Magna International, Inc.

Greetings and welcome to the second quarter 2020 results. The presentation of 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, just press the 1, 4 by the 4 on your telephone. If at any time the conference seems to reach an operator, just press the star, 4 by the 0. As a reminder, today's call is being recorded Friday, August 7, 2020. Now, I would like to turn the conference over to Louis Tonelli, Vice President, Investor Relations. Please go ahead.

Thanks, Tommy. Hello, everyone, and welcome to our second quarter 2020 conference call. We will have formal comments today from Don Walker, Swami Kotagiri, and Vince Galiffi. Yesterday, our Board of Directors met and approved our financial results for the second quarter ended June 30, 2020. We issued a press release this morning for the quarter. You'll find the press release, today's conference call webcast, the slide presentations go along with the call, and our updated quarterly financial review, all in the investor relations section of our website at NAGSA.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 state-farber disclaimer. As we review financial information today, please note that all figures discussed are in U.S. dollars unless otherwise noted. We've included in the appendix reconciliations of certain key financial statement lines for Q220 and Q22019 John will comment on the restructuring actions we recorded in the second quarter. Please note that when we use the term organic in the context of sales movements, we mean excluding the impact of foreign exchange acquisitions and divestitures.

And now I'll pass the call over to John. Thanks, Louis. Good morning. I hope everyone is staying safe and healthy wherever you are. Before I start, I want to reiterate that the health and safety of our employees remains our top priority at Magna. We have been reintegrating employees back into our plants and offices using our protocols, assessment tools, and guidance documents. It was a monumental exercise to plan, coordinate, and implement the restarts that as a company and as an industry, I believe we have responded extremely well to the challenge caused by the pandemic, including being a leader for other industries to follow in terms of safe and successful operational restarts. During the second quarter of 2020, our most significant markets of North America and Europe experienced year-over-year declines, both in percentage and absolute volume terms that far exceeded the worst quarters that we saw during the great financial crisis more than 10 years ago and the worst decline that I've experienced in my 40 years in the auto industry. The industry environment has been improving off these lows. Vehicle sales and production levels in our key regions were better sequentially in May and June as governments around the world started to ease lockdowns and as auto sales began to recover. The vehicle sales trend continued upward in July, and we expect a significant improvement in our sales from the first half to the second half of the year. Nevertheless, the general view of the industry is that the production trend line over the next few years would be lower than previously anticipated. This prompted us to initiate and, in some cases, accelerate the timing of restructuring plans to right-size the business to align with our updated expectations for the mid-term. Across the company, we have been taking difficult but necessary actions to strengthen our business for the future. We recorded a $168 million charge in the second quarter, substantially related to this restructuring. As expected for the second quarter, our sales reflected the severe production decline, falling 58% compared to Q2 2019. As a consequence, we posted our first operating loss on a normalized basis since 2009. However, underlying the discouraging results were a few encouraging elements. Our decremental margin associated with COVID-19 was about 22%, reflecting our efforts to reduce and defer discretionary costs. We conserved additional cash by reducing capital spending. and we expect the actions we undertook in the quarter to lead to an improved cost structure and decrementals going forward. At the same time, we continue to invest to secure a future and to ensure that we can successfully execute in all upcoming launches. While we remain in relatively uncertain times, we're confident that we have the balance sheet, the leadership and the right operating structure to allow us to remain nimble and responsive to whatever the future holds in the short and long term. Lastly, I want to comment on an important recognition from our largest customer. In late June, General Motors recognized Magna with six 2019 Supplier of the Year awards, the most ever for a supplier in a single year. The Supplier of the Year awards recognize GM's best suppliers that consistently exceed expectations, creating outstanding value or introduce innovations to the company. Magna won Supplier of the Year awards across our system segments for our mirrors, driveline systems, truck frames, fascias, and seating systems, as well as an innovation award for our free-form seat trim technology. I'm very proud of these accolades as they recognize our ability to provide solutions to the many challenges faced by our customers. With that, I'll pass the call over to Swami.

Thanks, John.

Good morning, everyone.

I am happy to report that we were able to achieve safe and orderly restarts in all of our operations around the world. Plant closures varied in length, with most plants shut down for several weeks. Overall, the mood and morale at our plants upon return to work have been positive. With respect to our restarts, capacity utilization in both China and North America Thank you very much. We don't expect these to have a significant impact on our business growth relative to the market over the next couple of years. One of the concerns we had a few months ago was the status of our supply base. We noted on our Q1 call that we were working closely with our suppliers to ensure a safe and timely restart. While we continue to track a number of suppliers, we have mitigation plans in place and to this point, have experienced no major supply-based issues impacting our operations. Our operations have been able to manage the transition to a new normal. Our Smart Start Playbook has been an excellent foundation and has become standard operating procedure. The protocols put in place have been well received and adapted by our plant employees. We have been able to manage the production ramp-up without significant disruption to our production efficiency. However, we are not stopping there. A team of varying backgrounds from across Magna looked ahead to develop recommendations on how operations could be adjusted to stay prepared, especially if a second wave hits or this becomes a seasonal illness. The team closely examined what may need to be done in our global operations over and above our current playbook and incorporated these into our regular operating mode and policies. We are staying prepared to keep our employees safe and protect our business. While our leadership team was addressing the short-term needs of the business, we were also looking and planning much further ahead at what our company, industry and society may need in the future. We continue to monitor ongoing trends and potential new trends and I believe Magna has the structure, people, technology building blocks and investment strategy to remain a leader in mobility. Lastly, I want to announce that Sherif Murakbi has joined Magna as Executive Vice President of Research and Development. Sherif will manage all aspects of Magna's innovation and new product development strategy and related activities. Sherif has been in automotive and technology industry for 30 years and comes to Magna from Ford Motor Company where he held a variety of product development and engineering leadership positions. He has extensive experience in electrification, having led the Ford team in developing a battery electric vehicle and hybrid electric vehicles. Sherif also served as President and CEO of Ford Autonomous Vehicles LLC and was on the Board of Directors for Argo AI, Ford's self-driving technology partner. Additionally, he spent time with Uber as Vice President of Global Vehicle Programs, leading the integration of their autonomous software into production OEM vehicles. We are very happy to have Sherif as part of our management team. I will now pass the call over to Vince.

Thank you, Swami, and good morning, everyone. I will provide a fairly high-level summary of our quarterly results today. Rather than go through a lot of detail, including on our segment results, which you can find in our MDMA, and are not particularly meaningful given the severe sales declines, I will spend some time addressing what our outlook implies about the second half of this year. As Don mentioned, We experienced the worst year-over-year decline in vehicle production that we can recall during the second quarter of 2020. Global vehicle production declined 42% year-over-year, but more significantly declined 70% and 59% in North America and Europe, respectively, our most important production markets. We estimate that COVID-19-related shutdowns negatively impacted our second quarter results, and sales in particular by approximately $5.5 billion and our adjusted EBIT by approximately $1.2 billion. This represents a decremental margin of approximately 22% reflecting strong cost control across Magna's operations. We have included in our appendix a breakdown of estimated COVID-19 related sales and decremental margins by segment. In addition, Equity income was negatively impacted by the COVID-19 related shutdowns. Our second quarter total sales were $4.3 billion, a decline of $5.8 billion or 58% from the second quarter of 2019. In addition to the COVID impact, our sales in the second quarter of 2020 were negatively impacted by the end of production of certain programs, currency translation, which was a $76 million headwind, and Net Customer Price Concessions. On an organic basis in Q2, our regional sales in North America, Europe and Asia each outperformed vehicle production in their respective markets. However, as a result of regional production mix, our organic sales underperformed the change in global vehicle production in the quarter. Recall that we far outperformed global production in Q1 in part Due to significantly lower production in China, where magna is relatively less represented. On a weighted basis, our organic sales slightly outperformed global production. Adjusted EBIT decreased $1.3 billion to a loss of $600 million, substantially reflecting the decline in global vehicle production due to the COVID-19 related shutdowns. Also contributing to the decline in EBIT, was lower tooling contribution in the quarter compared to the second quarter of 2019, higher engineering costs in our ADAS business, including retroactive social tax costs, net provisions for customer claims in the quarter, and higher net warranty costs. These were partially offset by lower spending for electrification and autonomy, as well as favorable assembly program mix, and the benefit of cost-cutting Our tax recovery was booked at 15.9% income tax rate compared to 23.5% on our pre-tax income in the second quarter of 2019. The tax recovery was lower than our typical tax rate primarily as a result of an increase in losses not benefited in Europe. Net loss attributable to Magna was $511 million compared to income of $509 million in Q2 of 2019, reflecting the lower EBIT, higher interest expense, and the impact of the lower effective tax recovery rate. Diluted loss per share was $1.71 for the quarter compared to EPS of $1.59 last year, so the time reflects the lower net income and the negative impact of 7% fewer shares outstanding. We estimate that the lower tax recovery rate cost us about 15 cents, assuming a tax rate of approximately 24.5% that we expected when we last provided an outlook in February. I'm now going to review our cash flows and investment activities. During the second quarter of 2020, we used $1.2 billion in cash for operations, representing a $2.2 billion swing from the second quarter of 2019. $1.2 billion of the change is a result of reduced earnings due to the lower sales. $934 million is a result of an increase in non-cash working capital. You may remember from the first quarter that, given the COVID-related shutdowns and our corresponding sales decline, we generated cash from working capital in the quarter When we normally invest working capital through the first half of the year, we said on our Q1 call that we expected this to reverse as we restarted production at various facilities around the world. Customer payment delays, the payout of our 2019 employee profit sharing plan, recoverable wage subsidies, and a shift from a tax payable to a tax receivable balance, which all aggregated to about $500 million, together with a ramp-up A production represented most of the change in non-cash working capital in the quarter. However, we expect to recover much of our working capital investment by the end of this year. The delayed customer amounts were collected shortly after the second quarter. Investment activities amounted to $243 million, including $169 million in fixed assets and $72 million in investments, other assets, and intangible assets. Free Cash Flow was negative $1.5 billion in the second quarter. In addition, we returned $116 million to shareholders in the quarter through the payment of dividends. Despite the significant use of cash in the quarter, our balance sheet remains very strong. At the end of the second quarter, our liquidity stood at $4.1 billion, including over $600 million in cash. In June, we completed an offering of $750 million of 10-year senior unsecured notes bearing interest at 2.45%. This debt raise provides additional financial flexibility at a very low rate at a time when the debt markets were highly receptive. Our adjusted debt to adjusted EBITDA at the end of the second quarter stands at 2.35 times. As anticipated, this is above our target range given the severe decline in EBITDA, particularly in the second quarter. We will likely stay above the target range in the short term, but expect the ratio to normalize back in the range in the second half of 2021. Yesterday, our board approved our second quarter dividend of $0.40, reflecting our collective confidence in our liquidity and our future. Now, let me turn to our outlook, which we reestablished this quarter. As always, our outlook is based on a set of vehicle production assumptions. Compared to other years, there is a higher degree of uncertainty surrounding future production given risk associated with consumer demand, increasing COVID-19 infection rates, supply chain, or other infection challenges and other factors. If actual production varies significantly from our assumptions, our results may also vary significantly. Rather than repeat the outlook already in our press release, I will make a few observations regarding our implied second half outlook in comparison to the second half of 2019. Vehicle production is expected to be down approximately 5% and 10% in our key markets of North America and Europe, respectively. Overall, we're also expecting global vehicle production down approximately 11%. We believe our expected second half stacks up well particularly given these production declines. Our total sales range implies sales at worst down 9% and at best up 2%. Our EBIT percentage range implies an EBIT dollar range of about $1.05 billion to $1.25 billion compared to $1.15 billion in the second half of 2019. And our free cash flow range implies for 2020 is between $200 and $400 million, implying a range of $1.3 to $1.5 billion for the second half of 2020, compared to last year's very strong second half of $1.45 billion. Lastly, comparing this outlook to our February outlook, we now expect second half decremental margins to be under 20%. This solid outlook reflects the combined actions we are taking across our business to mitigate the impact of the current environment we are facing. Thanks for your attention this morning. We would all be pleased to answer your questions at this time.

Thank you. And if you'd like, once again, to register your questions, just press the 1 pulled by the 4 on your telephone. You may 3-tone prompt to acknowledge your request. If the question has been answered, I'd like to draw your registration number one. One moment, please, for our first question. And we'll get our first question on the line from John Murphy of Bank of America Merrill Lynch. Go right ahead.

Good morning, guys. And thanks for the outlook. It's, you know, it's very helpful. And that's, you know, my first question. Vince, as we look at this, the performance in the quarter, decrementals of down 22% was impressive, but getting to just down 20% in the second half of the year is obviously even better. I'm just curious, as you're looking at this, first, are there any actions that you think might be sticky as the world normalizes, which means maybe earnings might be a little bit better than expected as the world normalizes? You know, and second, you know, sort of in the same vein, we think about incrementals on the upside over time. Are they going to mirror these new decrementals or could they potentially, you know, be higher? And how would we think about incrementals as sales and production actually start rising, presumably in 2021?

John, that's a really good question. It's kind of difficult to answer that in isolation. I think you've got to consider a whole bunch of things. I think when you look at the restructuring actions that we took in Q2 or commenced in Q2, and they're going to wrap up by the time we get to the end of the year, most of them, I think what you're seeing in the second half of the year is the benefit of some of those actions already established Impacting positively our decremental margin. But we don't get to the true benefit of all those activities until we get into 21. So we'll continue to see that fixed cost structure reduction helping us in 21. I think if you look longer term and you start thinking about what happens to overall volumes and how fast do they grow and in what regions and what happens to incremental margins going forward, at some point, You're going to be approaching average margins as the business grows at a significant rate. That's why I think you can't just answer that question in isolation. You've got to look at all the factors, sort of what regions are you growing, how fast you're growing, what's your absolute level of growth in sales. But I think when you look around the organization and you think about our culture, which we don't talk a lot as much as we should, Our decentralized operating system with our general managers focused on what they need to do to run their plant efficiently, what costs are required and what costs can they take out, and you kind of put that all together and make a pretty significant difference in our overall results.

Okay, that's helpful. And then just a second question. Don, as you look at the environment for new contracts or the bidding environment, I'm just curious, you know, what the pace of activity is. Is maybe it normalizing as everybody's kind of working through the crisis and hopefully, you know, getting back up and running? And also, you know, thinking just about launches, you know, in the near term for stuff that's in your backlog. I'm just curious if there's anything more disruptive than sort of two to three months, you know, delays from, you know, from COVID as things were down, you know, on the launch side. Are there any sort of near-term issues or maybe even opportunities?

For the most part, people worked pretty effectively through the down period. There was some delays where you couldn't get people in for physical testing, so we're seeing a few program delays from the customers. Most of them are relatively short. There's been a couple of cancellations. Most of them are – we're not talking about them. The customers can, but most of them are – none of the big programs we've got. The discussion is ongoing on winning new contracts. A little bit of a delay, but not particularly. So I was pleasantly surprised that we're able to keep on top of our launches. We just went through our quarterly reviews globally. Don't see any unusual spike in sort of running up against concerns on new launches. So we're in pretty good shape. Swami, you're probably closer than I am in certain in your areas. You've got any other comments there?

No, Don, I think you covered it pretty much. You know, small delays here and there, but nothing that I would say material that would affect the business going forward or the launches that are ongoing right now.

I think we talked about it in general. The move towards electrification is pretty consistent with what we saw before. I think the autonomous level two Level 2.5 continues. That's a big pull from the market. Spending on the Level 3, 4, and 5 are certainly slowed down a little bit. Everybody's trying to conserve cash. But I think the customers still have to be awarding contracts so they can hit their launches. So no big, huge delays there.

And keep in mind, to the expense that we have content on the old program that gets extended, Yeah, that really mitigates the potential loss business from launches that are delayed.

Got it. And then just lastly real quick on acquisition opportunities, I know the balance sheet might, you know, the leverage might be a little bit higher than your target range, but just curious, you know, what's out there? Have there been any new opportunities that have availed themselves because of the stress? and sort of what does the landscape look for you guys and what are you looking at most specifically as you kind of go through the funnel of opportunities?

I want to comment on anything specifically, obviously, but generally, unless there's a huge second wave that we don't anticipate, we went through a cash position. I think it would have been difficult to try and execute anything big unless it was a distress situation during the downtime period. or the downturn. We're continuing to look at things more in the technology areas where we want to add some capability. We have the ability to. We continue to pay the dividend. We stopped the buyback, but we should be back to a pretty healthy cash flow standpoint going forward. So we have the ability to move on something if we think it's We are continuing to look at pretty carefully what technologies we want to grow in and where we want to be located around the world. Thank you very much.

Thank you. And we'll get to our next question on the line. It's from the line of Peter Scalar of BMO Capital Markets. Go right ahead.

Good morning. Question on the decremental margin. of 22% in the quarter. As you know, there were various government subsidy programs in regions where they subsidized wages and other programs as well. Was that a meaningful amount and would that have had a positive impact on the decremental margin or were those subsidies that Magna would have received relatively minor?

Peter, good morning. It's Vince. You know, in terms of the amount of subsidies that we booked, particularly in Canada, probably higher than what we were anticipating. As you know, there was some programs in Canada where we were encouraged to keep people on our payroll, even though they weren't working. So, you know, we were incurring a cost that we otherwise wouldn't and had a reimbursement from the government. So that's kind of a net zero to us. I think if you back all that out and you look at the benefit of the government programs on our decremental margin, it's really not significant at all. Obviously, the sheer amount of recoveries is larger because of, as I said, inactive employees that we brought back on payroll, but didn't really have a significant impact on overall decrementals. Recall that You know, when you start looking at the bucket of, you know, I looked at, I looked at decremental margins from an operations standpoint. Then I looked at the cost of inactive labor, government support. And then the other part we've got in all of that is the cost of PPE in a quarter. You know, it's kind of hard to get an exact number. We're probably about, you know, $35 million of additional PPE costs in a quarter. Some are going to be, you know, obviously... Okay. Okay.

And Vince, like you touched on this a little bit in a previous question, but like your decremental margin was 22% in the quarter, but in your guidance, like you're guiding for a decremental margin of under 20%. So I'm just wondering why it's not the same on the way up as on the way down, or I'm just being too precise. It's really the 22% and 20% are really the same thing.

No, I think about it, Peter, as... It's an improvement. You remember last quarter we talked about kind of for the last nine months of the year, we thought about low 20%. I think when you look at even Q1 and Q2 on reduced sales and reduced EVA, we're running about 22% incremental. We're a little higher in Q1, but I think in total about 22%. And how we came up with that number is we looked at our outlook we gave in January and which is where we think we're going to be and we looked at the reduced sales as a result of COVID in Q1 and Q2 and the lost operating income and that's at 22%. When you go to the second half of the year, again, we're looking at the reduced sales compared to where our outlook was in January. So, sales are down because volumes are down and EBIT's down and the decremental on that is going to be less than 20%. So if there was no change in our cost structure, that decremento, you know, would be around 22%. Because we've taken some actions to right-size the business, we're seeing the benefit of that by way of a reduced decremento margin.

Okay. And then lastly, Vince, can you just, you know, based on your guidance, Magda's going to be back to – Thank you. Thank you.

and the rest of the team supportive. I still think there's some uncertainty with respect to where volumes end up for the balance of the year. We are generating, expect to generate some pretty significant amount of cash flow. I prefer at this point in time to kind of step back from the buyback. Let's get through This year, let's look at our business plan where volumes sort of shake out next year, and then we can think about starting to resume the buyback in 2021. Now, again, we might get through a quarter and things look a lot different. We might have a more positive view on things, and our actions could change. But that's our thinking at this point in time.

Okay, thanks for all your comments.

Thank you very much. We'll go for our next question on the line from James Piccariello from KeyBank. Go right ahead.

Hey, good morning, guys. Just to clarify on the second half guide, which is, of course, appreciated. So the implied back half, you know, you're looking at $650 million lower sales. I think the comment was just made that that drops through at a 20%, 22% decremental. All right, so that's $150 million in loss to EBIT. for the back half, and then we get back to flat year-over-year driven by the structural savings. Is that a fair assessment?

Yeah, so I think if you look at the slide deck that we posted, you know, you are looking at an EBIT, The mid-range of our implied outlook is the same as 2019 because our range is 1.05 to 1.25 on overall sales, depending on where you could be about flat. So if you look into 2021 and we still need to do our business plan, what we're going to get incrementally in 2021 is the benefit of the restructuring we're doing in 2020. So that should be accreted. There's going to be a whole bunch of other things taking place in 2021. Yes, remember some of the things we talked about at the beginning of the year. We're focusing on underperforming operations. We're expecting some contribution from that. We're expecting some contribution from reduced engineering costs on the three advanced ADAS programs that we're working on and so on. So there's a lot of moving pieces into 2021, but certainly the restructuring activities we're taking in 2021 will continue to benefit us in a bigger way in 21.

Got it. That's helpful. Question on complete vehicles. The margins continue to improve on downed sales as there's a recovery in the back half. Should we expect margins, you know, similar to maybe, you know, the second half of 19 or do they continue to, you know, at the first half run right here?

You know, we haven't given specific guidance on segments just given, you know, the level of, you know, more uncertainty on overall production volumes given other years. But what I can talk about on the complete vehicle business, if I think about the very first half of the year, there's a couple of things that have benefited us. One is we've had some favorable mix within just even assembly programs, depending on what vehicles are being sold and trim levels. If that continues, that should be positive year over year. Our Magnus Steyer group undertook a huge review of their overall processes and cost structure. And as a result, we're seeing the benefits of those cost-saving initiatives impacting us positively in Q1, but more so in Q2, and that's going to continue in Q3 and Q4. So that's different from where we were last year. The other unusual thing with our business here in Magnus Dyer and a lot of our programs there, we get a fixed cost recovery regardless of the level of production. So when you start thinking about incrementals and decrementals, we don't have the same level of operating leverage that we do in our production division. So that could impact ultimately where margins end up at Magnus Dyer. So, again, a lot of different sort of ingredients in there impacting margins. I guess the final point on MagnaSire, you know, if I would think about the business this year and last year, on the engineering side, you know, we've been getting a lot more work and we've been generating some decent margins on that. And given that engineering is a bigger proportion overall on MagnaSire because of reduced volumes, that's having a positive impact on average margins in this segment.

Got it. Just to clarify on the restructuring effort, 168 million charge in the quarter, is that something that, you know, possibly continues through the second half or is that a charge that reflects the entire effort possibly, potentially?

I think it's substantially all there. There's going to be some costs that are going to trickle into Q3 and Q4, depending on when we're going to be able to recognize them from an accounting perspective. But the bulk of it, substantially all of it's already been reflected in our accounts in Q2. Remember, some of that spending is not going to take place until later, but we've been able to recognize that cost in our financials for the second quarter.

Is there a typical return you get on your restructuring efforts in terms of savings versus costs? Is there a typical?

It depends what region. If you're letting some people go in certain regions, the cost of severance could be pretty significant. In other regions, it's a little less. There's a typical probably by region, but not typical across your organization. When we look at the The restructuring, there was about $150 million of it was restructuring. The balance of it was accident impairments across a number of our operations. That $150 million, as we get into 2021, should translate into about a $200 million annualized savings and costs on a run rate basis. So we'll pay back the restructuring costs in less than 12 months.

That's very helpful. Thank you.

Thank you very much. We'll get to our next question on the line. It's from the line of Dan Levy with Credit Suisse. Go right ahead.

Hi. Good morning, everyone. Thank you. First, we know that the GM large truck program, P1XX, is your largest platform. And if you look at the schedules, obviously, Easy Comp in the fourth quarter from the strike and They're producing everything they can. I think their volume is going to be up in excess of 30%. So to the extent that that volume materializes, could you give us a sense of what type of incremental margin you'd see on that? Is it fair to say that that's contributing nicely to the comments that you've given on second half decremental sub 20?

Well, Dan, we're not going to comment on incremental margins or margins in general on any programs, so we can't help you there. But you're right in terms of sales. It's definitely strong and certainly contributing to what we see as the opportunity for good organic growth in the back half of the year. So it's a big program, as you said. We've got about $2,200 of content on the new K2XX versus or the new GM platform versus the old one.

And as they're going all out, is it fair to say that your, I guess, the directional, your contribution margin on that Now is comparable to what you would have done in the past. Are there any inefficiencies as they're trying to squeeze as much out of that?

Yeah, we never talk about where we are, but we've done this program. A lot of content we've had in that program for several generations. So, you know, this would be typical going forward. I wouldn't want to comment on a particular program.

Okay, great. And then just as a second question, thank you. A question on, you know, the broader EV landscape that we're seeing and the role of complete vehicles. And we know we're seeing some, you know, obviously a lot of headlines with EV startups, and there's a lot of questions of those who want to go past that light. Are you having incremental discussions across the automotive landscape being with, you know, established automakers or with startups about – Complete Vehicles, and how does that vary regionally? What's the role of Complete Vehicles as this landscape is clearly shifting?

Don, if you want me to answer this, good morning. I think as a part of a normal process, we go through discussions with our various OEMs, from a product landscape perspective. And as part of that, you know, obviously the EV discussions are there from the customers that are traditional, as you said. And because for Magnus Tire, we do have a lot of touch points with the so-called newcomers that you talked about, which gives us also a pretty good visibility on, you know, what the other newcomers or, you know, the Future is being thought about in terms of EV. From our product strategy perspective, we talked about the different building blocks and the platform strategy that we have from various subsystems of the powertrain, and we are able to address that. And as you know, the design cycles are long enough that we have a good visibility and be able to pivot as we need going forward.

Just a couple of additional comments. If you think about a new entrant or a new mobility player, typically it's electric, but depending on what they're doing, they would be looking to hire for engineering and program management, which is a huge undertaking for anybody new in the business. and then on top of that, and that can be anywhere globally, on top of that, if it's going to be leading to contract vehicle manufacturing, we've got a big facility in Europe. We've also had a good startup in our joint venture we have for electric vehicles in China and that is working well. So geographically, we'd be more likely to be able to do something from a manufacturing standpoint in China or Europe, but engineering, we can do it anywhere.

As we're thinking about going forward, would you expect the discussions to accelerate more with legacy OEMs that don't want to put in place the added capacity, or is more of the incremental discussion on your end going to be with startups that just want to go asset-light?

I think it's both, and it's hard to predict what's going to happen. Part of it will be depending on what happens in vehicle volumes and what the specific car companies want to do from restructuring their capacity utilization. I think going forward, to the extent that people know what the market's going to do, they want to try and have it so they're running their facilities pretty closely to 100%, and then utilize people like Magnus Steyer for excess capacity. So it's difficult to... to answer that, unless we had a real crystal ball that says what the volumes are. And we're also pretty careful who we take business on. There's a lot of different startups talking about what they're going to do and how much money they raise, and a lot of people fail, so we're pretty particular in who we take business on for. So I do think mobility is something that Swami and his team are looking at pretty carefully, and I think there's going to be Different opportunities coming up with some new entrants.

Great. Thank you. Thank you very much. We're going to turn to the next question on the line. This is from Itai McKelly from Citigroup. Go right ahead.

Great. Thanks. Good morning, everyone. Just want to go back to the longer-term margin question. I mean, it looks like the second half guidance, Implies that you kind of get back to 2019 margins on still a fairly lower revenue base. And, Vince, I think you mentioned additional restructuring benefits and other potential tailwinds next year. So as we think about the big picture, do you think the earnings power of the company has increased through this downturn? That when and if we do get back to your prior 2022 revenue objectives or whatever that might be, that the margins could end up being higher than what you originally thought?

Yeah, I don't know if Vince wants to comment on it. One of the things we've been working on when we're looking at world-class manufacturing is I don't think we're going to be getting a lot higher margins on our traditional business. They are pretty well where they are. As we're bringing new technologies to market, we can usually get higher margins, and we've been spending a lot of money in the electronics area and the powertrain area, as well as a lot of other new products. That's why I'm particularly pleased to see the number of awards we won from General Motors because it's fairly representative of what we're offering to a lot of customers. It's just that they're recognizing innovation and execution. So margins can be affected by our cost of non-quality and getting a lot of non-value-added costs out of our company, and we've been working really hard on that. So there's a lot of moving pieces, but I think we are making good headway on our...

and many more. I think as you, assuming you get back up, not assuming, but when we get back to the same volumes and same sort of revenue, that'll be out a couple years out given what IHS is thinking about overall global production volumes. Our mix of business, I've got to believe, will be different than what we thought just in January. I sit back and think about your question. What I saw happen in the organization is certainly right-sizing the company for what we see in the short and mid-term from a cost perspective, but the relentless focus on world-class manufacturing and the time that the plants were down, I think, gave us an opportunity to reflect on things a little harder and a little differently and I think there's processes and costs that we took out that probably would have come out at some point down the road, but those have been all sort of accelerated and taken out. I think that's an incremental, but how that kind of maps up to when revenues sort of come back, you know, again, what our mix of business is, what programs we got awarded, what new programs we're working on. Those all come into play, and I just don't have the visibility right now to venture out a couple years out.

That's all very helpful. Just a quick follow-up, Vince. You mentioned that you expect to recover most of the working capital this year. Any high-level view on what you may be able to recover in 2021, kind of unrecoverable working capital or other timing differences affecting cash flow?

Sir, is that 21 or 20? Let me answer with respect to 2020. When I looked at the investment in working capital in the second quarter, about $930 million, it was more than I expected. When you start peeling back the skin on the onion, look at some of the late customer payments, We got that back in July. When you think about these government grants, net basis on a P&L perspective was pretty neutral. But it's a pretty significant receivable that we've got that we should be getting that in Q3, Q4. Income taxes flip from being a payable to a receivable. That'll flip. Remember that we also generated cash in Q1. from Working Capital. It was really unusual. So that's all come back into as a use of cash in the second quarter. And we remember we also had about a $200 million collection of receivables in Q4 of last year that we should have gotten Q1. So kind of think about where we end up at the end of the year. I think if We weren't thinking about that $200 million of cash that we collected in Q4 versus Q1. I would have thought we'd probably recover all of it. So, you know, are we short $100 or $200 million of that because of the pull forward of cash into Q4? Could be. But, you know, we could also get some other payments that we get in early in Q4 of 2020. So, we're going to get substantially, I think, all of that back by the time we get to Q4 of 2020.

Great. That's all very helpful. Thank you.

Thank you very much. We'll go to the next question on the line. It's from the line of Rod Lash with Wolf Research. Go right ahead.

Good morning, everybody. I wanted to follow up on just this significant amount of capital being raised by EV startups. It's something that – Clearly, the investment community believes that that has implications for the competitive landscape in auto. I'm wondering if that is actually influencing you in terms of the risk that you're willing to take with regard to some of these startups. As we look at that, should we be thinking that there's greater potential for expansion in complete vehicle assembly in North America and

Well, we really haven't done much in North America so far. We have an investment, which we've talked about in Waymo, and we're doing some work with them. We've had a good relationship with them, but it's relatively low volume. It's a bit like the chicken and the egg as far as the vehicle assembly work in North America. We continue to have requests or questions from potential existing customers who want to outsource some low-volume programs as well as some new startups. But you need a certain volume to justify the capital, even if it's a brownfield. I think... If we had a sheet of paper with all the potential new entrants into the market, how many will succeed? What would the volumes be? I do think there will be some people who will be successful. Will they be then joint ventured or bought by somebody else? Hard to say. I don't see a huge volume in the new entrants relative to the size of the market. But I know, Swami, do you have any other thoughts?

No, I think that you kind of addressed it, Don. I think, Rod, the EV market is kind of still evolving, just not only from the startup, but also the architecture perspective for different OEMs. So we kind of look at the landscape and be able to evaluate, and I'm sure there are opportunities, like Don said, as we engage with Magnus Tire, and also help the Product Roadmap from the component subsystem perspective.

Okay. And thanks for that. And I was hoping just, Vince, if you can clarify, you put out longer-term margins, I think, for 2022. Let's forget about the timeframe, but the margin was 7.6% to 8%. Just based on the $200 million of additional savings, if you just divided that by The 20% Decremental Margin. Is it reasonable to conclude that you could achieve that same level of profitability with a billion dollars of lower revenue, or were you basically implying that a lot of what we're seeing right now is essentially pulled forward from your future plans?

Rod, I think when you look at some of the things that... We talked about in Q2, part of that is a pull forward. So, you know, it would have been factored into our outlook that we gave for 22 back in January this year. Part of it is actually incremental activities that, remember my comments about, just gave us the time to kind of reflect on what we're doing, and we're doing things a little differently that wasn't in our plan. So that is incremental to whatever we would have talked about in the past. Okay.

So just to kind of summarize on that point, when you provide a margin target like that, it sounds like that's kind of a floating target a bit. It's really contingent on the mix and the size of the business. It's not like... You're not doing the reverse exercise and saying, look, based on the capital we committed, we have to reach this kind of profit and find some other way to get there. Is that fair?

So you're talking about 22? Sorry, can you clarify?

Yeah, so how do we read that kind of a target?

Well, sorry, let's go back. When we talked about January, and we pulled our guidance, obviously, but when we talked about January – It wasn't a target, Rod. It's based on a bottoms-up business plan based on business that's been awarded, substantially been awarded, so that's a high potential that we're going to get awarded. It's based on production volume assumptions. It's based on mix. It's based on exchange rates. So, you know, even if you get to 2022 and exchange rates are different or Thank you for joining us. Thank you. Thanks for clearing it up. Thank you. We'll get to our next question online from Chris McNally with Evercore. Go right ahead. Great. Thanks so much and great results, guys.

Maybe the first question, some of the questions have already been answered. If we think about some of the quote-unquote problem childs of 2019, some of the issues you had around seeding, the innovative contract, you know, Kotrag in China, could you talk about maybe just a little update about how many of those have we actually cycled through the benefit? It looks like probably on TV that you've gotten some of the issues back from Thank you very much.

is a challenge for all of our plants. But what we've seen from an operational standpoint is that in both of the operations in North America, we have continued to see improvements. I think in one in particular, even with lower sales, we're a little bit better than where we thought on an absolute basis. So that's a good story. I think when you look at our – you talked about – I think it was ADES and electrification. Our electrification spend is an investment because we've got programs coming in the future and platform technology and continued discussions with our customers. I mean, that's just continuing to be invested and incurred for the right reasons. On our ADAS business, we talked about some overspending in 2019. Thank you for joining us. There has been some restructuring in some of the joint ventures to take some costs out. I'd say in one particular joint venture, there's probably a little bit less volumes than what we were anticipating even with the restart of overall production volumes in North America. That's probably going to be a negative shorter term going forward than what we had anticipated in the past. But overall, we're Pretty well on track everywhere across the organization if you take COVID-19 into account.

Great. And then just a quick one on Steyer. You know, you talked about, obviously, the benefit in Q2 as a result of some of the cost actions, and that should maybe continue in, I think, Q3 and maybe second half. You know, should we start to think about this? Yeah, moving pieces, but as a 3% plus sort of margin business, you've been moving in that direction for several years. I guess that's the first part. and then the second part, you know, on the back of that EV question I think was asked earlier, you know, if there were programs that, you know, had 40, 50,000 of potential volumes, is that sort of the right hurdle for the kind of visibility that you need? You know, many of your programs are in that sort of area in year one, just thinking about the potential to grow this business, you know, well beyond the six or seven billion that it's been historically.

Well, we have an existing plan. We'll take programs that are 5,000, 10,000 units because they'll fit in there. If we're looking at a justification of a new facility, you want to get up to 80,000, 100,000, and ideally that's probably three programs at 20,000, but it never comes that cleanly. So I think there's some opportunities with some new startups, but It really comes down to what's the vehicle. Do you need a paint shop? Is it a green field? Is it a brown field? So from a margin perspective, we have complete vehicle manufacturing, and the margins are pretty low because of all the bought-in components. We also have engineering, and I do think there's opportunities for good engineering contracts, especially with some of the new components because of the capability we've got there. So I want to comment on whether we can get 3% or not, but... I've been very pleasantly surprised, but it's been nice to see the efforts and the results we've been getting out of our engineering and the manufacturing initiatives in Steyr. And that's typically in the existing facility over in Europe.

Yeah, Chris, you know, I think when you look, sorry, we're not going to give guidance and we're, you know, Any one of our segments, including Complete Vehicles, for this year or for the next couple of years. We'll do that again as we update our business plan in January. But, you know, in my commentary about margins, there's things that are going to move it in any one order. You know, it's going to be the mix of programs within our Complete Vehicle Assembly business. It's going to be the sound talk debate, you know, the level of engineering. What, in my mind, is incremental, and we've seen the team do a really good job, is focusing on some cost-saving initiatives, and we're seeing some handsome dividends on that, and that's going to continue. That's incremental to kind of what we were thinking even a year ago.

Fantastic. Thank you.

Thank you very much. We'll get to our next question on the line from Richard Hilgertz. Morningstar, go right ahead.

Thank you. Good morning, everyone. Thanks for taking my question.

I'd like to drill down a little bit more on the complete vehicle, too. You know, we went from a 2.4 adjusted EBIT last year to a 4.7 this year. You know, revenue from the segment was down almost 50%, but you went from $43 million to $44 million on the adjusted EBIT. Can you kind of characterize for me, please, you know, you talked a little bit about the favorable mix. You talked about the fixed cost recovery. You talked about cost reduction in the group. You know, that $44 million on that much of a drop in revenue, you know, can you talk a little bit about where most of that came from? Is this something that was all cost reduction driven and then partially the fixed cost or, you know, more of the fixed cost recovery and the mix that drove that?

Yeah, I'd say that the biggest impact is going to be, I look through this, you've got mix is probably the most significant impact on us and that's You know, trim levels and types of vehicles that are being produced and the amount of contribution that we have on that. I'd say followed by some of the cost-saving initiatives. What's a little more challenging, and I've got a summer here to try to figure this all out, is the impact of some of the fixed cost arrangements that we have with our customers. So you can have sales coming down. and you've got fixed cost recovery so you think margin would come down or profit would come down more than it actually has and that's because of the support we have under those fixed cost recovery contracts but Richard, keep in mind when the sales start to go up you also see the fact that you have those fixed cost recovery that you don't have that operating leverage so those are the factors that are There's been some more engineering work that this group has been doing, and particularly over the first half of this year. Our engineers, by a big part, have been working from home, and we've seen some efficiencies as a result of that. So that's all contributed to the growth in profitability and growth in margin percent and magnus iris. in Q2 of 20 versus Q2 of 2019.

Okay, great. Thank you. That's helpful. And then on the other segments on the decrementals, you know, pretty much good performance there across the board. Everything was under 30%. The seeding dropped from the 30s in the first quarter to 18 in the second quarter. and body exteriors and structures stayed fairly constant during the mid-20s. But then power and vision just about doubled from 15 to about 28. And I recognize that seating is more of a less capital-intensive business. On a high-level basis, just looking at the different segments, and given the entrepreneurial spirit of the company, I mean, did seeding perform better in the second quarter because of the individual plants doing more cost cutting versus the other segments or can you kind of just go through what's the difference there between the segments that drove the different kinds of performances there?

Well, I think the first thing you've got to remember, Richard, is that the level of capital intensity by segment is different So you're going to have different decrementals and incrementals as sales move around. You know, in our commentary, as well as if you kind of comb through our MDMA, there are some items that are impacting segments that are not COVID-related. If I think about our Body, Exteriors, and Structures group, I'd say there's probably, you know, A couple of things that kind of stand out. A couple of things just balance each other out. But last year was a heavy launch year for this group, and there was more tooling contribution last year than there was this year. So that's a negative if you look at it on a year-over-year basis. I'm not looking at it sequentially, but I'm looking year-over-year. We did talk about some provisions for some customer claims, and we have their plus and minus. every quarter. They're more significant than what they would typically be, and they're sitting in our body, excursions, and structures group, so that's a negative, which is going to impact overall decremental margins. In our power and vision group, when I think about decrementals other than COVID, I We talked about social security taxes, a difference in our view on consultants and whether they're employees or independent contractors. We booked a provision for social security taxes, which amounts to about $15 million in the quarter, which is reflected in our power and vision group. It's our electronics group. So that's one thing that impacted us. I think in seeding what you're seeing is some continued progress on some of the underperforming operations. We were struggling last year. An action plan was put in place. Even with reduced volumes, we're seeing some improved performance. which is what we were expecting with the team is focused on that. I think that covers some of the kind of unusual type items that are impacting decrementals and that's just the focus everyone's having on their cost structures across the organization which is having a positive impact on profitability.

And feeding off the launching business and the GMW business in Europe so you've got normal pull through on the launch that's offsetting the COVID impact.

Okay, great. And then given the guidance for the second half, I'm assuming that, you know, when we're looking at where the different segments have opportunity to improve, it looks like then body exteriors structures and power vision would be the ones that probably improve in the second half versus the seating and complete vehicle.

We're not providing details in terms of improvements in the back half by segment. Richard, sorry.

Okay, great. Thanks.

Thank you very much. And we do have one more question in the queue. It's from the line of Michael Glenn with Remain Genes. Go right ahead.

Oh, okay. Thanks for squeezing me in. Can you just give an update on the TRAG in terms of what you're seeing from the hybrid transmission product and As we think about a lot more fully electric product coming to market, will that have some implications for customer demand on the hybrid side?

Swami, you want to take that? Yes, Vince. I think as we're talking about the NEV credits and how China is looking at it in terms of including hybrids in the credit side. I think it will be a positive influence, we believe. In addition to the e-drives and, you know, looking at DCTs going to the hybrid dual clutch transmissions and the product of the DHT in the future, we see that as a positive trend for the product line in China. You know, when I say that for transmissions, whether it's the JVs or you know overall in general for the product line of transmission for us. And are you able to give some commentary on Europe as well? In terms of the specifically to this I'm assuming and I think Vince has mentioned in the past we've seen pretty good progress and traction in terms of the product line in terms of transmissions not just the You know, DCTs, but also the HDT part of it, which is the hybrid transmissions, and there is some good activity with customers even on the next generation, which is the DHT I talked about. So definitely much higher traction and interest in several programs in Europe as we speak.

Do you recall, Michael, that at Investor Day, We've talked about a couple of programs in Europe on the HTTP side, so it's going well.

Okay, that's it for me, thanks. Thank you very much. Ms. Walker, we have no further questions on the line. I'll turn it back to you.

Okay, well, I appreciate everybody dialing in this morning. It's been a very interesting year, to say the least, and Q2 is a complicated year. We have continued with the big priorities within the company. Sustainability is a big push in the company or diversity inclusion activities. The restart's gone extremely well, as we've talked about. The launches seem to be going well. We have had to make some tough decisions, but that's business, and we'll be getting some payback on that. So overall, I'm really happy with the efforts and the cooperation we saw throughout the company in a very difficult time, trying to keep people safe and comfortable working. Also in the execution of everything we're doing. So I'm really looking forward to seeing what the What the future brings in the area of new mobility, whether it's new customers or new products or new revenue models. So thanks, everybody, for tuning in, and hope you have a great day.

Thank you very much, and thank you, everyone. That does conclude the conference call for today. We thank you for your participation as we disconnect your lines.

Have a good day, everyone, and be safe.