Magna International, Inc.

Ladies and gentlemen, please stand by. The conference will begin momentarily. We thank you for your patience and ask that you please remain on the line. Thank you. Greetings and welcome to the Q4 and year-end 2022 results and 2023 outlook conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. 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, February 10th, 2023. I would now like to turn the conference over to Louis Tonelli, Vice President of Investor Relations. Please go ahead.

Thanks, Chris. Hello, everyone, and welcome to our conference call covering our 22 results and our 2023 outlook. Joining me today are Swami Kodagiri, Vince Galiffi, and Pat McCann. Yesterday, our board of directors met and approved our financial results for 2022, as well as our financial outlook. We issued a press release this morning outlining both of these. 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 today included in our presentation that relates to our commentary. This morning we'll cover our 2022 highlights as well as our Q4 results. We'll then provide our 2023 outlook and lastly run through our financial strategy. And with that, I'll pass it over to Swam.

Thank you, Louis. Good morning, everyone. Today I'll recap 2022, comment on our results, and address our outlook. 2022 was another difficult year for the automotive industry and for Magna. The year started with continued supply chain disruptions, most notably the lack of semiconductor chips, which was expected to improve considerably during 22, but instead remained an issue throughout the year. Although vehicle build recovered from the 2021 levels, OEM production schedules remained volatile throughout which drove significant inefficiencies in our operations, including trapped labor, overtime, and staffing availability issues, to name a few. It also had an adverse impact on our ability to achieve our continuous improvement plans and optimize the cost structure across the company. We also started 2022 expecting net input cost inflation of about $275 million year-over-year. The conflict in the Ukraine created additional input cost pressure, particularly in energy, and China's zero-COVID policy resulted in lockdowns and further supply chain pressures. These factors drove an additional $290 million of net cost headwinds, primarily energy-related. Despite significant cost volatility through 2022, we were able to slightly improve from our revised $565 million in net input cost from our April Q1 call. We ended at $530 million for the year. In the context of this industry environment, a tremendous amount of effort was expended by our team to manage through the challenges, launch business, negotiate customer recoveries, and resolve commercial items. We were also successful in booking a record amount of business for Magna. So, while we are not happy with our 2022 results as a whole, and especially with underperformance in some of our facilities, I am appreciative of the tremendous efforts made across the company. Unfortunately, we ended a difficult year with disappointing Q4 results relative to our expectations entering the quarter. Although our sales of $9.6 billion in the fourth quarter of 2022 were up 5% year-over-year compared to our outlook, Q4 sales were lower and mix was negative, with our operating segments down almost $400 million, excluding complete vehicles and the impact of foreign exchange. Turning back to year-over-year, EBIT margin for Q4 declined to 3.7%. This was due to both internal and external factors. Internal factors included higher warranty expense, which cost us about 35 basis points, provisions against certain balance sheet amounts, about 30 basis points, and operating underperformance at a facility in Europe, approximately 25 basis points. External factors included continued inefficiencies caused by ongoing last-minute reductions in OEM production schedules and a customer footprint decision that resulted in our having to take asset impairment charges, which was about five basis points. These were partially offset by higher commercial resolutions, which positively impacted us by about 25 basis points. Our adjusted EPS was $0.91 for the quarter, ending the year at $4.10. And mainly as a result of lower EBIT, free cash flow in Q4 was $340 million, which was below our 2022 outlook. I recognize that we have operations that have underperformed our expectations this past year. However, operational excellence remains core to Magna, a key differentiator and a fundamental element of our strategy going forward. Although we incurred additional costs to do so, we once again managed to minimize disruption to OEM production despite continued supply chain challenges and volatile schedules. Our customers continue to recognize their efforts in operational excellence and innovation. Last year, we received 107 customer awards. And our progress continues towards net carbon neutrality in our operations. Part of how we address operational excellence is through a focus on people. We developed the operational management accelerator program to enhance the technical breadth of our future general managers and leaders. This will ensure we can fill the pipeline of future leadership across Magna. And I'm proud that Magna received 14 leading employer recognitions this past year, including from Forbes for the sixth consecutive year as world's best employer. Turning to sales growth, we outgrew our markets in 2022 by 7%. And once again, we achieved this outgrowth in each of our major regions, North America, Europe, and Asia. We were awarded a record amount of business, about $11 billion annually for 2022. This represents more than 30% above the average of our last five years of awards. We expect this to drive strong sales growth over market and improved returns at this program's launch. And we signed an agreement to acquire B&R Active Safety, This will further accelerate our growth and position us as a leader in the fast-growing ADAS market. We have begun planning to ensure a smooth integration of the business once the transaction closes this year. Finally, we remain committed to innovation. We were awarded substantial new business in a number of core innovation areas. This includes battery enclosures, e-drives, driver monitoring systems, and smart access power doors. We won another Automotive News PACE award, our sixth such award in the past eight years. Our commitment to innovation continues. as we communicated last year we increased our r d investments in mobility megatrend areas in 2022 to support awarded programs and opportunities with that and i'll pass it off to you thanks swami and good morning everyone i'll start with a detailed review of our financial results as swami indicated our 2022 results were impacted by continued