Magna International, Inc.

Greetings and welcome to the Q4 and year-end 2021 results and 2022 outlook. During the presentation, participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. At that time, if you have a question, just press the 1 followed by the 4 on your telephone. If at any time of the conference you need to reach an operator, you may press the start followed by the 0. As a reminder, today's call is being recorded Friday, February 11, 2022. Now, I would like to turn the conference over to Louis Twinelli, VP of Investor Relations. Please go right ahead.

Thank you. Hello, everyone, and welcome to our conference call covering our 2021 results and our 2022 outlook. Joining me today are Swami Kodagiri, Vince Galiffi, and Pat McCann. Yesterday, our Board of Directors met and approved our financial results for 2021, as well as our financial outlook. We issued a press release this morning outlining each of these. 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. Just 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 the reminder slide included in our deck today related to our commentary. This morning, we will cover our 21 highlights as well as our Q4 results. We will then provide our 22 outlook and lastly run through our financial strategy. And with that, I'll pass it over to Swami.

Thank you, Luis. Good morning, everyone. We've been busy over the last few days taking our board through our annual results and our business plans. Today, I'll recap 2021, comment on our results, and address our outlook. 2020 was a very challenging year that was dominated by the global turmoil caused by COVID. In 2021, the auto industry was severely impacted by supply chain disruptions most notably the lack of availability of semiconductor chips. Once again, we found ourselves working closely with our customers to manage through the challenges to mitigate the impact on production. While I'm not happy with our financial results in 2021, when I sit back and think about the efforts and performance of our team, whether it be winning new businesses, launches, or other operational excellence activities, I was extremely pleased with the results we achieved. It is a testament to our people that we managed through yet another difficult operating environment. Our culture of collaboration and execution comes through once again in 21. In 2020, the first half of the year was severely impacted by COVID-related production shutdowns globally, while the second half saw a strong vehicle production rebound. In each of the first three quarters of 2021, we experienced sequential weakening of vehicle production as the semi-chip availability became progressively worse. In addition to the lower production, inefficiencies driven by the unpredictable production schedules of our customers drove higher than typical decremental margins. The fourth quarter saw some sequential recovery in production, but global volumes were still down 17% from the fourth quarter of 2020. As a result of this cadence, our sales of $9.1 billion in the fourth quarter of 2021 were down 14% year over year. However, Organic sales outperformed our underlying markets by 6% in the quarter. EBIT margin declined year over year to 5.6% while increasing from 2.9% in Q3. Our adjusted EPS was $1.30 for the quarter. And free cash flow in Q4 was $729 million ending the year at $1.3 billion. Now, let us look at some highlights for 2021. Keeping our employees safe throughout the pandemic has been and will continue to be our top priority. We have been evolving and updating our protocols and facilitating testing and vaccination programs globally to help protect the health and safety of our employees. We remain focused on three key priorities, building awareness, creating an inclusive workforce, including through training and leveraging tools and recruiting to help remove any bias during screening. To continue to cultivate a culture of learning, we have launched several new education programs for employees, facilitating further development. And among the many awards we received, Magna has been recognized for the fifth consecutive year being named Forbes World's Best Employer for 2021. We never lost sight of the importance of operational excellence. Last year, we committed to being carbon neutral in our European operations by 2025 and globally by 2030. This should place us among industry leaders in Europe, and North America. We managed through the year-long supply chain challenges while working diligently with our customers to minimize production disruptions. And our focus on operational excellence and innovation led to customer recognition. Last year, we received our highest ever customer recognition awards, 122 in total. Now, let me comment on growth. We outgrew our market in 2021 by 4%. This exceeded the outgrowth we anticipated in our initial outlook last year. In fact, we achieved that outgrowth in each of our major regions, North America, Europe, and Asia. And we launched new technologies that have significant growing addressable markets, namely e-drives, advanced driver assist systems, and EV battery enclosures. We expect these product areas to keep driving our growth for many years to come. Finally, I would like to touch on our innovation. We demonstrated the successful commercialization of our innovation activities over the past few years. We were awarded new business in a number of core areas. This includes a recently announced driver monitoring system for a German-based OEM. We won the CES Best Innovation Award for our ICON digital radar, which is going into production this year. We also continued to expand our collaboration with a growing ecosystem of entities to help accelerate time to market for our innovative products. And lastly, our commitment to innovation continues. Over the past year, we increased investments in megatrend areas to position us for the future. Normally, I would be passing off to Vince, and I've heard this statement over many years. Don did it, and I did it for the last quarter. He's here with us. Instead, I'll pass the call to Pat McCann, our new CFO, who will first take us through the financials. But before I do, I would like to thank Vince for continuing to be a mentor to both Pat and I. Pat?

Thanks, Swami, and good morning, everyone. I hope everyone is staying safe and healthy. I'm happy to be speaking with all of you at CFO. I would like to start by thanking Vince, who has helped me immensely over the years and has supported me while I've prepared my new role. It will be evident that Swami, Vince, and I are fully aligned on Magna's disciplined returns-based approach to capital allocation. Today, I will cover our financial results for the fourth quarter and full year 2021. I'll do a shorter than usual version of our quarterly review to allow more time to cover our outlook and financial strategy. More detail on our financials is included in the appendix. As Swami said, both 2020 and 2021 were impacted by significant global events. 2020 was affected by COVID-related production shutdowns, particularly in the first half of the year. 2021 was impacted by semi-chip shortages. Overall, global light vehicle production only increased 4% in 2021. Our consolidated sales rose 11% year over year. On an organic basis, our sales increased 5% compared to a weighted global production increase of 1%, driving a 4% weighted growth over market for the year. Mainly as a result of the higher year-over-year sales, our adjusted EBIT margin and EPS also rose. For the fourth quarter, global light vehicle production declined 17% as a result of year-over-year reductions of 20% 28% and 10% in North America, Europe, and China, respectively. On a magna-weighted basis, production declined 20% in the fourth quarter compared to Q4 2020. Consolidated sales were $9.1 billion compared to $10.6 billion in Q4 2020. We had strong relative sales performance in the quarter, with organic sales outperforming weighted production by 6%. largely as a result of the lower year-over-year sales, adjusted EBIT and EPS declined from the fourth quarter of 2020. As with the past couple of quarters, a more informative comparison is reviewing sequential results. Comparing Q4 to Q3 of 2021, global light vehicle production was up 21%, driven principally by China and Europe, as chip-related production shutdowns subsided to some degree. Our sales were up 15% due to higher production and the launch of new programs, partially offset by negative program mix and foreign currency translation. All of our segments experienced sequential increases in sales. Comparing the third quarter to the fourth quarter of 2021, our adjusted EBIT increased from $229 million to $508 million, and EBIT margin rose from 2.9% in Q3 to 5.6% in Q4. The adjusted EBIT increase reflected a number of factors. Higher earnings on increased sales, the $45 million provision on engineering contracts with Evergrande recorded last quarter, government R&D incentives received this past quarter, and higher commercial settlements. These were partially offset by higher input costs and increased transactional foreign exchange losses. I will now review our cash flows and investment activities. During the fourth quarter of 2021, we generated $849 million in cash from operations before changes in working capital and an additional $502 million in working capital. Investment activities in the quarter included $549 million in fixed assets, a $105 million increase in investments, other assets, and intangibles, $63 million to finalize the LG Magnet joint venture, $31 million for a small acquisition, and $45 million in public and private equity investments. Free cash flow was $729 million in Q4. We also repurchased 251 million of our common shares and paid 127 million in dividends. Growing our dividend is part of our stated financial strategy. And yesterday, our board approved a 5% increase in our quarterly dividend to 45 cents per share, reflecting the board and management's collective confidence in the outlook for our business. We have increased our dividend per share at an average growth rate of 12% going back to 2020. And now I will pass it to Swami for a few introductory comments before getting into the specifics of our outlook.

At our investor event last April, I articulated our go-forward strategy for growth. We are on track with our strategy to further strengthen our position in megatrend areas, drive operational excellence, and look to leverage our unique position in the industry to unlock new opportunities. I look forward to giving you the details of our progress at our investor event in May. But today, I'm going to focus on our three-year outlook, which I'm really excited about. It reflects our go-forward strategy to remain a leader in mobility. You're going to see that we continue to increase our investments in megatrend areas, and that much of the growth associated with this investment will be realized beyond our outlook period. Specifically in the outlook, we see both tailwinds and headwinds. In terms of tailwinds, we are launching content on a number of new programs, which is contributing to sales growth. I will come back to that shortly. Relative to last year's outlook, we have an increase in business awards and are seeing opportunities in megatrend areas, particularly electrification and autonomy. With the current robust auto demand and low dealer inventory levels, we expect a favorable production environment extending into 2024. And our operational excellence initiatives are expected to contribute to margin improvement through our outlook period. In terms of headwinds in our outlook, We expect continued semiconductor supply constraints to impact production in 22. The supply chain in general remains relatively vulnerable, which could also impact vehicle production. And our business is facing inflationary input cost impacts in areas such as commodities, labor, energy, logistics, and other areas, some of which are expected to be short-term in nature and others being more enduring. We expect weaker operating results in the first half of the year relative to the second, primarily as a result of semiconductor availability, which would negatively impact production more significantly in the first half. So how does all of this translate in our key financial metrics? We expect to continue strong sales growth through our outlook period, And we have confidence in our outlook. About 90% of our 2024 sales are already booked. In spite of inflationary input cost pressures and increased engineering activities in megatrend areas, margins are expected to expand in each year of our outlook. Our engineering investments in megatrend areas should increase to an average of about $900 million annually before customer recoveries. Capital spending is also expected to increase largely as a result of investments to support the growth in our outlook. Lastly, free cash flow generation from our business is expected to remain strong, reflecting our operating performance and a disciplined approach to investment. This should allow us to further invest for growth and return capital to shareholders. The industry is undergoing a significant shift towards electrified powertrains. In particular, OEMs are bringing an increased number of BEVs to market. We have been communicating for some time now that the vast majority of our product portfolio is powertrain agnostic, and electrification is in fact an opportunity for us. And Magna has significant content on electric vehicles that are launching this year across the globe. Just to name a few, we have over $3,500 in content on the Cadillac Lyrik, about $2,000 on the F-150 Lightning, about $1,000 on BMW iX, about $500 each on X-Peng and smart SUVs, and around $900 on the NIO ES7. These vehicles shown are well above our average content in the respective markets. These are just some of the many vehicle launches around the world that are contributing to the sales growth in our outlook. With that, I'll pass it back to Pat.

Thanks, Swami. Let me start with the key assumptions in our outlook. Our outlook reflects increased vehicle production in each of our key regions relative to 2021. In North America and Europe, our two largest markets, volumes in 2022 remain well below levels experienced in 2019, pre-COVID, and China production is also slightly lower. However, we expect increased production through 2024. We assume exchange rates in our outlook will approximate recent rates. This reflects a weaker Euro relative to 21, which negatively impacts our reported sales going forward. I will start with our consolidated outlook. We expect consolidated sales to grow by 7% to 9% on average per year out to 2024. reaching $44.6 billion and potentially as high as $47.1 billion. The growth is driven by higher vehicle production and content growth, including as a result of many new technologies across our portfolio. These are partially offset by foreign exchange, the end of production on certain programs, and net dispositions. On an organic basis, we expect consolidated sales to grow between 8% and 10% on average per year out to 2024. Excluding complete vehicles, we expect our organic sales to grow between 10% and 12% on average. In addition, we are expecting significant sales growth from unconsolidated joint ventures over the next few years, including from our LG ePowerTrain joint venture, our integrated eDrive JB in China, and a new seeding joint venture in North America. We expect our consolidated margin to expand in 2022 and then again out to 24. Relative to 21, our 2022 margin benefits from contribution on higher sales, lower production inefficiencies from unpredictable OEM production schedules, and operational excellence initiatives. These are expected to be partially offset by higher input costs and engineering investments to support new program awards and to capitalize on growing opportunities in megatrend areas. We also expect a meaningful step up in margins in 2023. This is largely driven by contribution on higher anticipated sales, operational excellence initiatives, and lower application engineering in megatrend areas. And we expect additional margin expansion in 2024, primarily driven by higher sales and operational excellence initiatives. Many of the same factors that are impacting consolidated sales and margins out to 2024 are also impacting our segments. In the interest of time, we will not run through the segment detail. However, they are included in the appendix, and we are happy to discuss any questions on them. Next, I would like to cover some of the highlights of our financial strategy. We have been consistent in communicating our capital allocation principles over the years, and I would like to reiterate these now. We want to maintain a strong balance sheet, ample liquidity, and high investment grade ratings. Invest for growth through organic and inorganic opportunities, along with innovation spending, and return capital to shareholders. Over the last couple of years, our capital spending has been below normal levels as a result of the environment. As we get into our outlook period, spending reflects the capital required to support the growth in sales. We expect capital spending to be approximately $1.8 billion for 2022 and remain relatively level out to 24. We expect further strong pre-cash flow, totaling about $6 billion over the next three years. In summary, we're executing our go-forward strategy. We plan to further grow our business with particular sales acceleration and megatrend areas, execute on our plans to expand margin, including through operational excellence, generate solid free cash flow to further fuel growth and return capital to shareholders, and accelerate investments to support growth on the car of the future. We hope to see many of you in May at our investor event where we will elaborate on our go-forward strategy. Thanks for your attention. We would be happy to answer your questions.

Thank you very much. And if you'd like to register a question, please press the one or by the four on your telephone. Your three phone prompt will acknowledge your request. If your question has been answered, I'd like to draw your registration. It is the one or by the three. If you're using a speakerphone, Let's lift your hands up before entering your request. Once again, it's the 1-4 to register your question. One moment, please, for our first question in the queue. And we'll proceed with our first question on the lines with Mr. John Murphy of Bank of America Merrill Lynch. Go right ahead.

Good morning, guys, and, Pat, welcome to the call. Just a first question. Question, if I look at slide 2023, which is your life and production assumptions, and slide 25, your 2024 sales, it looks like your sales from 21 to 24 are growing largely or essentially right in line at the midpoint with production. So I'm just curious, it seems like the growth of market that you had kind of fades away in your outlook, and it looks like it's complete vehicle assembly largely, but I just, you know, what's the key driver? Is it literally just the mix or what's going on there?

Yeah, you know, if you go back, John, to where we were, what we were expecting in 2021, we are sort of flat relative to production, organic growth, and we ended the year plus four. So the starting point is higher for one thing. We also said that our expectation for the 21 to 24 timeframe was like one to 3% on average per year. You know, if you look at excluding the impact of complete vehicles, which has had an impact on our overall growth, we're back at the kind of 1% to 3% per year in the 21 to 24 time frame. So certainly, you know, complete vehicles is negatively impacting our overall growth rate. And, you know, what we're not talking about here is unconsolidated sales, which is growing significantly over our planned period.

Yeah. Yeah, that helps quite a bit. And a second question, I mean, as the automakers are focusing more and more on AV and EV investments, there's this idea, and I think this makes a lot of sense, that they are going to outsource more and more parts of the vehicle, even outside those systems, which really lays into the sweet spot of Magna and your business. I'm just curious if you're seeing any incremental quoting on class A stampings, if you will, or other parts where there might be greater opportunity for you to take on more and more of the vehicle as they focus on their investment dollar and human capital on AVs and EVs.

Good morning, John. This is Swami. As we see today, definitely from a perspective of capabilities and capacity, we are well positioned if that comes through. But as we sit here today and look at the cadence of the sourcing activity, We don't see a significant shift as of yet, but that is to be seen. But like you said, if you look at what we have in terms of footprint and capabilities, we should be well positioned to address that piece.

Got it. And then just lastly, I apologize on the outlook, one more question on the 8.1, 8.6 range. It's the same as what you were expecting in 23. We're looking at a little bit higher revenue range. I mean, is this the ultimate margin as sort of this 8.1, 8.6 range that you think that Magnus hops out at, or is there potential over time as you grow and the business mix maybe shifts to potentially even get higher on margins?

John, when we think about the margin here, I think there's so many components we have to consider mix. I think the one thing that's changed year over year is some of the input costs have increased. When we do go out, we see significant input cost increases in 22. Some of those costs will, you know, stabilize, I would say, as we go through the outlook period. Some of them won't. When you think about labor, I think there's been a reset to some degree on the labor cost, whereas others will come off.

It's also going to step up in our investments for megatrend areas, which is going to impact our margins in the short term, but it's going to drive growth in the longer term.

Got it. And I'm sorry, if I could speak in one more, just on the ambassador bridge, It's not because you guys are Canadians, although you probably have a better perspective than I do as a New Yorker on what's going on up there. But, I mean, are you running into any issues with, you know, I mean, it's not shipping, it's trucking, you know, and any kind of disruption around that? Or is that just a hiccup that you guys will be able to work through or the industry you think will work through?

I think in the long term, I'm sure. Sure, we'll work through, but as of right now, we're constantly monitoring it, John, and some of the OEM customers have had to idle or cut production requirements. They're adjusting, I should say, the production schedules, and we're kind of starting to see some initial impact in some areas versus the other, for example, JIT facilities and so on. So we're watching it closely. I definitely hope that it will get resolved quickly.

Okay. Thank you very much, guys.

Thanks, John. Thank you.

Thank you. We'll get to our next question on the line, from the line of Adam Jonas with Morgan Stanley. Go right ahead.

It's so interesting. Your outlook is so balanced compared to many of your OEM customers that are guiding for really significant increases in margin over the next few years. So it's a nice dose of reality. Swami, where are you most concerned? You highlighted commodities. I mean, amongst the commodities, and particularly metals, what's giving you the most concern right now?

I think it makes a little bit, Adam, as you look at this stuff. Some of the commodities like steel, we are on resale, a significant portion of it. Some of it, you know, we have in the free market. A large part of resin also on resale. Some of it is not, especially the polyethylene-based, you know, speciality resins and so on and so forth. A little bit on aluminum and copper, but most of the times we are indexed on resale program, and the rest we have to manage through as the market is fluctuating. But I wouldn't say one is significantly different than the other. There's a bunch of commodities that we are closely monitoring. And the supply is going to be one of the key things that we have to look at and how our tiered suppliers are managing that is going to be also an important thing to closely monitor.

Thanks, Swami. And then just a follow-up on Steyr and Graz. a very highly anticipated launch for this November. I was curious if that looked on track from your perspective or anything you wanted to call out there. And any update on plans or timing or milestones regarding your decision of a North American contract manufacturing location? Thanks, Swami.

For the anticipated launch, we are Both the teams are working together well and progressing well, I should say, Adam Wright, but more specifics I would leave for the OEM to comment. In terms of looking just at various opportunities and grants, they continue. In the North American footprint, like I've said before, very open to the idea of having the footprint here. As I've always said, I think it's important to have a little bit of visibility on the product plan, even though it starts off at a lower volume, if there is enough visibility in the long term. I think we'll be looking forward to have that footprint in North America. Thanks, Swami.

Thank you very much. We'll get to our next question on the line from Itay McKellie from Citigroup. Please go right ahead.

Great, thanks. Good morning, everybody. First question, just wanted to go into some of the incremental investments you're making this year on the megatrend. I was hoping you could quantify kind of the year-over-year impact there. It sounds like that's mostly in power and vision. Maybe, Swami, you talked about some of the opportunities for revenue from these investments coming beyond, I think, 2024. So we can maybe quantify or talk about kind of where specifically you are investing on the EV and autonomy side.

Yes, Sitay. I think, as you said, a lot of the investment that we're talking about is in that region from an engineering investment perspective. If you look at the electrification side of things, I think if you look at the overall managed sales by 2024, we are going to be in the $2 billion range. And in our LG joint venture that we talked about, we continue to see a 50% CAGR over the next or during the planned period, I should say. In the ADAS area, last we talked about 20-plus percent CAGR. And as we look at the plan period now, from 21 to 24, we're even seeing a 30% CAGR. So I would say the investments that we have made and the platform technologies are starting to yield result, and we continue to see that going forward. Specific areas, e-drives. you know, larger addressable market for us, like we said before, not just the all-wheel drive, four-wheel drive. Now we are looking at, you know, all drives. So that is a expanded addressable market. On the ADAS side, we have, as we said, the building blocks in terms of the sensor suite, the compute, and the software infusion capabilities. I briefly mentioned about our radar going into production and also the a program with the German OEM on the driver monitoring system, and we also continue to see further traction in that product line.

And, Atay, I think the other thing we should consider when we talk about investments in megatrend areas is the portion that throws through P&L as gross engineering expense. The other part that's primarily in our P&B segment, as you pointed out, the other large investment we're making is in our BES segment, and that's primarily in the form of capital as we launch battery enclosures. So we're investing now for battery enclosures that are going to be launching throughout the outlook period. We recently started the launch of the Hummer here in Michigan.

That's all very helpful. Just a quick follow-up, and I apologize if I did miss it before, but I was hoping we can go through the bridge and complete vehicle assembly between kind of the prior outlook for 2023 that you had versus the updated outlook today for kind of the top line and margins as well.

If you look at 2023, we would have had the BMW 5 Series in there for most of the year. And that continues to be the case, but 2024 now we've brought another year. So that program, because it ends in 23, it's not into 24. Now, we do have the FISCO program that launches, but there's different accounting. So if you recall, we've had kind of full-cost accounting and value-added accounting. The five series is on a full-cost basis, so a much higher unit price per unit. And the FISCO program is on a value-added basis, so a much lower unit price. So even though the volumes in the plant are not that significantly different. The revenues are quite different.

That's very helpful. Thank you.

Thank you very much. We'll get to our next question on the line from Peter Scalar with BMO Capital Markets. Go right ahead.

Good morning. Just looking at your initial 2024 guidance, you're showing a lot of equity income growth over the planned period. I take it that's coming from some of these joint ventures, the partnership with LG, the partnership with Hasco. So I'm not surprised that the revenue is ramping up, but I was surprised at the growth of equity income, given that there would be initial ramp periods as those joint ventures begin to build. So I just wanted to add a little flavor on what's driving the equity income growth.

Hi, Peter. It's Pat. I think when you look at the equity income, what I would consider, you're right, a lot of the growth is coming from those joint ventures. And what you have to consider is in the early, where we are today is we're investing heavily via engineering spend to launch a lot of these programs in the EV markets. When we get out to 2024, a large portion of these programs will be launched, generating revenue. So it's a combination of lower application engineering, in the future, combined with margin on sales that are going to be generated?

I mean, the LG joint venture already has sales and it's ramping up pretty significantly, so there's investment there. ASCO launched the Volkswagen program last year, continues to ramp up, and there's another program that launches next year, so it's going to start having more higher sales, and so there's a change in the results as a result of the sales being much higher.

Okay. Another question I had is I'm a little lost on how many eDrive awards you've received and have announced. I forget when it was. I think it was last week or recently you issued the press release on the Volkswagen platform where you're providing the secondary drive. As I recall, last time you spoke, you had three major eDrive awards. Is the Volkswagen program you talked about last week, is that part of that or is that a fourth program? Maybe you could just review that. where you are on eDrive awards.

Yeah, Peter, happy to do that. You're right, the Volkswagen program is the first eDrive program, and we have talked about that before. We have another program, as I just said, that's launching in Hasco next year. That'll be a second. And then last year, we were awarded two additional eDrive programs that include both the primary and secondary drives. So we have four currently booked. Lots of conversations. In fact, there's an acceleration in conversations with customers over the last 12 months, and that's mainly due to all the focus on EVs. And certainly the LG partnership is a driver there. And we're looking at a bunch of additional quotes for this business.

Okay. And the LG partnership, is that for components for the eDrive system, or will the joint venture do the entire eDrive system, or a bit of both?

It's both, Peter. If you recall, it's It's for components, but also with any Japanese or Korean customers, they're responsible. LG Joint Venture is responsible as the tier one on the eDrive side.

Okay. And then just lastly, on the complete vehicle assembly where your results were pretty strong in terms of operating income, you attributed that partially to government research and development incentives. I'm just wondering what they related to and what What was the magnitude? Those incentives must have been pretty significant if you called them out.

Yeah, Peter, they're basically R&D credits, similar to what you would see here in Canada. The way this program is structured in Austria, they do run through EBIT. The number is in the range of about $20 million, and it's a little bit more significant than we're used to because it covers out-of-period amounts as well.

Yeah, okay.

Thanks, Matt.

Thank you. And we'll get to our next question on the line. From the line of Chris McNally with Evercore ISI, please go right ahead.

Hi. Thanks so much, team. Just a follow-up on the margin questions for power and vision and body. On Power Envision, you talked about the engineering upspend in 22. Could you just talk about, is that the majority of the margin hit year-over-year, or, you know, is it equally shared with things like component costs?

So, can you repeat the question, Peter? Sorry, Chris?

Yeah, the down margin year-over-year in Power Envision, you talked about the increased spending for R&D, ADAS programs, Is that the majority of the hit, or is, you know, if we were to rank order components, you know, higher chip prices and things like that are also a headwind?

Just trying to find the right page, Chris, you know, to get to what you're referring to.

To look at power and vision, I think what you're seeing in terms of The big impact to the margin are going to be the inflationary input costs. And a big chunk of the engineering spend is coming through in 2022. Those are the two biggest drivers of the decrease in the margin in 2022.

Okay, perfect. And then body wear, obviously, things normalize pretty quickly next year. Could you just talk about how raw materials are flowing through, obviously, You have steel recovery and you also have steel scrap. Just talk about some of the tailwinds there that get back your margin to this 8% plus typical range.

Hi, Chris. It's Pat. When I think about the BES segment, you're right. It's primarily a steel story with some resin on the exterior side. Specifically on the steel, we are primarily covered via resale or indexing programs. And we do have a benefit of being able to resell scrap steel on the market. Those markets tend to go together. So as we see steel coming off in the future, scrap recoveries will probably move in tandem, maybe a little bit quarterly delay or whatnot. I think the biggest driver, when you look at the margin increasing from the 5.7 to 21, it's really driven by higher sales. And the other factor is we're expecting some stability to come back into the production schedules from our OEM customers. So if you recall, in 21, we did have some fairly high decrementals. We have these big capital-intensive plants. And when we return back, I think that's driving the majority of that improvement.

Okay, that's great. So lower risk on Roth. And then my final question, just on Steyr, and I think it's been asked a couple of times, but I just wanted to clarify. In your slides, I think on slide 53, you have the volumes basically in like a 130 to 140 range. thousand unit range for 2024. As far as I know, I think the capacity is around 200,000. Is the Fisker number in there? Because we're, I guess what I'm trying to wonder is with the BMW rolling off and all the opportunities you have, could you fill that capacity, you know, the next couple of years, or are we getting close to the point where you'd make a go, no go decision on a new North American facility?

So, Chris, I think I would say, again, depending upon the mix and what the requirements are in the assembly and the paint and so on, I would peg the capacity roughly to be around 170 to 180 in Graz and, you know, similar number in our joint venture in China. So I think as the BMW rolls off, we talked about the Fisker just starting at the end of this year and slowly ramping into 23 and 24. So there is a little bit of a transitionary time as BMW comes off, right, and Fisker ramps up. And we continue to have many discussions on different variants and OEMs. So it's a lumpy business. It goes through the cycle. And we're having a whole bunch of conversations to utilize the capacity appropriately.

And Fisker is in. Okay. So you don't have, you know, there's only maybe 30,000 capacity there. If another big program came, you would need significantly more capacity. Okay. Thank you so much, guys.

Thank you. We'll get to our next question on the line from Dan Levy from Credit Suisse. Go right ahead.

Hi. Good morning. Thank you for taking the question. First, I wanted to go back on one of the earlier questions of the fact that the margin guide for 24 is flat versus 23 despite the higher revenue. I think you mentioned increased commodities, and I assume that that's just a broader catch-all for input costs. So maybe you can just elaborate a bit more on that. So if we're just thinking about input costs or cost inflation, what's in that bucket? How much Cost inflation did you see in 2021? What are you assuming for 2022? What are you assuming beyond? And then, you know, what's the mitigation? What are you assuming on mitigation of those costs, or are those costs all sticky?

So, sorry, Dan, it's Pat again. So if we think about the – I think your statement is correct. I would view it primarily as just higher input costs. And when we think about those higher input costs, it's going to cover items such as commodities, whether it's steel or resins. And when I talk about steel, obviously that's on a net basis. We have resin. We would have copper, aluminum. But we also have areas such as freight, energy costs. We're seeing an uptick primarily in Europe. And outside of third-party costs, we're also seeing an uptick in labor costs. And the labor costs in 21 were primarily more in the form of retentions or whatnot. What we're seeing as we go into 22 is we are experiencing higher than historical wage increases in various parts of the world. So coming back to the numbers, if you think about 2021, from that perspective, if we go back compared to 2020, our uptick of input costs is probably in the range of about $80 million. Of that 80, 50 related primarily to commodities and and third party party costs and 30 would be primarily labor. We roll forward into 2022. The additional uptick is in the range of both 275 million and that split would be 190 on commodities and the balance on labor primarily. Sorry, Dan, just don't want to cut you off, but sort of the first part of your question, when you're looking at the margin being flat from 23 to 24, When you start thinking about commodities, we're expecting them to come off labor stickier. And when you look at 23 to 24, I think we do have an uptick on our labor costs that is going to stick.

But we do have an uptick in engineering through that period. That's impacting the business in the short term.

Okay. So you're assuming full mitigation of the commodities or some of the commodities to come off correctly?

Yeah, we've assumed in our plan that we have some recoveries. But the numbers I pointed out are on a net basis.

Oh, okay. Thank you. And then next question is just on the LGJB. And I see the power and vision equity income, and it's coming up. maybe you could just provide some comments on the underlying profit. Cause I think Swami, you mentioned earlier that, you know, it's 50% CAGR, but if I just compare the equity income from 21 to 24, it appears like it's a slight uptick. So, um, you know, is that just a reflection that you're getting the revenue, but it's still not a steady state margin by 2024?

I think it's fair to say that we're still investing in it when we get to 2024. Unfortunately, we don't control the joint venture and, uh, We're not able to get into what the profitability is. Clearly, we're in heavy investment mode, and over time, as sales grow, we'll get contributions, but we can't comment on the impact. We also have in our equity income one of our joint ventures, which is planning pretty conservatively. It's conservative on the amount of recoveries that they intend to get or expect to get from customers, so that's impacting equity income in the short term.

Okay, thanks. And then just lastly, maybe you could just provide a quick comment on the free cash. You're guiding to something flat to slightly below 21. I realize a big part of that is, you know, higher capex. But, you know, it seems like the EBIT increase should more than offset that. So maybe you could just provide some comments on the free cash dynamics. Thank you.

so yeah just on the free cash flow again I think when you put in perspective of the range we're talking for capex I think that in that investment is pretty significant compared to the Delta in in profitability when we yeah and I understand notes passed over to me here so when you think about our capital spending the other piece we have to consider is we talk about capital, and this would be capital where if you go to a plant and they take, say, Magna on it, there's another significant increase, and it's primarily when we get into the megatrend areas and you talk about battery enclosures, there's a significant amount of investment of customer-owned tooling. And when we're guiding that number out, we're seeing a $50 million to $75 million increase in that number as well.

You'll see that in other assets.

Got it.

Okay, thank you. Thank you very much. We'll go to our next question on the line from Mark Neville with Scotia Capital. Go right ahead.

Hey, good morning, guys. I just want to make sure I understand. I'm sorry to go back on this. What's happening in complete vehicles? So volumes will be flat. Sales are down, but that's Fisker accounting. But you also have the BMW rolling off in 2024. Is that correct?

The MW rolls off late in 2023, or second half of 2023.

Okay. And there's a different accounting for Fisker? Is that right, too?

Yeah, we talked about it even last year. We're accounting for it on a value-added basis. Okay. Yeah, that's a lot lower price per unit than we are with the rest of our programs, including the MW5 series. Engineering is also down a little. We've been generating a lot of engineering revenues, And we're expecting that to come off a little bit from the high levels we've seen over the last couple of years.

Okay. Given the fiscal accounting, if it's just value-add, shouldn't we assume or wouldn't normally the margin be higher?

Yeah, the margin is higher. There are still some elements in there of goods that are included in the unit price, which... keeps the margin down a little bit, but it is higher. It's just there's a lot of factors that are going through that line. We highlighted a few of them in the appendix there, but it's more than just that FISCR that's going in there. There's some input costs that are impacting the margin, etc.

Pat, you mentioned some numbers in terms of inflationary pressures. I think you said $275 million 2022. Um, I missed the split.

Oh, sorry. Yeah. So two, seven, just to be clear. So it's two 75 incremental versus 21 on a net basis. And the split is 190 on commodities or third-party costs. And then 85 would be primarily labor. Okay.

Um, I'm just curious what sort of, what steps you can take, if any, um, Just around the labor and energy, again, I appreciate commodities move around, but I guess labor feels a little more structural. So what are some of the things you can do to sort of push that through or deal with that?

It's a mix, I would say, right? You know, some of it is continuing discussions with the customers, looking at productivity improvements within our operations. There's not one answer completely. You know, we look at continuous improvements and VAVs, and that's an ongoing exercise going forward to it. And some of it will be recovered in the new codes as we go forward.

Great. One last question. Just in the 2024 outlook, I understand there's no comments around M&A, but just curious to get your updated thoughts there. Thanks.

Yeah, I think... Like I always said, we look at the geography, the customer and the product strategy overall and try to look at what is the right way to go at either organic or inorganic. If the answer happens to be inorganic, then we look at what's the right approach to do that.

Hey, Mark, it's Vince. First time I'm going to say something on this call, kind of more of my area looking at overall strategic initiatives with Suami. On the M&A front, we typically do not build anything into our outlook, right? We only build in M&A that has happened or we've got a contract in place. So certainly with the strength of our cash flow, our balance sheet strength, and the what's happening in the industry and the evolution and how well we're positioned. You know, we obviously, as you can imagine, look at a whole bunch of things, and we have an overall strategic approach to our business. And with the right opportunities, you know, you shouldn't be surprised if we do use our balance sheet. We've used it in the past. I expect we're going to continue to use it in the future to strengthen our overall product portfolio to support our customers.

Got it. Thanks. I'm happy to get on, Vince.

Thank you. We'll get to our next question on the line from Mark Delaney with Goldman Sachs. Go right ahead.

Yes, good morning, and thanks very much for taking my questions. The company's outlook for global auto production looks pretty consistent with IHS. It is above some of the other auto tier one supplier guidance, and so I'm hoping you can elaborate a bit more on how you're deriving your outlook for production. How closely does it align with the OEM forecast that you're being given, and are you trying to factor in any conservatism given all of the supply chain issues?

I think if you look at 22, our Our outlook on a global basis is about 6% growth versus 21. In North American Europe, I think we're a little bit more aligned. If you look at the 24, my reflection is that we're still a little bit conservative relative to IHS, at least in North American Europe. So, I mean, we look at external forecasters. We definitely have our ear to the ground about, at least in the short term, what we're hearing from our... our groups and what they're hearing from their customers. So, I mean, it's a combination. We have to put a stake in the ground at a point in time, and we don't know, of course, what others are doing. We look at the analysts as well and where you guys are at, what you guys are expecting, and we come up with a collective view on Outlook, and then we finish our plan. That's kind of how we do it.

Got it. That's helpful. And then my second question was on Optimus Ride, an acquisition the company did relatively recently. Maybe you can talk a bit more on the assets and IP that that acquisition is bringing into Magnet and how you plan to incorporate it into the development of the company overall. Thank you.

Hi, Mark. We talked about continuing to look at different areas based on product strategy, and we have – done a few things to continue to strengthen our foundation in ADAS and software in general. And with this acquisition, we welcomed about 130 employees there. We felt the capabilities and the knowledge they had would add to what we're doing in the feature function development and so on. You know, not commenting specifically on the IP, but it really adds to the depth of the software in general. and the ADAS piece in specific. And we will maintain the office in Boston. It's a rich area in terms of the ecosystem of academic institutions and just the software talent, so we continue to grow that as a region. Thank you.

Thank you. We'll get to our next question on the line. From Colin Langan from Wells Fargo. Go right ahead.

Oh, great. Thanks for taking my question. I'm a little surprised by the commodity cost increase going from $50 million to $190, particularly if steel is heading in a downward direction or has been. What are the big components of that $190 increase if it's not steel?

Hi, Colin. It's Pat again. So when you think about the commodity increase, I think I've covered off a few of the major items. Obviously, resins, we have much less resin on a resale program or indexing program, just given the nature of the product. It's a harder product to hedge against. So resin is obviously a big part of it. The other big part is energy that's flowing through. We're seeing that in Europe. A lot of the... of the input costs. What we're seeing as well is when you look at energy and some of these input costs, they're coming through the supply base as well in the form of surcharges, which are a little bit harder to control. Specifically regarding steel, if you think about steel, and I understand steel prices have been coming off pretty steadily since towards the end of Q3 of last year, really the timing of your contract and when you lock in is going to drive a lot of that value. So it's a bit of a three-party negotiation when you're dealing with your customers and the mills and we're in the middle. And when you lock in those contracts really drives your steel pricing on a year-over-year basis.

The prices are coming down when these scrap sales are lower as well, and that's kind of baked into there as well.

Okay. Okay. And when I look at growth over market, if you look at 21 to 22 and I take out assembly, I'm coming up with something like an 11% growth. With your outlook for North America and Europe up 16, it seems like you're underperforming this year. Is that right? And is that just assuming some sort of platform mixed drag relative to geographic benefit? What sort of One, are you actually underperforming the market this year? And then two, is that in any color on what platforms maybe you're dragging that growth of the market to?

I don't think there's any particular – I think, you know, we give a range for our growth rates. Last year we were kind of thinking the same thing. We started the year kind of close to flat and we ended up at plus four, so the base is higher. But, you know, it's just a mix of programs that we have, you know, in the business that's driving this. The position we still think, excluding Steyr, we have growth in the entire period. You know, we've also got Crystal. We've also got a disposition that we did in 2021, which is impacting overall sales.

Okay. And anything in particular in power and vision? That one seemed to have the lowest growth year over year.

Power and vision in particular had really strong, global market over the last couple of years. We were 9% over the market in 2020 and 4% last year. So the base is certainly high there. And we have businesses in our vision that are pretty established. And so it isn't always going to go fast in the market. And it just depends on the year, just a mix of programs and business.

Okay. All right. Thanks for taking my question.

Thank you. We'll get to our next question on the line. This is from Rod Lash from Wolf Research. Please go right ahead.

Hey, this is Shreyas. I'm for Rod. Just following up on that power and vision question. So, you know, I know it obviously houses a lot of the secular growth elements of the business, like ADAS and eDrive. And, you know, you talked about consolidated revenues up 9% to 10%. Through 2024, you know, the market is up 9%. So a little bit of outgrowth. And I realize, you know, the JV part of the business is growing rapidly. But are there parts of the power and vision business that you expect to will grow a lot slower over these next few years and maybe even shrink that you can talk about?

The power and vision has, you know, we have the mechatronics, mirrors, lighting, ADAS, and in the powertrain, it's a combination of our transmission business and all-wheel drive, four-wheel drive, and the e-drives. So there's kind of some of the areas which are growing fast, as we talked about, with the rest of the market. Some of them are stable and have a very long runway for the next 10 years, which gives the stability, but those things are not growing as much as the other areas. We cannot look specifically at each of the product lines. For example, the mirrors that continue to grow with the market, every vehicle has that, but we are looking at the combination of the mirrors and electronics in the driver monitoring system, so that you know, turning out to be a new product line. So you can't really put a specific number on each one of these things. It's a mix. And I think as time goes on, it evolves, right? Some product lines will evolve faster than the other.

And the segment that's seeing the fastest growth in unconsolidated sales is not a part of our vision group, right? Due to the LG joint venture and the Haskell joint venture in particular.

Okay. And then, you know, you mentioned engineering spending is growing to $900 million. Megatron engineering spending is growing to $900 million in 2022. What was that spending in 2021, and what are you assuming for 2024?

We're talking about average annual numbers throughout the planned period. So if you look at just the average annual numbers, I would say it's about a $300 million increase as an average from the last planned period to now. Right, and that's gross spend. That's before recovery from our customers.

Yeah.

Okay, so basically you're saying that it would be up to $1.2 billion by 2024 versus the $900 in 2022? I just want to make sure.

We were just saying that we were expecting about $600 on average in our last outlook over the three-year period, and now there's an uptick to about $900 on average for that period. Okay. Okay, I understand. Thank you. On the growth side, growth side.

Thank you. We'll get to our next question on the line. It's from the line of Brian Johnson with Barclays. Go right ahead.

Thank you. A lot of my questions have been drained already, so I want to ask kind of a bigger picture one. You know, one of your large competitors that is considered a role model of the industry, Aptin, recently made a large and frankly expensive software acquisitions. So, and maybe this is a chance for Vince to talk about, you know, how are you thinking about the role of software overall at Magna and potentially the need for acquisitions, which of course have been very common in multi-industry space, to help you get there?

Yeah, I think, Brian, good morning. Software is such a wide topic and it is put under a broad umbrella. And if you look at the software capabilities and applications, It's different in different product areas, but for sure what you said is true that software will define a large part of the vehicle going forward. Given that overall statement, we continue to look at what software and what role does it play, whether it's ADAS or whether it's mechatronics, whether it's powertrain and so on. So we continue to look at each of the specific areas of what the application software capabilities are, and therefore the investments, whether organic or inorganic, to complement that. At a base level, there are some of the electrical architecture, like we did with Fisker, or with our entire business. We continue to look at the holistic view of what the vehicle is going to be, and we continue to add to that capability. So I think one of the unique things in Magna, which I think should be considered a role model, is how we can actually integrate and think holistically of a whole vehicle and what each system means. So that's how we look at it.

And does that mean you'd want to be active across the software stack, or are you thinking about specific domains or applications where you really want to focus your software expertise on?

We believe that we have to have a system viewpoint given our engineering, full vehicle engineering and full vehicle manufacturing. And given the domains that we have, we look at domain specificity also, right? So given our portfolio, we continue to look at all of them. And, you know, how the stack develops and what OEMs will take on versus what the suppliers will take on is evolving, and we continue to track that.

Okay, thanks.

Tommy, one more question?

Certainly. We'll proceed with our final question from the line of Michael Glenn from Raymond James. Go right ahead.

Thanks for getting me in. You made the comment on the 2022 gardens regarding the 1H, 2H dynamic. Can you just provide a little bit more clarity on how different will the two periods be as we're modeling this out?

Well, I mean, we don't provide – Pat's just having to look at the overall numbers. We don't provide quarterly guidance, but definitely the impact that the CHIPS is going to have is going to skew what you'd normally see as a stronger first half versus the second half.

Okay. Because coming at like Q4 at the end of the day was you came at it at $1.30 in EPS, and that was kind of well ahead of what consensus was forecasting. So – You know, are you expecting something different in Q1 versus what you saw in Q4? Does it get a little – is there a little more pressure in Q1 that starts to take place?

Yeah. We're not going to get into the details of, you know, let's try to walk from, let's say, the earnings or the margins in Q4 versus Q1. We don't provide that outlook. So, like I said, it's more – the direction was more related to the volumes. Mm-hmm. volumes in the first half versus the second half, we can't get into the details of what we expect in the first quarter or the first half on margins.

Okay. And just some thoughts on given where the free cash flow outlook is, some thoughts on how you would proceed with the buyback in 2022.

Mike, we do have an open NCIB where we're able to buy up to 10% of our shares. at any point in time. We have been active in the market. In the quarter just passed, we did purchase $250 million. I think it's going to be consistent with our liquidity or our financial strategy, which is our number one priority is to grow the business organically and organically. And if opportunities are not there, we're going to continue with the share buyback. when I think about the share buyback, what's nice about the buyback is we can turn it off. So if we do have an opportunity that comes up that is significant, we can turn it off. And we have turned it off in the past when we have looked at acquisitions. And I think we're not going to change that strategy going forward.

Yeah, Michael, just to add to that, I mean, I've been part of this capital strategy kind of and how we evolved it over the years. It's been pretty consistent kind of, you know, we look at a leverage ratio. We look at the macroeconomic environment. We look at the opportunities that we see and we've got to make sure we have enough liquidity. And to the extent that there's excess liquidity, you know, we've demonstrated over time that when we turn that to shareholders by way of buybacks, but as Pat talked about, the next thing with the buyback is you've got flexibility turned on and off depending on the situation. And, you know, our strategy in that area hasn't changed.

Great. Thanks for taking the questions.

Thank you. Mr. Karakiri, there are no further questions. I'll turn it back to you.

Thank you. Thanks, everyone, for listening in. I know we have had two straight years with a difficult production environment and industry challenges still continue to persist. However, we remain confident in the strength of our business model and our ability to grow and generate earnings and free cash flow to create significant long-term value for shareholders. We stay focused on executing our go-forward strategy and look forward to seeing many or all of you in Detroit at our investor event in May. Stay safe, stay healthy, and enjoy the rest of your day.

Thank you very much. Thank you, everyone. That does conclude the talk for today. We thank you for your participation as we disconnect your lines. Have a good day, everyone.