Earnings Call Transcript
Magna International Inc (MGA)
Earnings Call Transcript - MGA Q3 2023
Operator, Operator
Greetings and welcome to the Q3 2023 results. 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, you may press the star, followed by the zero. As a reminder, this conference is being recorded Friday, November 3, 2023. I would now like to turn the conference over to Louis Tonelli, Vice President, Investor Relations. Please go ahead.
Louis Tonelli, Vice President, Investor Relations
Thanks, Tommy. Hello everyone and welcome to our conference call covering our third quarter of 2023. 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 '23 as well as 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.
Swamy Kotagiri, CEO
Thank you, Louis. Good morning everyone. I appreciate you all joining our call today as we share our third quarter earnings results. Before I share some of the details, I want to thank my team for their continued progress and solid results, so let’s get started. Some key highlights to mention before I dive into the details. Our organic sales grew by 10% year-over-year, surpassing weighted production by 4%, excluding complete vehicles, and 2%, including complete vehicles. Our third quarter showcased strong operating performance with higher organic sales once again contributing to robust earnings that represented a significant improvement year-over-year. We continue to benefit from our activities in operational excellence and cost containment, leading to improved margins. We have raised our 2023 adjusted EBIT margin and adjusted net income outlook ranges for 2023, demonstrating solid operating performance even with the negative impact of the UAW strike in the third and fourth quarters, and recently announced our commitment to achieving net zero across Magna by 2050. Our industry continues to experience incremental improvements, including renewed supply constraints, stronger and more stable production schedules, and resilient auto sales in a number of markets. However, the global economy continues to face some interlocking challenges, including continuing elevated labor inflation, higher interest rates, geopolitical risks, and slowing economic growth. These challenges are impacting our entire industry. In North America, the Detroit 3 experienced UAW labor stoppages for about six weeks, which cost the industry approximately 220,000 units. The UAW has now reached tentative agreements with all three OEMs that need to be ratified. Our outlook reflects the full extent of the strike. We remain highly focused on containing costs and improving our margins. This is being achieved through ongoing operational improvement and cost recovery initiatives, as well as executing flawless launches across Magna. At our virtual investor event in September, we provided an update on the progress of our go forward strategy. Our ongoing investments in mega-trend areas are driving significant growth over the coming years, including over 35% in powertrain electrification, over 75% in battery enclosures, and over 45% in active safety. Most importantly, our portfolio is substantially aligned with the car of the future, which we expect to drive sales growth regardless of the pace of powertrain electrification. Where possible, we are working to mitigate risks, including by installing capital in tranches and employing different cost-sharing models with our customers. At the same time, we have been accelerating our activities around operational excellence to ensure we remain at the forefront of manufacturing and exceeding our customers’ expectations in all areas. We expect about 150 basis points of margin expansion from our collective efforts here, including about half that amount this year, and we are leveraging capabilities that already exist within Magna to unlock opportunities with new models and markets as they develop. It is early days for us in this area, but we have already had some traction. We have experienced 5x growth in battery swaps in our battery-as-a-service venture and are experiencing about 1,000 deliveries a day utilizing Magna-produced parts. We expect about $300 million in new mobility sales by 2027 with significant runway for additional profitable growth beyond that. We expect our strategy to deliver continued growth above market, improve margins and returns, and further shift in our portfolio towards mega-trend areas. This should drive increased shareholder value in the years to come. We also took a significant step forward in our commitment to sustainability and environmental stewardship by submitting net zero emission targets for validation by the Science Based Targets initiative with a goal to achieve net zero by 2050, together with meeting our near term Scope 1, 2, and 3 targets by 2030. Among the steps involved in meeting this target is transitioning to 100% renewable electricity use in our European operations by 2025 and globally by 2030. They have already made progress towards previously established sustainability actions. This year, we are on track to achieve our commitment to reduce global energy intensity by 10% in all manufacturing facilities with a target of 20% reduction by 2027. More than 30 Magna divisions have achieved carbon neutrality over the last two years. With that, I’ll pass the call over to Pat.
Patrick McCann, CFO
Thanks, Swamy, and good morning everyone. As Swamy indicated, once again we delivered strong earnings this past quarter despite the onset of the UAW strike in September. Comparing the third quarter of 2023 to '22, consolidated sales were $10.7 billion, up 15% compared to a 4% increase in global light vehicle production. Adjusted EBIT was $615 million and the adjusted EBIT margin increased 90 basis points to 5.8%. Adjusted EPS came in at $1.46, up 33% year-over-year, and free cash flow generated in the quarter was $23 million compared to a $210 million use in the third quarter of '22, despite our higher capital spend this quarter to support record program awards in '22. During the quarter, we paid dividends of $128 million and we increased our adjusted EBIT margin and earnings outlook despite the negative impact of the UAW strike. Let me take you through some of the details. North American and European light vehicle production were up 7% and 14% respectively, while Chinese production declined 2%, netting to a 4% increase in global production. Our consolidated sales were $10.7 billion, up 15% over the third quarter of '22. On an organic basis, our sales also increased 10% year-over-year for a 2% growth over market, or 4% growth over market excluding complete vehicles. The sales increase was primarily due to higher global vehicle production, the launch of new programs, adjustments to recover certain higher input costs, the acquisition of Veoneer Active Safety net of the divestiture of our manual transmissions plant in Europe, and the net strengthening of currencies against the U.S. dollar. These were partially offset by lower complete vehicle sales mainly due to a program changeover and an estimated $55 million impact from the UAW strike. Adjusted EBIT was $615 million and the adjusted EBIT margin was 5.8% compared to 4.9% in the third quarter of '22. Our continued focus on operational excellence and performance on cost initiatives is driving strong earnings on higher sales. This was despite the negative impacts of a program changeover in complete vehicles, the UAW strike, which we estimate cost us about 10 basis points, and acquisitions net of divestitures. Combined, we generated 40 basis points of net improvements. The adjusted EBIT margin was also positively impacted by about 60 basis points of net operational items, which include productivity and efficiency improvements at certain facilities and lower net engineering costs, about 50 basis points related to lower net input costs, and higher equity income which benefited margin by about 15 basis points. EBIT margin was negatively impacted by commercial items that had a net unfavorable impact in the quarter, which subtracted about 75 basis points year-over-year. Interest expense increased, primarily reflecting senior notes issued and borrowings in the first half of the year, as well as higher interest rates. Our adjusted effective income tax rate came in at 21.9%, largely in line with our '23 expectations but lower than Q3 of last year. Adjusted net income attributable to Magna was $419 million, up 32% over the third quarter of '22, reflecting higher EBIT and the lower tax rate partially offset by higher interest expense and minority interest. Adjusted diluted EPS was $1.46, up 33% compared to Q3 last year. This increase is the result of higher net income and fewer shares outstanding. The reduced number of shares outstanding substantially reflects the impact of share repurchases in 2022. Turning to a review of our cash flows and investment activities, in the third quarter of '23, we generated $821 million in cash from operations before changes in working capital, up $230 million or 39% from '22, and we invested $24 million in working capital. Investment activities in the quarter included $630 million for fixed assets and $176 million for investments, other assets, and intangibles. As expected, capex was higher than the $364 million in Q3 last year to support our record program awards in 2022. Overall, we generated free cash flow of $23 million in the third quarter. We also paid $128 million in dividends. Our balance sheet continued to be strong with investment-grade ratings from the major credit agencies. At the end of Q3, we had over $4.5 billion in liquidity, including about a billion dollars in cash. Currently, our adjusted debt to adjusted EBITDA ratio is 2.02. Excluding cash, we are holding to help pay down our €550 million senior notes coming due in the fourth quarter, our ratio would be 1.98. This ratio continues to decline and is tracking better than expected at the end of last quarter as a result of our improved operating results. We anticipate a reduction of our leverage ratio by the end of this year and a further decline through 2024. Next I will cover our updated outlook, which incorporates higher than previously expected vehicle production in both Europe and China, including as a result of better production in Q3. Our assumption for production in North America is unchanged from our previous outlook as stronger than expected production was offset by the impact of the UAW strike. We have not assumed any lost D3 production would be made up in the fourth quarter. We also assume exchange rates in our outlook will approximate current rates. We now expect a slightly weaker euro, Canadian dollar, and renminbi for 2023 relative to our previous outlook. We have narrowed our expected sales range with essentially the same midpoint as our last outlook. This mainly reflects higher European and Chinese vehicle production in the second half of '23, offset by the much stronger U.S. dollar relative to our last outlook and the estimated $310 million impact of the UAW strike. We communicated last quarter that beginning in Q3, Magna’s adjusted EBIT would exclude the amortization of all acquired intangibles. Our August outlook excluded our estimate of the amortization of intangibles associated with the acquisition of Veoneer Active Safety, about $30 million for half of '23. Our final analysis of all other acquisitions resulted in about $50 million of additional annual amortization to be excluded from our adjusted EBIT calculation. This additional adjustment amounts to approximately 10 basis points in EBIT margin. We have updated our historical presentation of adjusted EBIT to reflect these revised calculations. As a result of our strong performance so far in '23, our expectations for continued operational execution, and despite the negative impact of the UAW strike, which we estimate to be between 10 and 15 basis points, we have narrowed and raised our adjusted EBIT margin. We now expect our EBIT margin for '23 to be in the range of 5.1% to 5.4%, which compares to 4.9% to 5.3% previously adjusted by 10 basis points to reflect the amortization of all acquired intangibles. We are increasing our equity income range, mainly reflecting our better than forecasted performance in Q3. As a result of increasing our adjusted EBIT margin range, we are also raising our range for adjusted net income attributable to Magna. Our interest expense, tax rate, capital spending, and free cash flow expectations are all unchanged from our last outlook. In summary, we are pleased with our strong operating performance in the third quarter. Once again, we outgrew our end markets by 2% on a consolidated basis and 4% excluding complete vehicles. We’ve raised our outlook for 2023 and we have continued confidence in our plans for margin expansion in the years to come.
Operator, Operator
Thank you. Our first question on the line is from Chris McNally with Evercore. Please go right ahead.
Chris McNally, Analyst
Thank you, team. I appreciate all the details. Let's start with the significant topic of the week regarding EV demand. Could you provide an overview of your exposure, particularly in powertrain? Last year, you had $800 million, which is growing to about a billion this year, with targets of around $4 billion in the coming years. What percentage of this is pure EV versus hybrids? Additionally, could you discuss the pace of battery enclosures, which is a new growth area? Any information regarding 2023 and 2024 would be helpful. You've already provided long-term targets, so please remind us of some of the programs or geographic exposure. These are the key questions that I believe other analysts will ask as well, so let's start there.
Swamy Kotagiri, CEO
Hi Chris, good morning. We will try to address the different aspects of the questions. From an EV perspective, we believe electrification is a long-term and irreversible trend that is here to stay. The main concern has been the predictability of take rates and how soon they will materialize, meaning it’s a very prolonged process and still early in the electrification journey. Over the last three to four years, we have often stated that global penetration will reach about 30% by 2030. In light of this, we have focused on analyzing volume by program and customer, utilizing external sources like IHS alongside our own volume predictions to arrive at the figures we've mentioned. Historically, there has always been volume uncertainty across all programs, and we have a systematic approach in our planning to handle this, including discussions with customers when there are significant changes in volumes. Specifically regarding electrification of powertrain, we projected $3 billion in sales for 2025 and approximately $4 billion during our investor day for 2027. These figures are based on a careful assessment of our own volume estimates, considering various sources, and maintaining a more conservative outlook on take rates compared to what customers and the markets have been indicating. Regarding the battery enclosure segment, we estimate reaching about $300 million to $400 million this year.
Louis Tonelli, Vice President, Investor Relations
Yes.
Swamy Kotagiri, CEO
We mentioned $1.6 billion by 2025 and discussed the product line utilizing existing assets like castings, exclusions, or stampings. The dedicated assembly lines are considered tooling paid for by the customer, and this continues as a strategic product. When we examine the frames and underbody, we see a clear path forward. We drew an analogy to the frames of the late 90s, and we are still working on the third and fourth generations of the same product today. This is a long-term strategy, and we feel optimistic about it. I aimed to cover various aspects of the question. Did I overlook anything?
Patrick McCann, CFO
And the 48-volt is just under a quarter of our sales in ’27, of that managed sales number.
Chris McNally, Analyst
And then what about plug-in as well, because obviously there is definitely more of a concern about pure EV than plug-in has sort of continued. There is a decent amount of PHEV, right, in your high voltage for powertrain as well?
Swamy Kotagiri, CEO
Yes, I believe most of our overall powertrain sales are significantly driven by the 48-volt systems, especially in hybrids. We have a product line we discussed in the plug-in hybrid electric vehicles, but the majority is in 48 volts, which is applicable to the PHEV segment and pure electric vehicle switches in the A-drives.
Chris McNally, Analyst
Okay, and then the only last bit of detail, within battery enclosures, since it’s new and obviously there is one large platform that you discussed a win on, how diversified, if I look to 2025, is that $1.6 billion? Are we talking a handful of OEMs or is it five to eight?
Swamy Kotagiri, CEO
I believe we are referring to eight OEMs, Chris, and that is included in the projections we provided in the figures.
Patrick McCann, CFO
And that’s global.
Chris McNally, Analyst
That's great. If I could just ask one last question about pricing recoveries, we've discussed electric vehicles so much over the last week that we've somewhat overlooked the older topics we used to focus on in Q2. Could you update us on the pace of recoveries, how it's progressing, and what's still outstanding? Also, do you think this could provide a lasting benefit into 2024, given that you'll see the annualization of any price recoveries from the second half? Thank you very much.
Swamy Kotagiri, CEO
Thanks Chris. We’ve been disclosing, I would say, the net impacts rather than specific amounts, and if you look at certain costs in energy have declined, there is an improving trend in commodities in certain cases, and I would say we are on track to obtain the recoveries necessary to meet our outlook. Maybe a little bit of color - we talked about the $100 million at the beginning of the year as headwinds, and in our last call, we talked about that being reduced to $50 million. As we stand here today, we are at zero - that means the $100 million has been brought down to zero, but we continue our discussions and the focus still remains on all the things, whether it is operational excellence, whether it is looking at every program, and continuing discussions with customers not specific only to ’23. We have always talked about looking at it holistically from ’22 and even going forward, planning into ’24.
Operator, Operator
Thank you very much. We’ll proceed with our next question on the line. It is from Mark Delaney with Goldman Sachs. Please go right ahead.
Mark Delaney, Analyst
Yes, good morning. Thanks very much for taking my questions. First, as you guys are thinking about your prior target to reach profitability in mega-trend areas in 2025, as you’re seeing some of the traditional OEMs revisit the rate of their ramps around EVs, including some in North America where you’ve disclosed wins, do you still think you can reach that profitability target in 2025, and if so, are you contemplating having to make some changes in order to still get there?
Swamy Kotagiri, CEO
Good morning, Mark. Yes, when we discussed the major trend areas, it involves more than just electrification; it also includes ADAS and other related products. As we review the customer changes in the roadmap, if there are any, during our planning process, I can say that we have occasionally utilized different business models that are not entirely dependent on volume. For instance, this year, we experienced a change in volume on one program where we reached a commercial settlement. Additionally, we are exploring models where customers provide upfront capital related to an EV program, which allows us to reduce risk in various ways. Of course, it's impossible to eliminate all risk. We have been working on this, but I believe our approach is becoming more intentional and proactive as we discuss the EV platforms. We will provide more details when we return in February for the outlook.
Patrick McCann, CFO
Yes, and I think, Mark, when we talk about the mega-trends, there was a big improvement in the ADAS business specifically as we start launching these programs, and that’s regardless of whether it’s on or distributed across ICE and EVs in that space, so you’re expensing significant engineering today and as those revenues launch, we should have a lot of contribution margin dropping to the bottom line, so it’s really not just an EV explanation into ’25.
Mark Delaney, Analyst
Very helpful, thanks. In terms of the updated EBIT margin guide, you’re taking up your margin guidance on pretty similar revenue and despite the UAW strike headwind that you’re now having to overcome. You gave us a number of metrics around various puts and takes, but maybe just level-set us and summarize a bit what’s driving the better EBIT margin despite some of these headwinds, and is there anything unusual that you would say is more temporal helping the margins in the second half of this year, or do you think this is illustrative of the profit potential and gives you guys some good momentum toward the at least 230 BPs of margin expansion by 2025 that you’d previously talked about? Thanks.
Louis Tonelli, Vice President, Investor Relations
I can start and Swamy can jump in. When we look at the, I think guide to guide, we’re really just executing where we expect it to be. Volumes have come in a little bit stronger. If you look on an annual basis, we’ve said since the beginning of February that we’re going to improve our margins as we go through the year, and that was driven by launches, some changeovers, but also just the timing of recoveries of our commercial settlements. I think we’re tracking on that plan. The one change, I would say since February really has been the execution on the operational front that we’re exceeding our targets for, whether it’s cost recoveries or cost containment, and our acceleration of our improvement plans. I think that’s the big driver, and that’s what’s given us confidence. We’re reiterating what we said in September, that we have confidence in our ’25 numbers.
Patrick McCann, CFO
And we’re taking our input costs down. We said it was going to be a headwind of 50 last time around, and we’re saying it’s basically neutral now, so that’s another contributor to the outlook-to-outlook improvement.
Swamy Kotagiri, CEO
Yes, in summary, I would say, Pat, there is not any temporal topic that has added to the expansion, but it’s just operational excellence and the right trend of the materials and energy.
Mark Delaney, Analyst
Thank you.
Operator, Operator
Thank you very much. We’ll proceed with our next question on the line from Tom Narayan with RBC. Please go right ahead.
Tom Narayan, Analyst
Hi everyone, thank you for taking my question. First, I apologize for not covering this in the prepared comments. Could you clarify the impact of the UAW on absolute revenue and EBIT or EBITDA that you have experienced so far, or what you anticipate for 2023?
Patrick McCann, CFO
Yes, hi Tom, it’s Pat. Just to level-set, our Q3 impact was $55 million in sales, about 10 basis points on margin. Q4, we’re estimating an additional about $255 million, so on a full-year basis $310 million of sales with an impact of 10 to 15 basis points on our guide.
Tom Narayan, Analyst
Okay, thank you. Obviously my next question is on the EV side. I guess the question has to do with how orders work, your order book works. We saw some commentary yesterday from a couple of suppliers suggesting maybe some caution on the order book. Just curious in terms of how susceptible or how concerning could cancellations be should this downturn get more severe, or quote-unquote, EVs slow down and get severe. Do you have a lot of visibility on the orders? It’s a situation of, like, 50% growth going to 30% growth, so you have inertia to help you? Just trying to get a sense of the visibility on the order book around electrification.
Swamy Kotagiri, CEO
Good morning Tom. As we look at it, we haven’t really seen any cancellations, and as I had mentioned to one of the previous questions, if there is a volume change in terms of the planning, it is a discussion that we have with the customer, and I wouldn’t say we have seen anything significant. Maybe one topic or one point that might help, if you look at just not electrification but all content on EV platforms, we are in single digits as a percent of sales, right, in 2023. Going out to 2025, maybe one-fifth of our business roughly is connected to EV platforms. But again, I want to reiterate, we always look at volume planning from our perspective based on customer, based on platform, based on segment of the vehicle, looking at IHS data and other sources, so there is, call it the Magna volume that we have to have a judgment on. That’s one aspect of it. The other one, like I said, even on ICE, there are several programs which don’t hit the volumes that we had predicted, and we have mechanisms to have those discussions with the customers. This is besides having capital outlay in tranches, having flexible manufacturing so that we can flex as the volumes change, obviously within reason, and there are some cases where the volumes are up. It’s a complex situation here, but we have had this with customers and there is a little bit of uncertainty, and that’s where I said in some cases, the models on the EV platforms, the customers have come forward with the capital, and some we already had settlements on where the volumes changed significantly. In some cases, we are looking at the same product where the platform has both ICE and EV, so depending on which does better, there’s a little bit of a natural hedge. There’s a lot of these things that we look at from our planning perspective to again mitigate risk, not completely but it gives us enough comfort.
Tom Narayan, Analyst
Okay. Another thing that we heard yesterday was that there seems to be this kind of divergence of opinion on this EV decline story geographically, with a lot of Americans, let’s say, thinking that we’re in this Armageddon scenario, and then over in Europe it’s an opposite view. Just curious in terms of your OEM exposure to EVs, specifically investment, is that something that’s pretty geographically balanced, or how would you characterize your EV exposure geographically on OEMs?
Swamy Kotagiri, CEO
Yes, if we look at our overall sales, approximately 60% are in North America and about 35% in Europe, with the remainder mostly in China. From a regional standpoint, electrification rates are higher in China, followed by Europe and then North America. However, it’s important to consider specific platforms rather than just an overall segment view. Our relationships with customers and the conversations about business models play a significant role, making it more complex than a simple regional analysis.
Tom Narayan, Analyst
Got it, yes. My last one is just on that other topic, the price mix topic. Obviously the OEMs benefited on the way up in the past three years, and if we do get a normalization in price mix, one of the fears is that potentially the OEMs could go to the suppliers and ask for price downs. How has that happened historically in the past? Was it that you guys typically benefit on volume recovery regardless if price mix is coming down for your OEM customers, or do they have the ability to squeeze you guys as price mix comes down?
Swamy Kotagiri, CEO
Yes, those conversations have never been easy, and like you said, even when they were doing well in the last three years, I would say the conversations still were not easy. But I can say that we talked about various things in recoveries, looking at underperforming programs, programs coming to an end, input cost inflation, whether it was semiconductors or others. They were tough conversations, and I talked about getting the headwinds to be neutralized this year. All I can say is they will continue to be. They recognize that we have been living in this tough environment of inflation and chip shortages and supply constraints over the last three years, so we already have been living in that. I think we are not going to change our thinking process to be speaking with data. We have had tough conversations, but I would say they were fair and cordial.
Tom Narayan, Analyst
Okay, great. Thank you so much.
Operator, Operator
Thank you. We’ll get to our next question on the line, and it’s from Dan Levy with Barclays. Please go right ahead.
Dan Levy, Analyst
Hi, good morning. Thank you for taking the questions. I wanted to follow up on the last question regarding the commercial recoveries in the quarter. Can you provide any details about whether those recoveries were retroactive or based on piece pricing? Additionally, what was the magnitude of the recoveries you observed in the quarter?
Swamy Kotagiri, CEO
I think we talked about it - again, net impact other than gross, and I talked about the $100 million, and there is a complexity of talking productivity versus inflation recoveries and a whole bunch of other things. I would say about two-thirds of the recoveries in general are more related to flow-through purchase orders indexing and so on, that would continue going forward, and about roughly one-third are one-time, right, so the ones that are more mechanism-based, whether getting on an index or purchase orders and so on and so forth, will flow through into the following years, and the conversation of the one-time depends on, for example, energy and where they are versus what the recovery needs to be, so it’s kind of a mix.
Louis Tonelli, Vice President, Investor Relations
And Dan, if I can just add, when you compare to our expectations, we didn’t have a win on recoveries or commercial in our guidance. Really, when we’re talking about our increase in net inflation, the pick-up, it’s related to last year on the commercial side, and we’ve been guiding all year that we have roughly a 45 basis point headwind related to commercial issues, and that’s what’s coming through.
Dan Levy, Analyst
Thank you. Then the second, if you can maybe give us a sense of what’s happening within the segments, and specifically seating - I know it doesn’t get a lot of air time, but the best margin you’ve posted in a while, so just any voiceover on seating. Then complete vehicles, we know that you’ve said that there would be a changeover and that would drag it, you know, negative margins that I don’t think any of us expected. Maybe you could just give us a sense of when you get past this changeover and where those margins in complete vehicles should normalize to.
Swamy Kotagiri, CEO
Good morning. As we have discussed previously regarding seating, we noted that last year we faced a really unfavorable mix. With the improvement in chip supply, we are experiencing a more normalized volume in some of our major platforms, and we are beginning to see the associated benefits. It is important to highlight our ongoing commitment to executing various initiatives. Regarding seating and the mix issues, it is becoming evident. You are correct about the complete vehicles; we have mentioned that the changeover and launch cycle are affecting it, and this is still consistent with our expectations for that segment. As we move beyond this year into next year, we will be able to provide more details when we reconvene in February. However, as of now, everything is aligning with our expectations.
Dan Levy, Analyst
Great, thank you.
Operator, Operator
Thank you very much. We’ll proceed with our next question on the line from Colin Langan with Wells Fargo. Please go right ahead.
Colin Langan, Analyst
Great, thanks for taking my questions. If I look at the implied second half margin, it’s around 5.6%, which is clearly above your full year outlook. Should we be thinking of that as the right sort of jumping off point as we go into ’24, or you kind of mentioned that there’s a cadence of recoveries, so is there sort of a little help from the recoveries in the first half that’s helping that second half margin, making it maybe not a good base to be thinking about?
Louis Tonelli, Vice President, Investor Relations
Yes, good morning Colin. You're correct about the second half expectations. We anticipated that the recovery would be more focused on the latter part of the year. As Swamy mentioned earlier, we remain confident in our projections for 2025 while we work through our business planning process. We need to consider some volumes and assumptions. However, do we expect a decrease in margins for 2024? No. Do we believe we can achieve growth from the mid-5s upwards? I agree with that perspective.
Colin Langan, Analyst
Okay, understood. You mentioned earlier how we should consider the pace heading into next year. It seems that about a third of your recoveries might require some form of renegotiation. Does this imply that we will continue to face challenges in the first quarter until those recoveries are resolved, or is there a chance that it could become more automatic, meaning if certain conditions are met, you could secure them by January 1?
Swamy Kotagiri, CEO
Colin, I think like I said, the one that is in a mechanism basis that kind of flows through, but the other will be data-based on where our set of assumptions are in terms of energy and commodities and so on. That will be very fact-based. Some conversations for ’24 are already on the table, to the extent that we know the information, and if you remember, in the last two calls I said, when we talk ’23, it’s not just only ’23, some of it is ’22 and some of it is forward-looking, to think about what ’24 would look like. But like Louis said, that will become more definite once we finish our set of assumptions and have the plan in front of us.
Colin Langan, Analyst
Got it, all right. Thanks for taking my questions.
Operator, Operator
Thank you very much. We’ll proceed with our next question on the line from Joseph Spak with UBS Securities. Please go right ahead.
Joseph Spak, Analyst
Good morning everyone. I have a bit of housekeeping to address as I'm a little confused by the amortization details you shared. You adjusted your previous guidance by approximately 10 basis points, which would indicate around $40 million. However, in this quarter, it appears you added back $32 million. How do we reconcile that? Was the amortization unusually high this quarter? Why would it decrease? Could you clarify what the full year amortization was for last year and this year, as well as what the appropriate run rate is moving forward, so we can adjust our models accurately?
Louis Tonelli, Vice President, Investor Relations
Morning Joe. On amortization, we’re trying to get an apples and apples comparison, so what we’ve done, when you look at our financial reporting that will come out today, it’s very clearly listed on our analyst report in our financials. But just specifically to the numbers, when we guided in August, we said $30 million for half a year for Veoneer, so Veoneer is about $60 million of an impact annually. When we did our final scrub of all the other acquisitions that we had out there, on an annual basis there’s approximately another 50 that is going to flow through, so on an annual basis for the next couple of years, it’s going to ebb and flow as stuff rolls off, but you’re in that $110 million range.
Patrick McCann, CFO
And last year would have been about 50.
Louis Tonelli, Vice President, Investor Relations
Fifty - thank you.
Joseph Spak, Analyst
So it’s 50, and going forward it’s one-time?
Louis Tonelli, Vice President, Investor Relations
Correct, and this year would be 80.
Joseph Spak, Analyst
Right, so I know you mentioned that you restated prior years, but as we consider the fourth quarter, what is the appropriate starting point for the new measure of adjusted EBIT? Should we use that same amount of around $11 million that we need to add back for the fourth quarter?
Louis Tonelli, Vice President, Investor Relations
Yes, $11 million relative to what we said last quarter, because we basically would have implied 15, so about 11 is what we would have, incremental to what we said last quarter.
Joseph Spak, Analyst
Okay. The second question is if we look at BES margins implied in the fourth quarter and look at your full year guidance, there’s a step down. I know that segment has been performing better year to date, in part I think with some better performance at some of those underperforming facilities. But how much of that step down is strike related, because I know there are some big customers there, and how much of it is maybe a little bit of a push-out from the battery enclosures business? I guess related to battery enclosures, I know you’ve made big capex investment, is there any thinking to sort of maybe slow or re-time some of that spend, or is this something you just need to invest through?
Louis Tonelli, Vice President, Investor Relations
I believe there are two aspects to your question, so I'll address the first part. From the third quarter to the fourth quarter, you're correct that the impact of the UAW strike is more pronounced in the fourth quarter, which negatively affects margins. Additionally, we typically launch more business in the fourth quarter compared to the third, which also affects margins as anticipated. This is consistent with our guidance and is reflected in our increased guidance range for BES for the full year. Regarding the second part of your question about battery trays, they are not negatively impacting margins since the majority of the spending in this area is capital-related and recorded on the balance sheet. We are timing our capital expenditures as necessary. It's important to note that we're not building something and then waiting for business to materialize; we are aligning our facilities and scaling our build according to our customers' production schedules. If those plans change, we will adjust our spending accordingly. We need to continue investing in this area, but it isn't currently affecting margins for this year.
Patrick McCann, CFO
I would like to mention that regarding the UAW strike, it has a slightly greater impact on Q4 compared to Q3, and it is more significant in BES than in the other segments. If you examine our projected fourth quarter, it hasn’t changed much, so there isn’t a notable effect on sales in any particular segment; it is mainly the increased focus on the UAW strike in BES.
Joseph Spak, Analyst
So is something like an 8-handle a better underlying rate for that business at this point, if we sort of back out some elevated launch activity in the fourth quarter and the strike?
Patrick McCann, CFO
Well I mean, we’re implying kind of a range of 5 to 6.5 for the fourth quarter, right?
Joseph Spak, Analyst
Right, but I thought you just mentioned there’s some unusual stuff in the fourth quarter, at least the strike.
Patrick McCann, CFO
Yes, we’re not going to comment on where we’re expecting to go beyond this. We’ll give more color, I think, in February.
Joseph Spak, Analyst
Okay, thank you.
Operator, Operator
Thank you very much. We’ll get to our next question on the line. It is from James Picariello from BNP Paribas. Please go right ahead.
James Picariello, Analyst
Hi, good morning everyone. Back on the seating market, I know you guys don’t provide a backlog, but of course you have one. One of your competitors, also back on the EV topic, one of your competitors, they stated that their new business backlog, about 80% of it for next year was tied to EV programs, and they went ahead and cut that backlog contribution for next year by 20% just based on their perceived visibility or real visibility in what those EV build schedules look like. Just curious what your EV program mix in the new business draw for the coming years, what that could look like in the seating business, and if any other major product categories that are of course powertrain agnostic come to mind in terms of this EV exposure. Thanks.
Swamy Kotagiri, CEO
Good morning James. Overall, if you look at Magna this year, less than 10% of total sales is related to EV platforms. Regarding the specific question about seating, the content for us on EV platforms in that area is not significant.
Louis Tonelli, Vice President, Investor Relations
No.
Swamy Kotagiri, CEO
We don’t see that impact. Looking ahead to future years, it's too early to discuss volumes due to tight operations as we launch. We will need to coordinate with customers if there is a significant change. As I mentioned earlier, we will collaborate with them to determine how to adjust and what measures should be implemented if there is a considerable change.
James Picariello, Analyst
Okay, understood. Then just one quick on the LG powertrain JV, as we think about the targeted revenue ramp to $1.5 billion or $1.6 billion, whatever the number is over the coming years, just in terms of the customer regional mix of that joint venture, what that looks like.
Swamy Kotagiri, CEO
Yes, I think we were roughly talking about a billion this year, Louis, right?
Louis Tonelli, Vice President, Investor Relations
Mm-hmm.
Swamy Kotagiri, CEO
The customer mix is primarily in North America, with expansions into Europe. We are building on existing programs and preparing to launch new ones. This setup resembles a foundational platform, similar to the emissions and inverter systems we have developed. There is a specific focus on certain programs, yet the overall approach allows for broader applicability to emissions in general. Thus, there is some flexibility in our manufacturing and engineering processes, as they are not confined to a single program. We need to monitor the feedback from our customers for any significant changes. Currently, we have not observed any major decline or alteration, but we will provide updates based on our plans in February.
Operator, Operator
Thank you. We’ll proceed with our next question on the line from Jonathan Goldman from Scotiabank. Go right ahead.
Jonathan Goldman, Analyst
Good morning, and thanks for taking my questions. Just a quick one on the macro. I believe your previous North American production outlook did not factor in the impact from strikes, so if we strip out the impact that you’re projecting, your underlying production outlook would be up from previous expectations. Can you just discuss what you’re seeing in the macro environment that supports the relatively better outlook?
Louis Tonelli, Vice President, Investor Relations
Yes, good morning. Exactly, so when we guided in August, we guided excluding the UAW or Unifor issues at 15.2 million units. Our estimate is that we lost 220,000 units as a result of the UAW labor disruptions, which would imply 15.4. Of the 15.4, the 200 increase primarily came through in the third quarter.
Jonathan Goldman, Analyst
Is that more new products or product launches, or market growth? Any puts and takes there?
Patrick McCann, CFO
Just higher volume draws from our customers relative to what we were anticipating.
Jonathan Goldman, Analyst
Okay, fair enough, and then another housekeeping one. You raised the margin guidance, but it looks like below-the-line items are flat, so you maintained the free cash flow guidance for the year. Could you just help me bridge the delta there?
Patrick McCann, CFO
Yes, I think the simple answer is that it’s just a movement within the range. When you work through the math, we were comfortable holding the range where it was at.
Jonathan Goldman, Analyst
And there’s nothing particularly going on with working cap or anything else?
Patrick McCann, CFO
No, exactly.
Michael Glen, Analyst
Hey, thanks for getting me in. Can you just talk a little bit about power and vision margins? What I’m just trying to understand is the sequential uptick from Q2 into Q3, even excluding the amortization of intangible dynamic. You’re showing a pretty notable lift from Q2 into Q3. Was Veoneer accretive to power and vision margin in the quarter? I’m just trying to figure out exactly what’s behind the lift.
Swamy Kotagiri, CEO
Hi Michael, good morning. In the first half, we faced a warranty issue, a negative net commercial item in Q2, and increased engineering costs. That's the summary for the first half. Looking at the second half, we also had net input costs that were a challenge in the first half. However, if you consider the higher sales in the second half and exclude the one-time items and warranty issue, along with the increased engineering costs, these factors contributed positively to our bottom line, and equity income was up.
Michael Glen, Analyst
Okay, and in Veoneer, any comments on the contribution of Veoneer in the quarter to EBIT, power and vision EBIT?
Swamy Kotagiri, CEO
I would say the comments that we gave in the last call, that we are in line with expectations that we had during closing with Veoneer, and we continue to have good traction to realize the synergies that we talked about.
Michael Glen, Analyst
In North America, considering the recent quarter with the strike and other factors, can you evaluate the performance on a platform level? Specifically, did you notice any increase in the smaller programs during this quarter, or was performance generally aligned with previous periods? Are the larger, more profitable programs performing at the expected level for this period?
Louis Tonelli, Vice President, Investor Relations
You know, to be completely honest, I don’t have that in front of me, so it’s really hard. We don’t look at it by region, so. I’d have to look at it and see how it compares to what we’ve seen historically. I don’t think there’s anything notable that I can see in the quarter, but I’ll have to look at it a little more closely.
Michael Glen, Analyst
Got it, thanks a lot.
Operator, Operator
Thank you very much. Mr. Kotagiri, there are no further questions at this time. I’ll now turn the call back to you for any closing remarks.
Swamy Kotagiri, CEO
Thanks everyone for listening in today. I’m happy with our continued progress in 2023. We have a relentless focus on execution of our strategy and meeting our mid and long-term targets, and we have ongoing confidence in our ability to meet our plan. Thank you and have a great day.
Operator, Operator
That does conclude the conference call for today. We thank you for your participation and ask that you disconnect your lines. Have a great day, everyone.