Investment activities in the quarter included $476 million for fixed assets and a $115 million increase in investment, other assets, and intangibles. Overall, we generated free cash flow of $174 million in Q3, compared to $23 million in the third quarter of 2023, and we are maintaining our free cash flow expectations of $600 million to $800 million for 2024 despite the challenging industry environment. And we continue to return capital to shareholders, paying $138 million in dividends in the third quarter. In addition, as Swamy noted, we intend to begin repurchasing our shares this quarter, which demonstrates our confidence in our free cash flow profile and our focus on shareholder value. Next, I will cover our updated 2024 outlook, which incorporates reduced vehicle production in all key regions. We also assume exchange rates in our outlook will approximate recent rates. We now expect a slightly higher Canadian dollar, euro, and Chinese RMB for 2024 relative to our previous outlook. We are narrowing and lowering our expected sales range, reflecting lower volumes in North America and Europe, partially offset by positive foreign exchange, mainly from the higher euro. We have narrowed our adjusted EBIT margin range to 5.4% to 5.5% as we are now three-quarters of the way through 2024. Consistent with our original outlook commentary in February, customer recoveries and lower net engineering spend contributed to higher margins in Q3, compared to what we saw in the first half of the year. And they are expected to help drive margins to the highest level of the year in Q4. Our reduced equity income range largely reflects lower expected unconsolidated sales of EV components. We raised our effective income tax rate to approximately 23%, mainly due to the weak Mexican peso relative to the U.S. dollar, leading to unfavorable foreign exchange adjustments incurred for U.S. GAAP purposes. We have narrowed and lowered our adjusted net income to largely reflect lower EBIT and the higher income tax rate. We now expect capital spending to be in the $2.2 billion to $2.3 billion range. This is down another $100 million from our previous outlook, now totaling up to $300 million for the full year compared to our February outlook. This mainly reflects our continued focus on capital discipline and offsetting the impacts from a weaker vehicle production environment. And our interest expense and free cash flow expectations are unchanged from our previous outlook. To summarize the quarter, we had solid operating performance and we continue to execute despite a more challenging environment, with adjusted EBIT margin in line with Q3 of 2023 despite lower vehicle production in all key regions. We continue to be focused on margin expansion, capital discipline, and free cash flow generation. With respect to our updated 2024 outlook, we are reducing the top end of our sales range, reflecting lower expected production, projecting to be in the 5.4% to 5.5% range for adjusted EBIT margin, lowering our capital spending once again, and maintaining our free cash flow expectations for the year. We plan to restart meaningful share buybacks in Q4, as always, seeking to optimize value creation. And we continue to work to mitigate the impact of market challenges we are facing.

Our first question comes from John Murphy with Bank of America. Your line is open.

Good morning, everyone. I have a question regarding the implied results for the fourth quarter. It appears that sales, at the midpoint, would be roughly flat on a year-over-year basis, with an adjusted EBIT margin of 6.4% to 6.7%. Given the current circumstances, these results seem quite strong. I'm interested in knowing if there are any new business developments expected for the fourth quarter and how confident we are in achieving what looks to be a very positive quarter. Are we anticipating more recoveries? What factors are contributing to this outlook?

Good morning, John. I don't think there is anything significant regarding new business beyond the usual launch schedule for Q3 and possibly extending slightly into Q4. Our projections are based not only on the numbers but also on the EDIs and releases we are observing. Aside from that, nothing stands out as significant. We've always mentioned that some recoveries are expected in the latter half of the year, but I wouldn't say they are any notably different in the fourth quarter compared to the third quarter.

Okay. And then just to follow up on that. Considering the strong margins of 6.2% in the second half of the year and the impressive work you all have done on rationalization, how should we think about 2025? I'm aware you might not provide a precise outlook there. But Pat, as we consider the walk-off point for 2024, especially since you're delivering strong results in a challenging environment in the latter half of the year due to some of this restructuring, what do you believe the appropriate walk-off point for margins should be as we look ahead? Rather than specifying 2025, what should be the framework for our expectations?

John, like you said, I think it's difficult for 2025. But I think one of the key things that we talked about is the 75 basis points of margin improvement between '24 and '25. And I would say we are on track and with very little left in '24, we feel good that we have achieved that. So we have that operational runway with whatever we end with Q4, which we are talking about full year being 5.4% to 5.5%, and that we have the operational improvement of the 35 basis points to 40 basis points going into '25. And I would say, there is few other things we continue to look at. So I would say that's the best way to look at how we're going to end this year going into '25.

That's very helpful. And just lastly on the CapEx, is most of the pullback here 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?

Yes, John, you made a great point. There are a few things to consider, both contextual and current. In 2023 and 2024, we have made significant investments in the BES segment, particularly for battery enclosures. You’re correct about that. I believe we’ve completed most of the major efforts on this topic, unless new programs arise, which would require program capital rather than physical infrastructure. For context, back in the mid and late 1990s when Magna entered the frame business, our CapEx to sales ratio was around 9 and 10 for three to four years. That business continues to thrive after 30 years. The battery enclosures business is similar in design and capital intensity. We feel we have laid a strong foundation, and as I've mentioned, electric vehicles represent a long-term trend. Their growth trajectory may be uncertain, but when it arrives, it will benefit us since we've already established this foundation.

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?

That's fair, John. I think three buckets I always like to consider on big investments like this. One is more like brick-and-mortar, for which you are right. It will be multiple design cycles. In the past, we were building frame plants in Ontario, in Mexico, in Southern part of U.S. So that bucket, you are right. The second part is using capacity like stamping presses, castings and so on and so forth. As there is volatility in production, we are using that capacity to bring back some of the outsourced strokes that we have to leverage that and use that capacity right now. And when EVs or the critical programs come back, we can flex back and forth again. So that's the second bucket. Third bucket is really capital specific to programs, like assembly capital, that is very program-dependent. So that's kind of how I look at the business overall.

Great. Thank you very much, guys.

Thanks, John.

Thanks, John.

And your next question comes from the line of Tamy Chen with BMO Capital Markets. Your line is open.

Hi, good morning. Thanks for the question. Pat, I wanted to ask about the starting of your buyback, well, this quarter Q4, and it's a fairly substantial amount, too, 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 1.5 times. I see you're still at 1.93 times. So, can you just talk a bit about what moved the buyback timeline up quite a bit?

Yes, good morning, Tamy. Regarding the NCIB, we are still aiming to return to our long-term ratio of 1 to 1.5, which is fundamental to Magna. As we review our business plans and progress through the year, we are getting closer to that goal. Previously, we mentioned that we would begin buybacks in 2025, but we've actually moved that timeline up by one or two quarters. This is not a significant change; it is in line with our current situation and reflects our performance over the past nine months. Our current ratio is 1.9, which is slightly better than expected, so we are on track and moving faster. This acceleration does not indicate a change in our strategy; it's simply a reflection of our progress.

Tamy, I would say that our capital allocation principles are unchanged, like Pat said. It's just that we have a confidence of taking the right steps to drive margins and cash flow, including the operational initiatives that I talked about, lowering capital, reducing engineering spend. And as Pat said, looking at what we have in terms of visibility, we believe we can increase the free cash flow even in a relatively modest production environment assumptions.

Got it. And just to clarify on that, it doesn't sound like you foresee any impact or issue to your investment grade rating by pulling forward and starting the buybacks now.

We are not doing this in isolation. We have had discussions and meetings with the major credit rating agencies. While I cannot discuss their decision, we have walked them through this process in a meaningful and measured way, and it has been discussed with the appropriate parties.

Okay. Thanks. And my other question is, on the Power & Vision segment, so, 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. Thank you.

Yes, Tamy, I think, overall, for the P&V, we have talked about the annual guidance, right? And I think it's a small change, but not substantial from where we started at the beginning of the year. And I remember the question asked in the first quarter when we were in the low-2s. And I said the volatility of whether it's production or program launches and customer recoveries, and I came out a little bit and said we expect double of what you saw in the first quarter into the second quarter, just to give you an indication. It's actually the volatility of the programs, the customer recoveries, the engineering recoveries when the programs launch. That's what is driving the volatility. It's not about the business. So I think I would look at what we are indicating as the margin range annually rather than look at quarter-by-quarter in that. Pat, I don't know if you want to add something.

Yes. Tamy, when considering the quarter-to-quarter volatility, P&V faces three significant challenges. First, equity income significantly affects margins since there are no sales, which we have discussed previously. Second, our engineering expenditures fluctuate each quarter, along with the recoveries associated with them, impacting margins in the latter half of the year. Lastly, similar to other groups, many of our commercial inflation recoveries will occur in the second half of the year, as mentioned earlier. Returning to Swamy's point, our overall perspective for the full year remains the same; we anticipate continued margin growth. However, for the individual quarters, I still foresee the unusual pattern of a weak first quarter, followed by margin growth throughout the year, which we are currently observing.

To address your question about ADAS, there is currently only one vehicle program, and we haven't identified a trend or seen any additional programs. However, we continue to have momentum with many large programs in ADAS. Please stay tuned for further updates.

Thank you.

Thanks, Tamy.

And your next question comes from the line of Adam Jonas with Morgan Stanley. Your line is open.

Hi, good morning. It's William Tackett on for Adam Jonas. Thanks for taking my question. I'm just curious if you guys are seeing anything new, whether it's program pushouts or just volatility in this quarter, or what you expect into 2025? Really, anything that you're seeing for 2025 that kind of help catalyzed the buyback? Thanks, guys.

If your question pertains to sourcing and program decisions made by customers, we have observed a number of delays and deferments, and we are monitoring that closely. However, as I mentioned, this is not the primary factor fueling margin growth for the upcoming year. We have specific tasks outlined on our roadmap. As I noted in a previous comment, half of the 75 basis points is already secured, while the other half depends on our current initiatives. Any additional shifts, such as improved volumes or a more favorable electric vehicle trajectory, would act as positive factors.

Got it. That's helpful, guys. And then maybe are you seeing anything new in terms of pricing and mix on the EV side this quarter, and particularly, if you're seeing OEMs push for lower pricing as we move into 2025?

Not really. As you know, right, what we're working through right now was a decision two years or three years ago in the sourcing in terms and conditions and POs. So, no, we are not seeing anything right now.

Got it. That's helpful. Thank you.

Thank you.

And your next question comes from the line of Dan Levy with Barclays. Your line is open.

Hi, good morning. Thanks for taking questions. Wanted to start first with just a question on the implied guidance for Complete Vehicles segment. There is a substantial step-up in the fourth quarter, both in revenue and margins. Maybe you can just give us a reminder of what's going on there and the underlying dynamics as you move past the Fisker program?

Good morning, Dan. Yes, I think the math shows that, I agree. And really, the biggest change is coming out of the engineering segment, so for everybody's benefit. Our Complete Vehicles has a significant engineering business in it, and most of that engineering gets a lot of the settlement and the customer negotiations happen in the fourth quarter, and that's our expectation. So, as you mentioned, Fisker is behind us. We're in the middle of finalizing negotiations with a couple of other customers related to various programs, and we expect those conversations to happen in the fourth quarter and settle. And that's really what's driving the change in sales and in margin.

And is there any update on filling the idled or vacant capacity?

Good morning, Dan. We are continuing our discussions, but there isn't anything significant to report beyond the customer NDAs and discussions. However, I can mention that there are a few ongoing discussions regarding the 2026 to 2027 timeframe, leaning more towards 2027.

Got it. Thank you. As a follow-up, wanted to ask about the recovery. So I understand 3Q is a non-repeat benefit. But what is the outlook on recoveries going forward? And specifically, you talked to this, that you've obviously incurred a fair amount of expense and tooling validation expense for different programs that have been delayed, volumes coming in far below what was originally anticipated. So maybe you can just give us a sense of the tone and tenor of those discussions and the potential for recovery payments down the line?

I think I’ll begin, and Swamy can elaborate on the customer-facing aspect. Looking at the commercial side and the discrete items in that role, we previously discussed the 75 basis points and the 50 basis points of commercial. I want to clarify that we faced commercial headwinds in the third quarter of 2023, which are not expected to recur. Therefore, the impact we anticipate for the third quarter of 2024 is less significant, and these will involve recoveries related to various customer negotiations. Much like the inflationary recoveries, we expect these to take place in the second half of the year.

And I think, Dan, the question regarding your tooling and engineering and so on and so forth, even with the deferments and volume reductions, the tooling remains agnostic, right? We get paid on that. And the upfront, there is two pieces of engineering payments, one that, I would say, is paid once you get to a certain milestone in the program that is usually pretty good. The question becomes the amortized engineering into the piece price that becomes a discussion, right? To your second part of the question, the tone and tenor of discussions, they're always tough, like anything else, these negotiations or discussions. But I would say, we are on track, they are fair. But we also have no choice. We have to address all the headwinds that we've been facing, and in the spirit of partnership, they do realize and we put things on the table of how we need to be healthy so that we can have the partnership healthy, and it's good for the industry. So, yes, they're tough, but we are having those conversations.

Great. Thank you.

And your next question comes from the line of Joseph Spak with UBS. Your line is open.

Hi, good morning. It's Alejandro on for Joe. I wanted to follow up on the recoveries. Ford mentioned supply reimbursements for the canceled EV program. Could you provide a timeline for when we might expect those recoveries? Will this be more of a 2025 event?

Yes. I believe it's a mix of various factors. Ford is a significant customer for us, and when we assess the situation as a whole, it's challenging to pinpoint an exact timeline due to the complexity of different elements involved. Progress is being made, and we will establish a framework, but I anticipate it will take several years as we move forward.

And can you give us sort of a little more color as to, like, how much you were investing for that program and what was built out already and what still did not get built out for that program?

We cannot provide a specific comment on that because there are parts of the facility related to capacity allocation and specific program capital that we are addressing. It's challenging to detail this because some aspects have already been implemented while others are still in progress. Therefore, it's a complex question to assign a specific number to.

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 onto higher sales in the fourth quarter?

At the Magna consolidated level, Q3 tends to be a low production period. As Dan mentioned earlier, we are seeing an increase in sales in our CVA segment, primarily due to engineering efforts, which are not production-based but rather related to finalizing engineering agreements. This is the main factor contributing to the positive trend, along with some favorable foreign exchange impacts.

Great. Thank you.

Welcome.

And your next question comes from the line of Tom Narayan with RBC Capital Markets. Your line is open.

Hi, thanks, everyone. I have a question about the buyback financing. You mentioned you have $1.1 billion in cash and $3.7 billion in total liquidity, with the potential for more free cash flow due to reduced capital expenditures. I also noted your leverage ratio is decreasing from 1.93 to around 1.5. Considering these factors, if production declines next year as some are anticipating, how would you plan to finance this situation? Would you use your cash reserves or tap into your liquidity? Are you considering paying down debt to achieve that leverage ratio if EBITDA decreases next year, as many suppliers are suggesting? I'd like to hear your thoughts on these various aspects. Thank you.

Good morning, Tom. As I mentioned, we need to find a balance between maintaining our investment grade rating and adhering to the guidelines we've discussed, specifically the 1 to 1.5 range. Towards the end of next year, we may experience some fluctuations, but that remains our guiding principle. As Pat mentioned, we have visibility on our plans through 2025. We've set modest assumptions for volume production. With that in mind, we believe we can execute up to a 10% share buyback. However, we must consider market conditions, as significant changes could lead us to reassess our buybacks and overall strategy. Any major shifts would impact the entire industry, prompting us to reevaluate our approach. Currently, we are confident in our plan based on the cautious production assumptions for 2025.

Yes. I think the only thing I'd add is that when we laid out this plan 18 months ago concerning our deleveraging strategy, it included the fact that we have term debt that needs to be repaid. We borrowed against our commercial paper programs, and that aspect remains unchanged. It's important to remember that our cash flow expectations, which we have implemented in 2023, continue to be expected in 2024. We are progressing along this path, and in response to Tamy's earlier question, we are more confident in that path now. While cash may fluctuate by $100 million or $200 million depending on timing, we are on track to pay down the term debt and reduce borrowing on commercial paper.

Okay. And the expectation on the better free cash flow, that's coming from a combination of potentially lower CapEx and, I guess, better EBITDA, right, coming from your, I guess, growth over market production assumptions?

That's right, Tom. It's lower engineering spend, lower CapEx, better EBITDA. Yes.

Not just growth over market, it's also operational excellence, right?

Yes. Right, right, cost control.

I'm sure you've noticed that many suppliers in the industry are being very cautious about 2025. One of your OEM customers has significantly cut production this quarter, and we've heard that European OEMs are concerned about the CO2 regulations, with some considering shutting down plants. It seems that in Europe, the sales rate might drop to around 14 million, down from the 16 million pre-pandemic level. However, there is an expected increase in EV sales to meet the CO2 requirements, which presents a complex situation. Could the recovery in EV sales be beneficial for you, especially in Europe, if production decreases but you have higher content per vehicle? How do you view this potential scenario of reduced production next year balanced against an increase in EV sales? Thank you.

Yes, Tom, I think there are a couple of points to consider. First, the planning for significant dropouts, like a COVID-type situation, is not something we use as a baseline but rather as a way to prepare for what we would do if that occurred. Second, regarding electric vehicles and internal combustion engines, I believe we are fairly balanced. For some of the electric vehicle platforms in our BES segment, the content per vehicle is likely to be higher. If we experience favorable conditions in the programs we've invested in, such as battery enclosures, we would see positive impacts. Additionally, we have consistently aimed to maintain flexibility in our operations. Many of our product lines can adapt regardless of the trend, but if we are involved in supplying components like mirrors, seats, or doors for electric vehicles, it will certainly affect us. Overall, we feel fairly balanced, but if electric vehicles gain traction, we expect a higher content per vehicle in that scenario.

Got it. And if I could just sneak in one last question. BES, I know you mentioned Complete Vehicle with the margin increase in Q4, but it appears that the implied margin for BES in Q4 is the highest at the midpoint for the entire year. Is that due to the pricing recovery you mentioned earlier with the OEMs, or is there something else happening? Thanks.

I think you got it right, Tom. It's settlement of the commercial recoveries.

Got it. Thanks, guys.

And your next question comes from the line of James Picariello with BNP Paribas. Your line is open.

Hi, guys. 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 Magna programs that informs this fourth quarter assumption? Thanks.

Good morning, James. Louis might have more to add. We have a clear view of the program releases, but it's important to keep in mind that these releases typically occur 12 to 13 weeks in advance. Due to the uncertainty in the industry and how companies are managing their inventories, changes can happen. This means we cannot fully predict outcomes. We are actively managing our operations daily by adjusting our direct labor and other business factors. We are definitely adapting at an operational level; that’s part of our process. We are noticing some softness in the fourth quarter, but we've been careful in our approach. However, there are still eight weeks left in this quarter, and some recent announcements were not factored into the current data you have.

Thank you. Regarding the buybacks, I apologize if this has already been addressed, but concerning your leverage target, do you expect to trend slightly or moderately above that for some time through next year? I'm looking for a sense of the bandwidth of that leverage in relation to your buyback commitment for the next 12 months. Thank you.

James, our principles remain unchanged, and we have discussed reaching the targeted range by the end of 2025. That has not changed. Pat did mention that we might experience fluctuations in our cash balances and leverage ratio throughout the year. However, our goal of achieving the leverage ratio target by the end of 2025 still holds.

Welcome.

And your last question comes from the line of Bruno Dossena with Wolfe Research. Your line is open.

Hi, thank you for taking my questions. I would like to gain more insight into the free cash flow outlook, both in the near and long term. For the near term, you are guiding to $700 million of free cash flow this year at the midpoint. Based on my calculations, year-to-date, it is roughly breakeven. Could you help us understand the transition between $600 million and $800 million of free cash flow in the fourth quarter alone? Regarding the longer term, as a follow-up to Tom's earlier question, next year could be challenging, especially since you are comparing it to a year when your largest customers were restocking, and we know that order volumes from European customers have been softening. I would appreciate it if you could quantify the factors fully within your control, such as CapEx, R&D spending, and potential restructuring efforts, to increase free cash flow regardless of the production outlook. Thank you.

I believe the main variable will be the volumes. We are currently projecting the volumes for next year to be relatively flat. We will provide more details and specifics in February. The free cash flow you are observing is typical for this year, and we are confident we will remain in the $600 million to $800 million range we previously mentioned. Additionally, we expect to reach around $2 billion by 2026. Given the current market conditions and our flat volume assumptions, our projections for 2025 and 2026 are still valid. However, if there are significant changes to those assumptions, we will need to reassess. Many factors are within our control, such as capital management, operational discipline, and engineering, and we are optimistic about those. We will continue to analyze our numbers closely.

And our final question will come from the line of Mark Delaney with Goldman Sachs. Your line is open.

Good morning, and thank you for taking my question. I wanted to follow up on James' inquiry regarding your comments about the fourth quarter revenue outlook. You mentioned some developments that emerged yesterday that might not have been reflected in the industry perspective, but you also characterized the revenue forecast as prudent. I want to ensure I grasp your message here and whether the revenue outlook is more bottom-up, influenced by schedules, and if you still feel confident in that while considering potential impacts on the industry forecast. I'm also curious if you're suggesting there might be risks to the revenue outlook in response to James' question.

Good morning, Mark, and thanks for asking that question. No, what I meant is to give you an example that announcements are coming on an everyday basis. So it will be very difficult to put an exact number on everything. But just to clarify, given all the data that we have and the set of assumptions that we have taken, unless there is something very drastic still forthcoming, we feel pretty comfortable and expect to be in line with what we have put out for the fourth quarter.

Even when we have announcements, our recent trend shows that the outcomes often fall short of expectations, which poses some challenges for us. Therefore, we believe we are being quite cautious in our approach.

Thanks, Mark. So...

We do have another question queue. Our next question will come from the line of Colin Langan with Wells Fargo. Your line is open.

Thank you for my question. I wanted to follow up on the quarter-over-quarter transition from Q3 to Q4. The sales show about a 44% contribution margin on those increased sales sequentially, which is quite high. Additionally, nearly all the growth is coming from CVA, a lower-margin business. I believe you mentioned a potential settlement in BES that could be contributing to this. What factors are behind such a significant underlying contribution margin? Is the Q4 rate sustainable?

Good morning, Colin. As we transition from Q3 to Q4, you're correct about the sales changes. We discussed the engineering aspects and the pattern of settlements expected in the fourth quarter. This won't follow the traditional pull-through model but is more binary. Overall, we still anticipate improvements in our commercial settlements, consistent with the trends we've observed over the past two years. However, in the P&V group, we are noticing some sales softness relative to Q3. When you consider all these aspects together, that forms the overall picture.

And what is driving the sales softness in P&V?

It comes back to everything Swamy and Louis spoke about as far as the mix. We're going to talk macro and that's what we have in our whole volumes. You get a little bit more granular, as Swamy said, we look at our releases and then you have mix within those releases. So it's across hundreds of platforms. It's a bottoms-up. And the reduction is less than 10%, but it just all adds up, Colin.

Got it. I know we've talked a lot about the buyback, but can you give us some guidance on how to think about it? When I look back at 2018 and 2019, you were doing over $1 billion a year in buybacks, which was more than your free cash flow. Should we expect something like $100 million, $200 million, $400 million, or $500 million per quarter? How should we approach modeling this moving forward?

Yes, Colin, I won't go into the specifics. As we've mentioned, our approach to share repurchase is a long-term strategy rather than a one-time action. That's how we plan to proceed. When we mention a target of up to 10% of our float, that's essentially our goal, though it may not be exact. The implementation also relies on market conditions; if volumes remain stable and macroeconomic factors don’t shift significantly, it’s challenging to state our precise plans now. However, we want to emphasize that we won't wait until the third or fourth quarter of next year to start. We aim to begin now, and this will be significant in relation to our overall 10% float target.

And 10% by when? So is there a deadline when you want to get the…

The NCIB rules are up to 10% float and it applies for 12 months, starting from the release. So, this November to next November.

Okay, up to 10%. Okay. All right. Thank you for taking my questions.

And our next question comes from the line of Michael Glen with Raymond James. Your line is open.

Well, thank you for getting my question in. I just want 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 roll back in a meaningful way?

No, I don't think so. In previous calls, I've mentioned that many of these commercial recoveries are more about procedures. They fall under purchase orders or different terms and conditions, and it’s not something we negotiate every year. There is a small part that does relate to productivity and various other aspects of our commercial discussions, but generally, I would say that’s not a significant risk.

And then just on inventory levels, I know we read a lot about some concern on inventory levels, particularly across the D3. Are you seeing any different communication from your customers on inventory levels versus what is being written about in the media?

No, not specifically by platform. We analyze our situation closely, based on the insights we've shared in our comments about releases and inventory management for adjusting our operations, but we haven't observed anything specific apart from what you're noticing in the fourth quarter.

And our final question comes from the line of John Murphy with Bank of America. Your line is open.

Good morning, guys. I appreciate you sneaking me in for this quick follow-up. Swamy, when you talk about these recoveries in commercial settlements in the second half of this year, really, the genesis of those is the results 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 were 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 one-time and kind of like you guys hitting the lottery. The reality there is a result of things not going right at the OEM level. Is that a fair characterization?

My simple answer is your characterization is correct. We would like the business to be running well. They're not looking at lump sums. There is some parts of it, which is entrenched inflation, what happened in '22, how we amend the terms, some part of it may be addressing on a yearly basis, but it's more how do we make it embedded into the normal course of business, and the overall intent, like you said, John, is normal, business runs well and we recover the way we need to and the way it was intended to.

Great. Thank you very much.

Thanks, John.

And there are no further questions at this time. Swamy, I turn the call back over to you.

Thanks, everyone, for listening in today. As you might have heard and, hopefully, get that we remain very highly focused on margin expansion, the capital discipline, the free cash flow generation and, obviously, on normalizing our capital allocation with increasing returns of capital to shareholders. We remain very confident in Magna's future. Thanks for listening in, and have a great day.

And this concludes today's conference call. You may now disconnect.