Magna International, Inc.

Greetings, and welcome to the third quarter 2020 results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Friday, November 6, 2020. I would now like to turn the conference over to Louis Tonelli, VP, Investor Relations. Please go ahead.

Thanks, Jason. Hello, everyone, and welcome to our third quarter 2020 conference call. Joining me today are Don Walker, Swami Kotagiri, and Vince Galissi. We will have four more comments today from Don and Vince. Yesterday, our Board of Directors met and approved our financial results for the third quarter ended September 30th, 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 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. 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 Q320 and Q319 between reported results and results excluding unusual items. Our quarterly earnings discussion today excludes the impact of unusual items in Q320 and 19. Dom will comment on the non-cash impairment charge we recorded in the 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. Lastly, please note that we will be providing our 2021 outlook at the same time as we report our fourth quarter and year-end results in February 2021. And now I'll pass the call over to Don.

Thanks, Louis. Good morning, everybody. Hope everybody's safe and healthy wherever you are today. Before I start, I would like to acknowledge all Magna employees around the world for their tremendous efforts in meeting and exceeding the challenges of the past nine months. I'd also like to once again reiterate that the health and safety of all of our employees remains our top priority at Magna. Today, I'll review our recent highlights, including our announcement of Swami's appointment as Magna's next CEO, our strong third quarter financial results, A non-cash impairment charge related to our investment in one of our equity-accounted transmission joint ventures, our agreement to acquire Hongli, the start of production in our vehicle manufacturing joint venture with BJEB in China, our announced cooperation with Fisker, and a key program award in camera monitoring. I'll switch up the order a little bit here in order to start with our strong Q3 results. Following this significant production decline driven by the COVID-19 pandemic in the first half of the year, we were experiencing a recovery in production which started at the end of the second quarter, particularly in our key markets of North America and Europe, as well as China. We were pleased with our operating performance in our quarter. While sales were down 2% year-over-year, Our adjusted EPS increased 38% to $1.95 in the quarter, and we generated $1.3 billion in free cash flow. These strong results reflect our operational focus on world-class manufacturing and the actions we have taken to reduce discretionary and structural costs in response to the lower levels of production. While production is recovering and auto sales have been fairly robust in the past few months, the resurgence of COVID-19 remains a risk to future sales and production. I believe the government's realized the importance of keeping our industry going. We have shown it has been done safely, so I hope we wouldn't have to shut down manufacturing. We believe the actions we have taken to reduce our cost structure and adjust discretionary spending are once again evident of our operating philosophy and agility in adapting changes in our operating environment. I would now like to address the non-cash impairment charge we took this past quarter. In the past few years, we have highlighted some of the changes we have faced in our GITREG joint ventures. Similar to last year, during the third quarter of this year, we began to develop our business plans including volume projections and cash flows for future years. Based on this, we concluded that the carrying value of our investment in Getreg-Jingling Transmission or GJT joint venture gets further impaired resulting in a $200 million non-cash asset impairment charge after taxes and minority interest. We are disappointed in our future projections in the Getreg joint venture and particularly growth in the Chinese business. The structuring actions we announced last quarter included further charges to right-size GJT. We continue to review ways to optimize our joint venture transmission businesses. On the positive side, our wholly-owned transmission business, which is primarily dual-clutch transmissions or DCTs, continues to be strong. Our package-neutral hybrid DCT on which a motor is embedded directly into the transmission is an important element of our powertrain electrification strategy. You'll recall that we have an award from BMW for transmission technologies for front-wheel drive platforms. This award is for our scalable DCT including hybrid transmission variants covering 170 different vehicle applications. We also noted at our investor day earlier this year that we have have been awarded 48-volt hybrid DCT business with an additional customer. We begin to launch our hybrid DCT product next year. There continues to be strong interest from other OEMs for our DCT products, and we are confident that this will remain a key product supporting our customers' vehicle electrification strategy going forward. Overall, Kotrag has been a good acquisition. Since we allocated a higher proportion of the value to the JVs at the outset, it has resulted in some impairments in our investments in those JVs. Next, let me discuss some recent developments at Magna, including a couple that highlight our continued focus on expanding in China and a couple that demonstrate the unique position we hold in the industry. We currently have a non-controlling interest in a joint venture with Hong Li. a leading seed supplier to Chinese automakers. Back in September, we signed an agreement to acquire 65% ownership of Hongli's entire seeding business. China is an important market for Magna, and this transaction strengthens our competitiveness in seeding through additional manufacturing sites, full engineering and testing, and increased vertical integration. The majority of Hongli's plants are vertically integrated with JIT Seeding Assembly structures, foam, and trim capabilities, that enable an optimum sourcing solution for automakers. The transaction is expected to close in early 2021. This past quarter, in our complete vehicle manufacturing joint venture facility in China, we began to launch the ArcFox Alpha T, the first vehicle to be produced with the ArcFox brand for BJEV, and our first vehicle assembled outside of Europe. While volumes are not are going to be significant through 2020. They are expected to grow over the next couple of years as we ramp up production and additional Art Fox vehicles are introduced. As part of our strategic direction to support traditional automakers as well as new entrants, we signed agreements with Fisker that provide the framework for a platform sharing and manufacturing cooperation for the Fisker Ocean SUV. Initial production is planned for the fourth quarter of 2022. This is a great example of our strategy to leverage our strong portfolio to scale for future mobility needs and utilize our full vehicle engineering and manufacturing capability. This is a unique, competitive position for us, particularly with the new mobility players and OEMs seeking to expand their electrified offerings. As part of the cooperation, Fisker issued magna warrants to purchase shares currently representing approximately 6% of its equity. In addition, we have recently been awarded business for a new camera monitoring system across multiple vehicle models for a global automaker. Our new Clearview technology will enter the market in 2022 using a unique combination of our camera, mirror, electronic, and software capabilities. The Clearview system creates a complete vision system that enhances driver safety by giving the driver more information about their side and rear This system demonstrates Magna's ability to combine our capabilities to provide optimized solutions for our customers. Lastly, and importantly, I'm happy that we recently announced that the Board has appointed Swami Kotagiri as CEO, effective January 2021, following my retirement at the end of the year. Leading Magna over these years has been a tremendous honor, and I'm extremely proud of everything we've accomplished. I've truly enjoyed the ongoing dialogue that I've had with the investment community and will miss the regular contact. Fortunately, most if not all of you are familiar with Swami through his interactions over the past few years through quarterly investor calls, investor days and other presentations as well as through visits to our CROI offices. In addition to Swami's strong technical and operational strengths, he has played an integral role in developing Magna's strategy and advancing our position in the changing mobility landscape. I am very confident in Swami's leadership and ability to move Magna forward into the next decade and beyond. And I'm also very confident in the extremely strong and experienced management team we have at the senior leadership positions across Magna. And with that, speaking of experienced senior management, I'll pass the call over to Vince. Well, thank you, Don, and good morning, everyone.