Magna International, Inc.

Greetings and welcome to the Magna International Q3 2022 results conference call. During the presentation, all participants will be in a listen-only mode. Later, 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 the operator, please press star 0. As a reminder, this conference is being recorded Friday, November 4th, 2022. It is now my pleasure to turn the conference over to Louis Tonelli, Vice President, Investor Relations. Please go ahead.

Thanks, Tina. Hello, everyone, and welcome to our conference call covering our Q3 2022 results. Joining me today are Swami Kodagiri, Vince Galiffi, and Pat McCann. Yesterday, our Board of Directors met and approved our financial results for Q3 2022. We issued our press release this morning outlining our results. You'll find the press release, today's conference call webcast, the slide presentation to go along with the call, and our updated quarterly financial review all in the investor relations section of our website at magna.com. Before we get started, just as a reminder, the discussion today may contain forward-looking information or forward-looking statements within the meaning of applicable securities legislation. Such statements involve certain risks, assumptions, and uncertainties, which may cause the company's actual or future results and performance to be materially different from those expressed or implied in these statements. Please refer to today's press release for a complete description of our safe harbor disclaimer. Please also refer to the reminder slide included in today's deck related to today's commentary. And with that, I'll pass it over to Swami.

Thank you, Luis. Good morning, everyone. Happy to be here to provide a general update on Magna as well as our Q3 results. Key takeaways from today's call, we continue to manage through a difficult operating environment and our results for the third quarter improved both on a year-over-year basis and on a sequential basis compared to last quarter. Excluding the disappointing performance at certain facilities which impacted our third quarter, and is contributing to our reduced outlook, our results were in line with our expectations. We expect another sequential improvement of earnings in Q4, including as a result of our efforts to secure cost recoveries from customers. And we have reduced our sales and margin outlook for 2022, mainly reflecting increased operating inefficiencies and lower production assumptions. While we are highly focused on addressing short-term external and internal challenges, we continue to make progress on our go-forward strategy to drive our future business. Let me briefly cover the current dynamics impacting the industry. We continue to experience supply constraints, in particular semiconductors. Improvement in the second half of 2022 is not as much as expected. At this point, we anticipate some ongoing schedule choppiness through the end of the year and into the first half of 2023. Input costs remain elevated, with higher energy costs in Europe the most recent factor. We continue to make progress in customer recoveries, and our discussions with customers continue. Relative to our previous outlook, we expect only a modest increase in our net input cost for 2022. The stronger U.S. dollar relative to other currencies in which we operate, particularly the euro, continues to negatively impact our reported results. And there remains risk going forward that high inflation and rising interest rates will impact auto consumers. In terms of tailwinds, dealer vehicle inventories remain below historical levels. And to this point, underlying auto demand remains resilient and constrained by tight supply. And global auto forecasters continue to expect increased light vehicle production in the coming years. Now turning to our third quarter earnings. Relative to the third quarter of 2021, Consolidated sales were 9.3 billion, up 17 percent. On an organic basis, sales were up 27 percent compared to a 24 percent increase in global light vehicle production, representing 3 percent weighted growth over market. This outgrowth includes the impacts of continuing customer recoveries. EBIT margin increased 190 basis points to 4.8%. Increased vehicle production was the largest positive factor. Higher net input costs was the most significant offsetting factor in Q3. Our EBIT margin improved year over year in every operating segment. Our adjusted EPS rose 91% to $1.07 for the quarter. and our use of free cash flow was $210 million in Q3. During the quarter, we repurchased 3.1 million shares using $180 million in cash and paid out another $125 million to shareholders in the form of dividends. Pat will take you through the details of a revised 22 outlook later. Let me take you through the broad strokes. Compared to our previous outlook, we are reducing adjusted EBIT margin at the midpoint by about 30 basis points to a range of 4.8 to 5%, mainly related to three factors. We are experiencing a higher level of operating inefficiency in a few facilities. The EBIT impact from these operating inefficiencies is about 15 basis points. The most significant is the BES facility that we have highlighted last quarter. We have identified the issues and action plans are in place. We expect progress in improving the run rate of losses going forward. Our lower volume assumptions in North America and Europe result in lower sales. And relative to our last outlook, we are seeing more disruption costs from production schedule changes. These are partially offset by contribution on higher sales in China. Together, the volume, sales, and scheduled volatility impact is approximately 10 basis points. Lastly, there has been some movement in a couple of areas of our net input costs. But overall, we are expecting about $20 million in higher costs, which is essentially the impact of lower sales of scrap steel and aluminum compared to our previous outlook as a result of lower market prices. Despite bringing our outlook down, we still expect improved sequential earnings in Q4 relative to Q3, mainly reflecting lower net input costs partially offset by higher engineering expense. While we're tackling short-term industry challenges, we continue to take steps in our go-forward strategy. We are leveraging Magna's capabilities and platform technologies in areas such as 48-volt battery management, software stack, and sensors to enter growing adjacent mobility markets such as micromobility. Our recent ULU investment allows us to enter the world's largest growth market for two-wheeled electrified mobility with India's largest two-wheeled electrified mobility as a service business. And through both our collaboration with Kartken and our own internally developed robots, we are addressing last-mile delivery. In the area of powertrain electrification, we are launching hybrid DCTs for Stellantis, starting with Jeep and Fiat models. Our agreement also includes additional future hybrid models for Europe. Our scalable hybrid technology is an important step in helping our customers electrify their fleet to improve fuel efficiency and performance and to meet regulatory requirements. To date, we have been awarded hybrid DCT business with three global OEMs, BMW, Mercedes, and Stellantis. Earlier this year, we broke ground in our LG joint venture on a new facility in Mexico that will supply inverters, motors, and onboard chargers. This is an important step in our ability to support our customers' powertrain electrification plans in North America. Lastly, we recently won another automotive new space award, our sixth such award in the past eight years for a solution that offers real-time dye adjustments during the stamping process. We are also awarded an Automotive News PACE Pilot Innovation to Watch for a better performing aluminum dye cast alloy used for structural applications. The innovation provides both a lower cost and lower carbon footprint. These awards recognize our efforts to drive innovation and technological advancements across Magna and very proud of our continued success here. With that, I'll pass the call over to Pat.