Release Date: August 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Magna International Inc (MGA, Financial) reported Q2 sales of $11 billion, in line with expectations.
- Operational excellence activities are on track to contribute about 75 basis points to margin expansion during 2024 and 2025.
- The company has reduced its planned gross megatrend engineering spend for 2024 by another $40 million, bringing total reductions for the year to $90 million.
- Magna International Inc (MGA) has further lowered its expected CapEx range by another $100 million, totaling up to $200 million for 2024 compared to the February outlook.
- The company is maintaining its free cash flow outlook at $600 million to $800 million for 2024.
Negative Points
- Adjusted EBIT margin was down 30 basis points to 5.3% compared to the second quarter of 2023.
- Adjusted EPS came in at $1.35, down 12% year over year, reflecting lower EBIT and higher interest expense.
- Interest expense increased by $20 million due to higher short-term borrowings and higher market rates on new debt.
- Net income was $389 million, down from $441 million in Q2 of 2023.
- The company is seeing slower BEV adoption than previously anticipated, particularly in North America and Europe, leading to program delays or cancellations.
Q & A Highlights
Q: As EV programs are pushed down and to the right, how do you think about the potential for the backfill of ICE vehicles?
A: We are cautious and rely on exact data available today. We have already seen some offset by higher ICE volumes, approximately $900 million. We continue to pursue opportunities but only consider confirmed data.
Q: How complicated is the restructuring around the Fisker, G-Class, and Ineos changes?
A: The restructuring is straightforward and already in action. We have addressed the appropriate cost base for complete vehicle assembly, and the process is on track.
Q: Why does Magna management feel the stock is not a good enough investment for share buybacks?
A: We believe it is the best investment but are committed to a leverage ratio. With the Veoneer acquisition, we are on track to meet our leverage commitments. Share buybacks are in the cards once we achieve our balance sheet goals.
Q: Can you give a more detailed update on what’s happening in the ADAS market, particularly in China?
A: The ADAS market in China is seeing some in-sourcing by OEMs, impacting our sales by about $600 million. However, our overall exposure in China is roughly 10-12% of our total ADAS sales. We continue to see similar traction and win rates in other regions.
Q: Given the current pull-through of EVs, do you feel OEMs have appropriately recalibrated their expectations?
A: We have been conservative in our volume assumptions and feel contained in our set of assumptions. We continue to monitor the market but have taken a conservative approach to our forecasts.
Q: What are your assumptions on production schedules, especially from the D3, for 2024?
A: We are projecting North American volumes at 15.7 million, Europe at 17.1 million, and China at 29 million. We see flattish production year-over-year for the D3, with some declines from H1 to H2, particularly for Stellantis.
Q: How do you view the globalization of the Chinese auto industry and its impact on Magna?
A: We see opportunities as Chinese OEMs look to localize production in Europe. We have the experience and capability to support them. We are also present in China, working with both western and Chinese OEMs, and believe we can bring value as they globalize.
Q: Do you still think you can be breakeven within the megatrend areas in 2026?
A: We are going through a lot of flux and need to do a bottoms-up analysis. The sales adjustment related to EVs includes impacts beyond just the megatrends, affecting seats, mirrors, and body-in-white as well.
Q: Can you help us understand the sequential margin walk for 2024?
A: The big factors for H2 are commercial recoveries and lower engineering net spending. We expect a similar margin improvement trajectory as seen in 2023, with incremental improvements from Q2 to Q4.
Q: How much will engineering costs be lower in the second half of 2024?
A: We are not providing specific numbers but have highlighted that lower engineering net spending and commercial recoveries are the most impactful factors for H2.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
