Magna International Inc. (NYSE:MGA) Q1 2024 Earnings Call Transcript

Magna International Inc. (NYSE:MGA) Q1 2024 Earnings Call Transcript May 3, 2024

Magna International Inc. misses on earnings expectations. Reported EPS is $1.08 EPS, expectations were $1.28. Magna International Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by, and welcome to the Magna International First Quarter 2024 Results. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Finally, a reminder that this conference is being recorded. I would now like to turn the conference over to Louis Tonelli, Vice President of Investor Relations. Please go ahead.

Louis Tonelli: Thank you, operator. Hello, everyone, and welcome to our conference call covering our first quarter 2024. 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 2024. We issued a press release this morning outlining our results. You’ll find the press release, today’s conference call webcast, the slide presentation to go along with the call and our updated quarterly financial review all in the Investor Relations section of our website at magna.com. Before we get started, just as a reminder, the discussion today may contain forward-looking information or forward-looking statements within the meaning of applicable securities legislation.

Such statements involve certain risks, assumptions and uncertainties, which may cause the company’s actual or future results and performance to be materially different from those expressed or implied in these statements. Please refer to today’s press release for a complete description of our safe harbor disclaimer. Please also refer to our reminder slide included in our presentation that relates to our commentary today. With that, I’ll pass it over to Swamy.

Swamy Kotagiri: Thank you, Louis. Good morning, everyone. I appreciate you joining our call today. Let’s jump right in. There are some notable takeaways from the quarter that I would like to highlight before getting into some of the details. We are pleased that our Q1 results for sales and earnings, excluding fiscal impairments, came in ahead of our expectations. This was in part due to our continued operational excellence activities, which are on track to collectively contribute about 75 basis points to margin expansion over the next two years. We are maintaining our adjusted EBIT margin outlook for 2024 despite the negative impact of assuming no additional Fisker Ocean production and lower sales on program delays and mix.

Our operational excellence activities, continuing efforts to contain costs and commercial recoveries are all expected to contribute to this. And we issued $400 million of senior notes in Q1 to refinance debt coming due this quarter. We expect to be back into our target leverage range during 2025. So far this year, we have experienced more stable production schedules relative to what we experienced in recent years. This is contributing to improved operating results. We anticipate a relatively flat vehicle production environment over our outlook period, particularly in our key markets of North America and Europe. As a result, our continued content growth is contributing to our higher sales. As we said earlier this year, inflation continues, in particular, for labor.

However, we have been working hard to mitigate cost increases, including ongoing discussions with customers for additional recoveries. Lastly, our customers continue to evolve their electrification strategies, particularly in North America. We are assessing the potential impacts on our sales, earnings, capital and free cash flow and are working with our customers to optimize investment and capacity plans. We’ll continue to update when we have more clarity on major impacts, if any, to our business. It is important that I provide an update on our current status for the Fisker Ocean program. Production of the vehicle is currently idled. Our current outlook issued today assumes no further production. Consistent with disclosure, we provided in our annual information form, this assumption reduces our 2024 sales by about $400 million and impacts our adjusted EBIT margin by about 25 basis points.

We fully impaired our operating assets and warrants in the first quarter totaling $294 million. We have $195 million in deferred revenue associated with the Fisker contract that could offset the $294 million in asset impairments that cannot be recorded in Q1. This amount will be recognized in income as performance obligations are satisfied or upon termination of the fiscal contract manufacturing agreement. In order to mitigate the impact of the lower sales on this program, we recorded additional restructuring costs of $22 million in the quarter. We continue to monitor the situation, and we’ll evaluate opportunities to further mitigate the impact on our business. Overall, we expect to offset the adjusted EBIT margin impact from this item through actions taken and strong execution across the company.

I would like to comment on how we are proactively managing to address challenges and further improve our financial performance. Our operational excellence activities are on track to contribute about 75 basis points of improvement over the next two years. In addition, input costs, which were expected to be a 30 basis point headwind to EBIT margin this year has been reduced to about 25 basis points now. We are optimizing engineering spend which is expected to be down about $50 million from our February outlook. We are lowering our capital spending outlook to the $2.4 billion to $2.5 billion range, and we are continuing restructuring activities to optimize our footprint. As a result, our leverage ratio is on track to be back in our target range during 2025.

We have a continuing focus across Magna on margin expansion and free cash flow generation. Electrification remains an important industry trend although the take rates are uncertain in the short and midterm. Our EV strategy with respect to customers, programs and regions in which we want to participate is both, targeted and deliberate. And as you’ve heard us say for many years, we are quoting business based on our volume assumptions, not our customers. With all this in mind, we continue to win business and advance our position in electrification. We have been awarded specialized eDrive business to support one of our customers’ high-end vehicle platform. This primary rear drive system delivers for 700 kilowatts of power and exceptional performance, reflecting our expertise in electric powertrain system engineering and integration.

Lastly, before I pass the call over to Pat, I want to highlight recognition received by Magna, which I am very proud of. Magna was named at 2024 Automotive News PACE Award winner, one of only thirteen winners for our integrated driver and occupant monitoring system. We also received PACE pilot recognitions in seating for our EcoSphere 100% melt-recyclable foam and trim; and in exteriors, for our Modular & Scalable Active Grille Shutter Assembly. Magna was the only company to receive both a PACE award and multiple recognitions for PACE pilot innovations to watch. And 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.

An assembly line of light trucks in a state-of-the-art manufacturing plant.

Most recently, General Motors recognized Magna with five awards across four product areas. This brings our total to 30 GM Supplier of the Year awards over the last five years. With that, I’ll pass the call over to Pat.

Pat McCann: Thanks, Swamy. And good morning, everyone. As Swamy indicated, we delivered solid first quarter earnings ahead of our expectations, excluding the Fisker impairments. Recall that we indicated on our February call that we expected our 2024 earnings to be lowest in the first quarter of the year. Now, comparing the first quarter of 2024 to the first quarter of 2023. Consolidated sales were $11 billion, up 3% compared to a 2% increase in global light vehicle production. Adjusted EBIT was $469 million. And adjusted EBIT margin was up 10 basis points to 4.3%. Adjusted EPS came in at $1.08, down 6% year-over-year primarily due to interest costs, but ahead of our expectations. And free cash flow used in the quarter was $270 million, compared to $279 million in the first quarter of 2023.

During the quarter, we paid dividends of $134 million. We also raised $400 million to repay debt coming due later this quarter. More importantly, with respect to our outlook, as Swamy noted, we are maintaining our adjusted EBIT margin range and lowering our capital spending range. Let me take you through some of the details. North American light vehicle production was up 2%; and China was up 11%; while production in Europe declined 2%, netting to a 2% increase in global production. Breaking down North American production further, while overall production increased 2%, production by our Detroit-based customers declined 3% in the quarter. Our consolidated sales were $11 billion, up 3% over the first quarter of 2023. On an organic basis, our sales increased 1% year-over-year for a minus 1% growth over market in the first quarter, but plus 2% growth over market, excluding Complete Vehicles.

Once again, negative production mix in North America unfavorably impacted our year-over-year sales growth in the quarter. Our sales increase was primarily due to the launch of new programs, higher overall global vehicle production the acquisition of Veoneer Active Safety and increases to recover certain higher input costs. These were largely offset by lower complete vehicle assembly volumes, the impact of foreign currency translation and normal course customer price givebacks. Adjusted EBIT was $469 million, and adjusted EBIT margin was 4.3% compared to 4.2% in Q1 2023. The higher EBIT percent in the quarter reflects approximately 40 basis points of operational items, the most significant of which relates to our operational activities, including improved results at underperforming operations, 30 basis points of nonrecurring items, the most significant of which are lower warranty and a gain on the sale of a noncore equity method investment.

These items were partially offset by higher net input costs, in particular for labor, which approximated 20 basis points and volume and other items, which collectively impacted us by about 40 basis points. These include acquisitions, which came in at lower margins than the corporate average; lower earnings on lower assembly sales, including as a result of the end of production of the BMW 5 Series, net of higher earnings on higher component and system sales as well as transactional foreign exchange gains. Interest expense increased, reflecting net debt raised last year as well as higher market rates on the new debt. Our adjusted effective income tax rate came in at 21.5%, essentially in line with Q1 of last year. Net income was $311 million compared to $329 million in Q1 2023, mainly reflecting higher adjusted EBIT, offset by higher interest expense and minority interest.

Adjusted diluted EPS was $1.08 compared to $1.15 last year. Turning to a review of our cash flows and investment activities. In the first quarter of 2024, we generated $591 million in cash from operations before changes in working capital and invested $330 million in working capital. Investment activities in the quarter included $493 million for fixed assets and a $125 million increase in investments, other assets and intangibles. Overall, we used free cash flow of $270 million in Q1. We continue to return capital to shareholders. We paid $134 million in dividends in Q1. Our balance sheet continues to be strong with investment-grade ratings from the major credit rating agencies. At the end of Q1, we had over $4 billion in liquidity, including about $1.5 billion in cash.

Currently, our adjusted debt-to-adjusted EBITDA ratio is up 1.83, excluding excess cash held to pay down debt coming due this quarter. We anticipate a reduction of our leverage ratio, and we are on track to be within our targeted range during 2025. Next, I will cover our updated outlook, which incorporates slightly higher-than-expected vehicle production in China, while our assumptions for production in North America and Europe are unchanged from our previous outlook. We also assume exchange rates and our outlook will approximate recent rates. We now expect a lower euro and Canadian dollar for 2024 and a slightly higher RMB all relative to our previous outlook. And as Swamy mentioned earlier, we are assuming no more production of the Fisker Ocean.

We are reducing our expected sales range, despite this, we are maintaining our EBIT margin outlook, reflecting our operational excellence efforts to contain cost and obtain commercial recoveries. We have increased our expected tax rate for 2024 from 21% to 22%, largely reflecting a change in the mix of earnings towards higher tax jurisdictions. As a result of reducing the range of our sales and the higher expected tax rate, we are reducing our range for net income. We now expect capital spending to be in the $2.4 billion to $2.5 billion range compared to approximately $2.5 billion in our February outlook. This mainly reflects revised program spending. And our interest expense, equity income and free cash flow expectations are all unchanged from our last outlook.

Let me walk you through the change in our sales outlook from February to now. As we mentioned earlier, we have assumed no future production for the Fisker Ocean. Consistent with our previous communications of the 2024 impact, this reduced sales by about $400 million. We have received updated information on the amount of directed content on the new Mercedes G-Class assembly programs, which has reduced sales by about $400 million. Recall from our February outlook that we expected no dollar impact related to the sales change. Our updated FX rates resulted in about $200 million of lower sales and the remainder, including reduced active safety sales, partially offset by other amounts netted to about $200 million in lower sales in our outlook. In summary, we had solid financial performance in the first quarter, ahead of what we had expected, excluding the Fisker impairments.

We are on track with our operational excellence activities and are taking further actions to mitigate impacts from lower expected sales. As a result, we are maintaining our adjusted EBIT margin outlook for 2024. We’re also lowering our capital spending expectations for the year, and we are assessing the impacts of OEM electrification plans on our business in order to optimize investments and capacity plans. All in all, a solid start to 2024. Thanks for your attention, and we are more than happy to answer your questions. Operator?