Earnings Call Transcript - MGA Q1 2023

Operator, Operator

Greetings, and welcome to the Q1 2023 Results Call. As a reminder, today's call is being recorded Friday, May 5, 2023. Now I would like to turn the conference over to Louis Tonelli, VP, Investor Relations. Please go ahead.

Louis Tonelli, VP, Investor Relations

Thanks, Tommy. Hello, everyone, and welcome to our conference call covering our first quarter 2023. Joining me today are Swamy Kotagiri and Pat McCann. Yesterday, our Board of Directors met and approved our financial results for the first quarter of '23. 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 and 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. And with that, I'll pass the call over to Swamy.

Swamy Kotagiri, CEO

Thank you, Louis, and good morning, everyone. I appreciate you joining our call today, and let me jump right in. There are some notable takeaways to highlight before getting into some of the details. Organic sales grew by 15%, outperforming weighted production by 8%, driven by growth across our portfolio. Our strong Q1 operating performance reflects robust earnings on higher organic sales. We are raising the lower end of our adjusted EBIT outlook by 60 basis points based on the strength of these results and targeted actions to reduce expenses and optimize our cost structure. We are highly focused on executing our strategy and remain confident in our ability to meet our long-term growth and margin outlook. Given our sales growth of about $8 billion in the next three years, particularly on new program launches, we are investing in the business and expect CapEx to sales ratio to normalize by 2025. Our CapEx outlook is unchanged for 2023. In the quarter, we issued $1.6 billion of debt to finance our pending acquisition of Veoneer Active Safety, and we plan to be back in our target leverage range by the end of 2024. Our successful debt offering was done while maintaining our investment-grade rating and strong investor interest despite a challenging market environment for debt issuance in Q1. As you all know, our global economy continued to experience some interlocking challenges, including higher inflation, rising interest rates, geopolitical risks, and slowing economic growth, which continue to have an impact on our industry. We have remained focused on driving operational improvements, working with our customers to recover inflationary costs, and executing on our strategy to deliver long-term value. Let me share some of these specific operational improvements and where we have intensified our actions, giving us confidence in achieving not only this year's outlook but our plans beyond 2023. We have undertaken a number of actions to mitigate the short and midterm macroeconomic pressure we are facing, including the consolidation and restructuring of some corporate functions, manufacturing footprint optimization, and repricing some programs that are underperforming our expectations. At the same time, we have and continue to intensify actions that are core to our daily business, including automation activities. In fact, about 15% additional productivity has been identified, including a possible 120 automation installations over and above the planned 70, all to be completed within the year. Additionally, our corporate enterprise-wide global purchasing initiative that started last year is helping reduce direct component pricing, freight optimization, and overall supplier management, among other things. We are starting to see traction here. And finally, smart factory initiatives with a digital ecosystem implementation, which include leading indicators, analytics, and higher levels of automation, all aimed at achieving higher productivity levels, are all well underway. We expect these initiatives to help us achieve our 2023 outlook and will be key to expanding long-term margins. Now looking at our sales in Megatrend Areas that are increasing per our plan. Sales for these product areas were just under $1 billion combined last year and are expected to roughly double to just under $2 billion this year, double again by 2025, and be up to $7 billion by 2027. These products have a sales CAGR of around 50% in the period from 2022 to 2027. The pending acquisition of Veoneer is expected to add meaningful growth on top of that. As the sales growth continues, our roughly $900 million of engineering spending in these areas is expected to be relatively flat over our outlook period. Given that these product areas are reaching an inflection point, we are beginning to leverage our engineering spend to the point where we expect these businesses to be profitable by 2025. We recently announced a few key product wins contributing to our growth in these areas, including ClearView Vision Systems on the Ram 2500 and 3500 heavy-duty models, battery enclosures business on General Motors, EV pickups and SUVs, and eDrive systems for a Europe-based global premium OEM, just to name a few. We are expecting overall growth for Magna of around $8 billion from 2022 to 2025. This is partially driven by the record business awards we achieved in '22, which were 30% above our 5-year average. This high-growth cycle is driving the near-term capital investment. Our CapEx to sales ratio is expected to decline to historical levels of low to mid-4s by 2025. Just as a reference point, we exceeded a 5% threshold during other periods of growth in 2016 and '17. More than $1 billion of our expected capital investment over the next 3 years, including about $500 million this year alone, is to build on a strong position in battery enclosures. A market position that we believe we can maintain over the long term and generate strong returns from investments across multiple program life cycles. And it's important to point out that we continue to win business across our core product areas as well, including seed complete assemblies on GM's EV pickup trucks at Orion Assembly, engineering and complete vehicle assembly for INEOS, and smart access power door systems on a Ferrari program. Lastly, before I pass the call over to Pat, reflected in our ongoing commitment to operational excellence is the recognition we received from our customers. Typically, Magna receives more than 100 launch and quality awards from various global automakers around the world each year. Most recently, General Motors recognized Magna with a total of 8 awards, seven supplier of the year awards, and one overdrive award. We were one of only two suppliers to win both awards and the only supplier to win six or more in a given year, and we have done it for three consecutive years. With that, I'll pass the call over to Pat.

Pat McCann, CFO

Thanks, Swamy, and good morning, everyone. As Swamy indicated, we delivered strong first quarter results coming in ahead of our expectations. Comparing the first quarter of 2023 to the first quarter of 2022, the consolidated sales were $10.7 billion, up 11% compared to a 3% increase in global light vehicle production. EBIT was $437 million. While EBIT declined 120 basis points to 4.1%, it was up 40 basis points from the fourth quarter of 2022. Adjusted EPS came in at $1.11 down 13% year-over-year, partly due to a lower tax rate last year. Free cash flow used in the quarter was $279 million compared to $99 million in the first quarter of 2022 and partly reflecting higher capital spending to support our strong growth. During the quarter, we paid dividends of $132 million, and we are raising our sales outlook, as well as the low end of our EBIT margin range. Let me take you through some of the details. North American light vehicle production was up 8%, Europe was up 7%, while production in China declined 5%, netting a 3% increase in global production. Our consolidated sales were $10.7 billion, up 11% over the first quarter of 2022. On an organic basis, our sales increased 15% year-over-year for an 8% growth over market in the first quarter or 5% growth over market, excluding complete vehicles. The increase was primarily due to higher global vehicle production and complete vehicle assembly volumes, the launch of new programs, and price increases to recover certain higher input costs. These were partially offset by the impact of foreign currency translation, lower sales due to the substantial idling of our operations in Russia, net divestitures, and normal course customer price givebacks. Adjusted EBIT was $437 million, and adjusted EBIT margin was 4.1% compared to 5.3% in Q1 2022. The lower EBIT percent in the quarter reflects about 80 basis points of nonrecurring items, the most significant of which relates to lower net favorable commercial items and a warranty accrual. About 70 basis points of operational items, including inefficiencies at a BES facility in Europe, which we highlighted beginning in Q2 of last year, impacted us by about 40 basis points in Q1, along with higher program-related engineering spend and launch costs. These were partially offset by productivity and efficiency improvements at certain facilities. In addition, higher net input costs impacted us by about 60 basis points. These items were partially offset by earnings on higher sales and higher equity income. Interest expense declined slightly, reflecting a make-whole payment made last year to early redeem debt as well as increased interest income earned due to higher current rates. Our adjusted income tax rate came in at 21.6%, largely in line with our 2023 expectations but higher than Q1 of last year. Net income attributable to Magna was $319 million compared to $383 million in Q1 2022, reflecting lower EBIT and higher tax rate, partially offset by lower interest expense and minority interest. Adjusted diluted EPS was $1.11 compared to $1.28 last year. The decrease is the result of lower net income, partially offset by fewer shares outstanding. The reduced number of shares outstanding primarily reflects the impact of share repurchases during or subsequent to Q1 of 2022. Turning to a review of our cash flows and investment activities. In the first quarter of 2023, we generated $568 million of cash from operations before changes in working capital, while we invested $341 million in working capital. Investment activities in the quarter included $424 million for fixed assets and a $101 million increase in investments other assets and intangibles. The $424 million in CapEx was higher than $238 million in Q1 of last year due to additional investments we are making in our business to support growth. Overall, we used free cash flow of $279 million in Q1. We also paid $132 million in dividends in the quarter. Our balance sheet continues to be strong. At the end of Q1, we had $5.9 billion in liquidity, including over $2.4 billion in cash. We completed several debt transactions this past quarter. This debt will be used primarily to fund the acquisition of Veoneer Active Safety, our capital spending program included in Megatrend Areas, and to refinance our euro debt set to mature this year. Currently, our adjusted debt to adjusted EBITDA is 2.19 times. Excluding cash we are holding to pay down our euro debt, our ratio is 2 times. As Swamy said earlier, we anticipate a return to our target leverage ratio of 1 to 1.5 times by the end of next year. Next, I will cover our updated outlook, which incorporates slightly higher-than-expected vehicle production in both North America and Europe as a result of better production in Q1. Our assumption for production in China is unchanged from our previous outlook. We also assume exchange rates in our outlook will approximate recent rates. We now expect a stronger euro and slightly lower Canadian dollar for 2023 and relative to our previous outlook. We are increasing our expected sales range, largely reflecting the higher North American and European production in Q1, as well as the higher euro. We are increasing the bottom end of our adjusted EBIT margin range, we are now at 4.7% to 5.1%. As Swamy indicated, the increase reflects our better-than-expected Q1 and actions undertaken to reduce expenses and optimize our cost structure, partially offset by an increase in launch-related spending for 2023. As a result of increasing the ranges for our sales and the low end of adjusted EBIT margin, we're also raising our range for net income attributable to Magna. Our interest expense, equity income, tax rate capital spending, and free cash flow expectations are all unchanged from our last outlook. In summary, we had a strong operating performance in the first quarter. Once again, we outgrew our end markets by 8% on a consolidated basis and 5% excluding complete vehicles. We're taking additional steps to reduce our expenses, optimize our cost structure, and improve margins. As a result of our strong Q1 and incremental cost optimization actions, we are raising the low end of our EBIT margin outlook expectations for the year. We are determined to deliver on our outlook, but recognize there's plenty of work ahead, particularly with respect to input cost recoveries from our customers. We are laser-focused on execution. Finally, we expect to close the Veoneer Active Safety transaction in the second quarter and remain highly focused on the integration of this business. Thank you for your attention, and we'll be happy to answer your questions.

Operator, Operator

Thank you very much. Once again, if you would like to register your questions on the floor on your telephone or to potentially request if your question has been asked, please press the 3. One moment, please, for your first question. And we'll get to our first question on the line from John Murphy with Bank of America. Please go ahead.

John Murphy, Analyst

I just wanted to touch on Slide 10 and battery enclosures specifically. As we look at this, you're talking about having the battery enclosures for all of GM's EV trucks. I'm just curious; could that go beyond trucks to the Ultium platform more broadly? And then also, should we be thinking about this battery enclosure business on the truck specifically or maybe even more widely similar to what you did on the hydro frames for GM back in '98, '99 changeover, and that may be somewhat of a similar opportunity to be sole sourced and have a very large profitable business with great returns.

Swamy Kotagiri, CEO

John, this is Swamy. I think you kind of hit on some of the key points. The battery enclosures business is a product line that is not restricted to SUVs and trucks. That's where we have a lot of the traction right now, but should be an applicable product to any that has different versions of the battery enclosures, right, and any material. The key that we are excited about in this product line is the existing product, process and asset base that we have and the capabilities of different materials and different processing technology that we are able to bring to do what's right for the product. So we actually see proliferation of this product line across any battery vehicle. And to your second point, if you just look at the investment that we're making, like we did in the frame business in the mid- to late '90s, we see this as multiple program lives. And once we have the investment in place, incremental returns and margins will come because we see this as a multi-life cycle award going forward with the expertise that we have.

John Murphy, Analyst

And then a second question on the short term here on schedules. It sounds like things normalized quite a bit in the first quarter and continue to do so in the second quarter and hopefully for the remainder of the year. How much of an impact did that have in the quarter improving the margin sequentially? Because it seems like a lot changed here from the fourth quarter. And fourth quarter was still plagued with a lot of uncertainty and volatility in schedules. I mean how big a deal did that play in the quarter sequentially? And how should we think about that going forward?

Pat McCann, CFO

John, it's Pat. As we look at the schedule volatility, we anticipate improvements as we move through the year. However, we are still experiencing some fluctuations transitioning from Q4 to Q1, and the improvements did not meet our expectations. Nonetheless, we have noticed some stabilization in our schedules more recently in April.

Swamy Kotagiri, CEO

So I think, Pat, maybe to add, as you said, we continue to see the volatility, but we have taken a lot of initiatives internally and also had some collaborative discussions with the customers to have a little bit more visibility beyond the normal time. Even looking into February and March, we saw a lot of start-stops. But better communication, for example, with some customers, we did not run on weekends, working together and figuring out how to minimize some of the inefficiencies caused by start-stops. But moving from March to April, we are starting to see a little bit of improvement, but looking forward to that stability, John.

John Murphy, Analyst

And then, concerning higher input costs on the raw material side, as well as labor, energy, and logistics, I'm curious, Pat, as you consider the year ahead and discuss recoveries in commercial settlements to recoup some of these costs. How should we approach the various categories of raw materials, especially steel, labor, energy, and logistics? How successful do you anticipate being on both a gross and net basis?

Pat McCann, CFO

What we're observing currently and what we project for the year, John, pertains to the various categories. Since the beginning of the year, we have noticed a decrease in energy curves moving forward. We have had significant success in energy recovery. Therefore, the improvement in our margins is not solely due to these reductions. We have also previously mentioned that we have some hedging programs related to energy to secure supply and some partial hedges. Regarding steel, it has increased beyond our expectations from February. At this point in the year, most of the steel has already been purchased and secured for the entire year, so the impact of this is not fully reflected in our current results. Conversely, we are actually seeing a benefit from scrap steel, which is repriced monthly. In our outlook, we anticipate a benefit of about $20 million, reducing our previous $50 million in scrap headwinds down to $30 million. As for labor, we haven't experienced much change in our labor assumptions because those rates are fixed at the start of the year.

John Murphy, Analyst

But the ability to get recovery on labor at this point? I mean with the automaker customers, I mean how are you seeing there? Are you able to go to them and say, listen, we're getting more labor inflation, potentially logistics inflation. And can you get recoveries? Or do you feel like sort of you're at the level of steel right now where it's locked in for the year and it's a 2024 discussion?

Swamy Kotagiri, CEO

It's not locked in, John. The discussions continue not just for '23 and '24, but back into '22. As you know, we always offset the normal inflation with the productivity improvements and so on. But with the, call it, abnormal inflation that we had either in Mexico or in Europe, where based on the regular contractuals, we were looking at 7.5% to 9% in some areas, wage inflation. So we are in discussions with the customers on, call it, above normal. But it's not as discrete as to say this is labor, this is commodity. We are holistically looking at it to say this is the normal world. This is where we are including some of the inefficiencies that are caused by the customers on the start-stop. So a lot of tough discussions, but I would say constructive making progress in the first quarter and hope to make more and record some of the ongoing recoveries beyond the first quarter.

Operator, Operator

We'll proceed with our next question on the line is from Adam Jonas with Morgan Stanley.

Adam Jonas, Analyst

So I just wanted you to comment on the changing environment. It just seems like from the end of last year to now has been a really pretty sharp change in supply and demand in EVs, like really narrative changing. I mean you got Tesla who seems to be willing to run the business at a loss potentially and kind of really signs of an oversaturated market in China. I'm just wondering from your lens, do you think that business as usual and expected? Or do you think that the narrative shift is significant enough for something to change in your strategy over the next 2 or 3 years? How nimble are you staying? And then I have a follow-up.

Swamy Kotagiri, CEO

We have to stay nimble or we don't survive in this industry. We always talked in our product strategy about how do you get as modular and as callable as possible, even from the perspective of manufacturing processes. The same thing applies, right? How do you have scalable modules? How do you plan lines in such a way that you can have some amount of flex? It obviously does not have infinite flexibility to volumes. Some of it is the terms you have with the customers in terms of volume take rates and what you put in fixed assets versus being able to move from one to the other. Just generally, in terms of the products, we are very focused on what we think we can address and how we address those whether EV or not in our eDrive platform. We look at, let's say, here is the low tier, here is the mid-tier of mid-plus and do we address the internal market in all segments? Not really. We are looking at the platforms before we take the business and risk-adjusted to the volumes that are being assumed. In some cases, there are platforms where you have both organs. As an example, in our transmissions and DCTs, we have the DCTs, the hybrid, and the eDrives. So there is some amount of hedge there doesn’t work through in all platforms, all products. Yes, it's a lot of moving pieces, but we continue to look at that. I wouldn't say we are perfect and there is no risk.

Adam Jonas, Analyst

My follow-up question is about the Chinese OEMs, especially the more aggressive ones in the export market like BYD and Geely. It appears there’s a directive from Beijing encouraging these domestic companies to progress. I recall you mentioned a book relating to historical events that may provide insight into how the industry is changing. Can you share your thoughts on your exposure to these rapidly expanding Chinese EV manufacturers? Are you appropriately invested in them, and could this signal a potential decline in global CPV for your company?

Swamy Kotagiri, CEO

I don't see any atrophy at this stage when I assess the business. Our primary markets are North America and Europe, but we also have a presence with global OEMs in China as well as local Chinese OEMs like BYD and Geely. I can't definitively say if our growth is on par with the average in Europe or North America, but I can say that we are very focused on local manufacturing for OEMs rather than simply shifting products between regions. Additionally, we carefully evaluate the region, platform, OEM, and specific programs regarding risk adjustments to set financial hurdles before proceeding. This framework applies to all the programs we analyze.

Operator, Operator

We'll get to our next question on the line is from Peter Sklar with BMO Capital Markets. Go ahead.

Peter Sklar, Analyst

Looking at the vehicle assembly segment, Steyr, it seemed to perform well during the quarter, both in terms of revenues and margins and the profits you generated there. Can you just talk a little bit about the context of what's going on? Because I believe the BMW 5 Series was ramping down, and the Fisker Ocean was ramping up, and there was the possibility you might have had quite a bit of disruption at the facility during the quarter, which was negatively impacting results. So can you just talk a little bit about how things are unfolding at Steyr?

Pat McCann, CFO

Yes, Peter. So I think we were really satisfied with our Steyr performance in Q1. What we did see was volumes come in above expectations for the quarter. And the mix on those volume increases was positive. Just one point of clarification. The vehicle that is ending in Steyr is the BMW 5 Series, not the BMW X5. And that's ramping down in Q3 and Q4 of this year. So it's still running at this point in time. We did have sales outperformance in Steyr in the quarter, but also we're still seeing some strength in the back half of the year. They did have some engineering margins come through as they settled some contracts related to the accounting. But those are the big factors driving that. And they're still focused on turning over the plant and ramping hard as they come up in the back half of the year.

Peter Sklar, Analyst

And when is the Fisker Ocean ramping up? Sorry, when Pat in the second half as the 5 Series ramps down?

Pat McCann, CFO

Correct. That's when you go to the launch a heavy ramp as we move on forward from this point, but it will be that timing.

Peter Sklar, Analyst

Pat, on another question, on, as I recall, on the fourth quarter conference call, management indicated that you expected Q1 results to be weaker than Q4, but we got the opposite where Q1 results were actually stronger than Q4. So can you talk about what changed in the business since you initially provided that viewpoint for a weaker Q1?

Pat McCann, CFO

I believe the primary factor was volume. When assessing our volume expectations, they aligned closely with IHS, and we ended up achieving around 300,000 to 330,000 more units than anticipated. Our sales exceeded our expectations and showed strong pull-throughs. While it's easy to mention a pull-through, achieving it requires considerable operational excellence to maintain those strong margins. We executed very well in the first quarter, which was the main contributor. Regarding the significant decline from Q4 to Q1, there was an expectation that customer recoveries would be realized in the latter half of the year. Last year, we saw robust recoveries in Q1, and we are actively making progress and securing good agreements, but results are indeed below Q4 levels, aligning with our expectations.

Peter Sklar, Analyst

And then just lastly, on the body and exteriors plant in Europe where you've been having the difficulties I believe it's financial performance has gotten worse quarter-over-quarter. I think you said on this call, negatively impacting margins by 40 basis points. And correct me if I'm wrong, but I think you said for Q4 had a negative impact of 25 basis points. So can you just kind of summarize what's going on at that plant and what the outlook is for improvement?

Swamy Kotagiri, CEO

Peter, this is Swamy. The last time I communicated, the planned performance is going to be eliminating all losses by end of 2024. We are on track for that, just a little bit of clarification. When we talked about the performance, what Pat was doing is comparing Q1 '22 to this quarter '23. And as I said, the real issue started in the second quarter of '22. Thus it looks worse in comparison to that quarter. But if you look at the progress, as we have indicated, there are a little bit of puts and takes here and there, but we are on track for 2023 and getting to eliminating losses by 2024. I would say we are in good shape.

Operator, Operator

We'll get our next question on the line is from Tom Narayan with RBC. Go ahead.

Tom Narayan, Analyst

I had a follow-up on the last question. On complete vehicle. I understand the strength in the quarter. But curious, I guess, why you're guiding for the margins to come down, I guess, for the remainder of the year? Were there specific things that maybe in that segment that benefited that are isolated in Q1?

Pat McCann, CFO

As we transitioned from 2022 to 2023, Peter highlighted a few key points. Firstly, we are anticipating a significant changeover at our facility. The production of the 5 Series is winding down while we are in the midst of launching the Fisker. As we approach a vehicle launch, both launch expenses and incurred costs increase disproportionately as we get closer to the start of production. Secondly, there is a contribution margin gap due to lower production of the 5 Series. In 2022, we also benefitted from licensing income related to platform sales and technology licenses. That accounting amortization is now concluding. Additionally, we saw strong engineering margins in 2022. Finally, we are facing challenges with energy and labor costs in 2023. These factors are contributing to a downward adjustment in our guidance for this year.

Tom Narayan, Analyst

And then maybe kind of similar to that Power & Vision, you're guiding for that to upshift in the remainder of the year. Just curious as to maybe what's behind that?

Pat McCann, CFO

Yes. When we analyze the performance of that team, we are observing some sales growth on a year-over-year basis. We're witnessing strong demand for this product as we enhance it. However, as we entered 2023, we also had increased engineering expenses in this product area due to the introduction of new technologies. This initiative is crucial. The team is benefiting significantly from the operational excellence efforts previously mentioned. We are on track with our execution plans, and we anticipate positive outcomes from those efforts. Additionally, we experienced a warranty issue in the first quarter of 2023, which can be inconsistent. Historically, our warranty costs have ranged between 1 and 1.25 and are expected to stabilize within that range for the full year. Once the warranty expenses decrease, our operational execution will contribute to improved margins for the remainder of the year.

Tom Narayan, Analyst

I see. Okay. And lastly, on the disclosures on Veoneer. Just curious what kind of information we'll get on that profitability, etc.? Or are we going to get that on earnings? Or how should we think about that? That's something that a lot of folks are eagerly anticipating.

Swamy Kotagiri, CEO

As Pat mentioned, we are on track to be able to close midyear as we get closer. Our intent is to be able to give a revised 2023 outlook, including Veoneer when we come to our next earnings call in August. We are even contemplating a couple of weeks out after the earnings call to have an investor update, where we can give a little bit more color. So that's where I think we can talk through. We've been discussing our ADAS growth and programs and so on and so forth. We can give some more color on that once the closing is done. First, in the earnings call, followed a couple of weeks later, where we can talk in general overall.

Operator, Operator

We'll proceed with our next question on the line is from Itay Michaeli from Citi. Please go ahead.

Itay Michaeli, Analyst

Just two questions for me. First for Pat. Maybe just talk through how we should think about the cadence of total company margins the rest of the year, as well as the complete vehicle segment? And then second, for Swamy, maybe back to ADAS. I was hoping you could just provide an update on the overall booking environment, the competitive environment, and then any progress both on the imaging radar side and driver monitoring as well?

Pat McCann, CFO

As we look at our margin profile throughout the year, our outlook since February remains unchanged. We anticipate margin expansion driven by increased sales, completed product launches, and customer recoveries. Additionally, we will benefit from scale in various automation and optimization projects. Although we do not provide quarterly guidance, we expect to see positive margin improvement as we move from quarter to quarter. Specifically regarding Steyr, there will be a low performance in one quarter due to missing sales contributions and the associated launch costs as we near full ramp-up of that vehicle.

Swamy Kotagiri, CEO

And Itay, on the question of the ADAS, I think we talked about the CAGR over the business plan period; we continue to track that as we go through from a portfolio perspective. The digital radar has been launched or is launching in one of the programs. We continue to have conversations with other customers 2 or 3 actively going through that technology coming into production or into more programs. As we sit here and look at it, we continue to track the plan that we put in place for the planned period. So we take the market. We continue to make progress to hit the plan that we have in place.

Operator, Operator

We'll get to our next question on the line is from Colin Langan with Wells Fargo. Please go ahead.

Colin Langan, Analyst

If I recall the original guidance, I think you had about $150 million of input headwinds, which sounds like that's modestly improved to about $130 million. You had the $70 million of the nonrecurrence of some warranty and provisions. And I believe there's like $170 million of sort of nonrecurrence of favorable commercial settlements in the initial guide. Can you just sort of provide color on what those settlements are with sort of normal? How are they trending in Q1? And are you still expecting sort of that year-over-year drag this year?

Swamy Kotagiri, CEO

So I think just to hit one by one. The $150 million that you're talking about was the inflation headwind that we talked about; $50 million of that was scrap-related. As Pat mentioned, we're looking at $50 million to be $30 million, so it's a pickup of $20 million. The other $100 million goes related to the incremental inflation headwind in 2023. As I talked, we are looking at offsetting that or continuing to look at ways to mitigate that with operational improvements, customer recoveries, and hopefully, the trend of the energy and commodities and other things, if they go in the right direction. It helps us reduce the risk of recovery. And that's the reason for our increase in the lower end of the margin. You talked about the commercial settlements. They're really not inflation related. For example, when we change the programs, scope or shut down a plant. Those are the types of discussions we have to get those recoveries, and they can’t be linearly predicted, as you can imagine, right? We had some of those in the last year. And we obviously cannot plan for such things this year. For the visibility that we had, we said we don't see the same magnitude of commercial settlements this year. Therefore, the variance is going to be compared to last year to this year; the settlements would be lesser and therefore, have a negative impact overall.

Colin Langan, Analyst

I mean is sort of the $170 million the right range of the help last year that you're not expecting to reoccur? It seems kind of large; I was sort of looking at the numbers.

Louis Tonelli, VP, Investor Relations

Yes, it hasn't changed that much versus our look.

Colin Langan, Analyst

I just want to follow up on the disclosures; it says there's $450 million of balance sheet exposure related to EV start-ups like this in Q1. It's actually up from about $400 million in the annual report. How should we think about this exposure over time? How are you thinking about counterparty risk with these newer EV start-ups, particularly as I believe you're exploring adding capacity in North America?

Pat McCann, CFO

We're monitoring new entrants in the market. The financial exposure related to the programs we are launching with these newcomers involves working capital, fixed assets, and other assets. This figure increased in the first quarter mainly due to investments for program launches. The amount will fluctuate throughout the year as we invest in tooling and engineering, much of which is paid before the launch. Regarding electric vehicles and our collaboration with them, we consider the appropriate risk-return profile for these programs. We need to ensure there is a solid business case with suitable commercial terms before deciding to invest, especially since we exercise more caution compared to our traditional customers. Currently, we have $450 million in exposure on our balance sheet from a $20 billion asset base, maintaining about 90% of our assets linked to eight customers. This provides some context.

Swamy Kotagiri, CEO

And just to clarify even further, Pat, on the topic of our plants for North America, it's not really plans. It is from a roadmap to say that we are open to look at footprint in North America, but we always said it has to be multi-life programs and risk-adjusted and so on. It's just more openness rather than saying that we have a definite plan.

Operator, Operator

I will proceed with our next question on the line is from Dan Levy with Barclays. Go ahead.

Dan Levy, Analyst

I know you discussed that some of the pace of disruption is lightening. Maybe you can give us a sense of what type of incremental margins we should be expecting as the pace of disruption continues to dissipate?

Swamy Kotagiri, CEO

Then you mentioned disruptions in what? Sorry, I didn't catch that word.

Dan Levy, Analyst

Production disruption.

Swamy Kotagiri, CEO

Yes. The production disruptions or start-stop where we have a release and then it changes either on volumes, right, or the takes and so on. As you can imagine, that leads to a lot of inefficiencies of planning, tracking labor, and so forth. So we've been working with the customers very collaboratively, and they are starting to give us longer visibility or finding a way to redo the production schedules. As an example, with one of our customers, we figured out a way not to work on weekends so that there is no premium cost. So a lot of that is internal initiatives for us to figure out how to address those inefficiencies, and we've been able to do that. But still, the customers are coming to the table to figure out, like I said, give us better visibility, figuring out a way to hit the volumes the way we can do it without too much cost. With that said, we looked at the downtime hours in February, where it was not a lot better than what we saw in Q4. But if you go in from March to April, we are starting to see a little bit of improvement, and that's caused due to semiconductors or some other supply chain constraints and customers managing their product lines and so on.

Dan Levy, Analyst

And the type of incremental margins we might expect as some of these pressures dissipate.

Pat McCann, CFO

Dan, when considering the margins, they will obviously differ by segment. We typically conduct a bottom-up analysis of margins. Based on historical data, our incremental margins should align with what we have observed in the past. However, it is important to note that with much of the growth requiring new facilities, we aren't necessarily seeing a full pull-through. For instance, when transitioning from two shifts to three, you are not fully absorbing fixed costs. Therefore, for some of the new facilities, the contribution margin will be lower, resulting in more of an EBIT margin pull-through.

Dan Levy, Analyst

And then I just want to follow up on the prior commentary you gave on cost actions. And maybe repricing the contracts, what type of visibility you have, what the magnitude of those benefits might be? And just general tone and tenor of how much low-hanging fruit there is to improve?

Swamy Kotagiri, CEO

Dan, I wouldn't be able to categorize how much specifically on the program repricing. This is a hygiene issue, as I would say, going through operations and looking at every little detail. We kind of looked at the management SG&A, engineering consolidation, restructuring of plans to look at accelerating some of the restructuring activities that we already had in the plan and outlook, and how do we pull forward some of those things. As part of this process, we looked at some of the programs where we had contractually ways to look at repricing right or programs that were not meeting our expectations in terms of profitability, margins, and returns. We looked at automation and a whole bunch of productivity improvements that we're going through, and that was the reason for us to talk about incremental margins going from '23 to '25. We've been able to pull forward some of those things. We talked about the purchasing initiative. We are looking at freight optimization, and we're working with our Tier 2 suppliers. So it's a whole bunch of activities that are adding bits and bytes, but that's how you chip away. There is not one big magic one that is contributing to a lump sum here. It's just grinding away at every detail.

Dan Levy, Analyst

And it's not a footprint issue, correct? It's not an issue, I would say, in a place like Europe where the LMP is lower than capacity. We're not talking about footprint actions, necessarily, correct?

Swamy Kotagiri, CEO

No, it's not a foundational issue. It's just optimizing every little thing that we have and rebalancing, but it's not a foundational footprint issue, no.

Operator, Operator

Our next question on the line is from Michael Glen with Raymond James. Go ahead.

Michael Glen, Analyst

I want to revisit a point I made earlier. As we observe these OEMs launching their electric vehicles and aggressively aiming for breakeven in their EV programs, I’m curious about the extent to which they will seek additional support from us as we invest in these initiatives. Is there any risk related to pricing? How would you assess the pricing risk associated with the EV programs?

Swamy Kotagiri, CEO

It's a normal course of action, Michael. We have already pricing discussions on productivity and givebacks and so on and so forth. You can have the product and be able to bring value to them; that's how we get the products. I mean there's always going to be conversations, but we are looking for what we have in our framework to meet our margin and returns profile just like they do; we have our shareholders. So I think it's going to be an ongoing discussion. We have to look at bringing value with the product and process and innovations that we have. We don't see anything beyond that, and we will know how to entertain that. I mean, we have to do the business. We have to.

Pat McCann, CFO

And Michael, just for perspective, these are long-term contracts. They're not subject to annual repricing, and it cuts both ways. So we're entering into significant investments under long-term contracts.

Swamy Kotagiri, CEO

Most of our customers, we have strategic relationships. It's not just a tactical discussion. It's long term, and it spreads across so many product areas. We do have an advantage there.

Michael Glen, Analyst

And then on the other side of this, you have all these legacy platforms that are facing some degree of volume decline, structural volume decline over time. So how do you view what happens with margins in those programs as we think out beyond 2025?

Swamy Kotagiri, CEO

I think we have to look overall, right? When you talk about programs, there is a certain aspect, which is of the asset that is not dedicated to the program like a press or an extrusion, or a machine center or in motor. But if you look at the assembly line that might be dedicated to a specific program, and that's where we have to think and make judgments on how do you put the flexibility in so that we can use certain parts of the assets in one versus the other. We've always talked about, as an example, a large part of the assets and capital that we have in our transmission and all-wheel-drive, four-wheel-drive business can also apply to do the product in the eDrive business, not all of it, but a significant part. So we have to have the discipline to figure where we put capital and how relevant is it going forward for the products for the car of the future. It's a very thorough exercise that we go through.

Michael Glen, Analyst

Can you provide more details about the actions taken in the restructuring related to the charges in Power's Vision segment?

Swamy Kotagiri, CEO

I think the two charges that you might have seen. One was the warranty reserve that Pat talked about, and the other one was the engineering spend that we had on a couple of programs.

Pat McCann, CFO

I agree. If you're referring to the actions taken regarding restructurings, those were in the MML space. It’s a combination of two areas. One is simplification. If you look at the restructuring we did this quarter, part of it involved consolidations. We're adapting and looking at our portfolio beyond our current outlook, taking steps to consolidate our operations for greater efficiency. The other aspect is that we had internal restructuring which resulted in costs associated with a management reorganization, leading to further cost optimization as Swamy mentioned earlier.

Swamy Kotagiri, CEO

And the payback is with a strong payback.

Operator, Operator

Thank you very much. And 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, Tommy, and thanks, everyone, for listening in today. I'm happy with the progress in the first quarter, but there is a lot of work ahead of us. It's just the beginning, and we feel confident with our progress and in our long-term strategy. Thanks. Have a great day.

Operator, Operator

Thank you very much. And that does conclude the conference call for today. We thank you for your participation as you disconnect your lines. Have a good day.