Greetings. And welcome to the First Quarter 2019 Results Conference Call [Operator Instructions]. As a reminder, this conference is being recorded on Thursday, May 9, 2019. I'd now like to turn the conference over to Louis Tonelli, Vice President of Investor Relations. Please go ahead.

Thanks very much. Hello, everyone, and welcome to our First Quarter 2019 Conference Call. We'll have formal comments today from Don Walker, Chief Executive Officer; Swamy Kotagiri, Chief Technology Officer and President of Power and Vision segment; and Vince Galifi, Chief Financial Officer. Also joining us today are Eric Goldstein and Jim Floros from our IR team. Yesterday, our Board of Directors met and approved our financial results for the first quarter ended March 31, 2019. We issued a press release this morning for the quarter. 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. 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 Q4 '19 and Q4 '18 between reported results and results excluding unusual items. Our quarterly earnings discussion today excludes the impact of unusual items. Within this year, we adopted a new lease accounting standard that replaced previous lease guidance under GAAP. The most significant impact of this new standard on our financial statements was the recognition of right of use assets and lease viabilities for operating leases. We've recognized right of use asset and lease viability each of $1.7 billion based on the present value of the remaining lease payment over the lease term. The adoption of the news standard which has been done prospectively with no prior year restatement did not have a material impact on earnings for cash flows. The new standard is expected to have an approximately 140 basis points negative impact to return on invested capital. Prior period comparative have restated to reflect the transferred of certain assets out of corporate and other to the company's operating segments to better reflect the utilization of these assets. And now I'll pass the call over to Don.

Thanks Louis. The first quarter was a bit noisy with some strong performance in a challenging environment as well as some negative development. I'll review the quarter relative to our expectations and then discuss changes to our outlook. Q1 light vehicle production North America and Europe was essentially in line with what we are forecasting. While volumes in China particular on key programs were considerably lower than we anticipated previously. Our Body Exteriors and Structures margins came in little better than expected in our complete vehicle segment performed in line with our expectations. Our Seating segment is in the middle of launching a significant amount of new business mainly in a new facility in South Carolina and incurred higher cost in a quarter than expected. In our Power and Vision segment, with the exception of our electronics, our business overall was largely in line with our expectations including our equity earnings. In Electronics, we incurred a higher level of engineering and other costs relative to our expectations substantially associated with three ADAS programs that are utilizing new technologies. We expect the higher spending to continue. In addition, given the current status of two of the programs, we wrote off amounts that we're on our balance sheet at the end of 2018. Going forward for the time being, we are expensing our capital spending in a portion of an engineering that would have otherwise been capitalized in these two programs. As we look forward, three main factors have caused us to reduce our 2019 outlook. The higher costs in electronics that are expected to continue through this year. We now anticipate some softening in light vehicle production across all of our key markets relative to our previous expectations; in particularly we've reduced volumes in Europe and China considerably. This is expected…

Thanks Don, and good morning, everyone. I would like to address the current status of our ADAS business and recent developments at one of our transmission joint ventures in China. Let me start with ADAS. As many of you know, ADAS and autonomy are new and evolving areas for the automotive industry. As emerging areas of technology, there is a relatively higher degree of uncertainty about the level of engineering and other costs required to participate in this area. These are also areas that can provide big opportunities for participants that are able to scale. We were awarded programs over the past couple of years with two customers that involve LiDAR and advanced technologies in cameras. We are recently determined that engineering and other costs on these programs are higher than anticipated. There are a number of elements that drove this. We underestimated the scope of work required to develop new or higher performance software feature levels, including the extent of testing required to meet certain customer specifications. The commercialization of new technologies, it took us longer than anticipated to get the appropriate team in place and there have been scope changes that expanded the deliverables. As a result, we increased our engineering activities including capital and external resources on the projects during the first quarter. We incurred approximately $20 million above what we anticipated in engineering in the first quarter on these programs. And we wrote off $27 million in related assets that were on the balance sheet as of December 31st, 2018. For the time being, we will continue to expense fixed assets and engineering on the two programs that were previously planning to capitalize. For the balance of 2019, our outlook has built in the run rate at the end of Q1 on the higher than expected…

Thanks Swamy, and good morning, everyone. We posted solid first quarter sales and adjusted diluted EPS despite a challenging global production environment. The negative impact of foreign currency translation due to the strong US dollar and unanticipated costs in our electronics business. We also generate a free cash flow of $347 million and returned $403 million to shareholders through share repurchases and dividends. I'm going to cover each of these in my financial review. Our consolidated sales were $10.6 billion, a decline of 2% from the first quarter of 2018. These sales were posted in a quarter in which global vehicle production declined 7% and currency translation was a $553 million headwind. These factors were largely offset by the launch of new programs, particularly in complete vehicles and acquisitions that have divestitures. We delivered above market organic sales changes in each of our operating segments. Our adjusted EBIT margin declined compared to last year. We reported 6.8% in the first quarter of 2019, down from 8.1% in Q1 of 2018, but in line with our expectations. 130 basis points of this decline relates to lower margins in our Power and Vision segment; 30 basis points relates to a decline in Seating margins and 10 basis points was driven by the increase in the proportion of sales generated by a complete vehicle segment which have below corporate average margins. These were partially offset by a 40 basis point increase related to our Body Exteriors and Structures segment. I'll get into the specifics of these in my segment review. Adjusted EBIT declined to $720 million, reflecting higher engineering and other costs in our electronics business, a decline in equity income, a favorable settlement in Power and Vision in 2018, reduced earnings due to lower sales. The impact of acquisitions that our divestiture…

[Operator Instructions] Our first question coming from the line of John Murphy with Bank of America Merrill Lynch. Please proceed with your question.

Good morning, everybody. Just a first question on what's going on with the ADAS stepped up spending. It sounds like in the quarter, I am just trying -- making sure I get this right, in the quarter that $20 million of the increase was ongoing cost that you expect to kind of persist through 2019 and maybe you can kind of rationalize or become more efficient as we go through 2020. And $27 million was a write- down for expenses that have been capitalized. They're not going to be expense going forward. Is that correct in what's in the quarter?

Partially, John. So I think when you look at Q1 to Q1, you recall last year given our guidance earlier on here we talked about a step-up in spending for electrification autonomy. So besides $20 million and $27 million numbers you referred to, there has been just a step-up in spending which was completely expected and built into our guidance. I think when you look at kind of Q1 actual to our expectations, there was even --there was higher engineering and other cost in our electronics business. There's two pieces to that. One was a higher engineering cost of about $20 million in a quarter. And there were some fixed assets and some engineering that was capitalized last year that we wrote off in Q1 and net amounted to $27 million. So as you kind of look forward for the full year, we anticipate that-- forgetting about write down but the additional engineering kind of the run rate at the end of the quarter is going to continue. The other thing that's going to impact us negatively versus prior expectation was that capital and engineering that we thought was going to be-- we assumed was going to be capitalized in our guidance for 2019 is not going to be expensed. So when you look at kind of the impact overall in where we are now in our outlook for 2019 with where we were on a previous outlook, the impact to these changes or part of this higher engineering spend, part of it is write off of the prior cost on the balance sheet part of it is capital on engineering we thought we were going to capitalize that's going to impact consolidated margins by about 0.4% for 2019 versus previous expectations.

Got it. And when we think about this going forward, I mean I guess the challenge is how much is this is on the existing programs that you're working on, and sort of how much this will kind of persist as you win new programs. I am just trying to understand I mean if it's not capitalized it seems like it's program specific. Had it been capitalized it may be something that's less program specific and may be spreadable or addressable across future programs. I mean should we be thinking about this kind of stuff being slightly lower margin like we're looking at right now? Or is there something unique or something wrong with what I'm saying there?

Yes. I think John when you look at sort of the success of the capital or the capital engineering, it relates to two of the three programs that have created some of the overspending in Q1. So I wouldn't sort of generalize say that it's an entire view of our business. So, yes, as we move on this program I think we're going to revisit again whether we start to capitalize the capital and start to capitalize on the engineering would otherwise would have capitalize. But given kind of where we ended up in Q from my perspective we are prudent to write off what was on the balance sheet at the end of 2018 and not to start capitalizing things we thought we're going to capitalize until we get further along in the program. And get a pure handle on how these costs are going to evolve and hopefully ramp down with some of the actions that we're taking.

Okay and then second question, if we think about the actions by your customer in the transmission change from 2020 to 2019 on sort of that being pulled forward from 2020 to 2019. I mean isn't there something you could do with pricing to address this? I mean if they're pulling forward a switch from a dry to a wet clutch DCT, a whole year I mean that seems like that's an action by which you should not necessarily be hurt, you're helping the customer out in a big way. Shouldn't you be able to price for that?

John, this is Swamy. We --as we talked about the China 6 regulation, the pull forward from 2020 to 2019 there -- we had the DCT drag clutch transmission and as the pull forward happened you have to go still through the homologation with the respective engine platform. And if they have a CVT that had already gone through this homologation process then that fit in. Our target now is to take the DCT wet clutch transmission with the right torque and go through the development. When we say development, it's really the homologation for the China 6 on the right engine platform with the customer. And that is the action item that we're taking right now.

But that's their issue not your issue. I am just curious why you can't price for that?

You still have to go through the process, John, of doing the homologation testing with our transmission, but with their engine platform. And they have to do that.

Okay. And then just lastly on the seating launch cost, I mean it sounds like this is a little bit one-time in nature but I was just curious what exactly is going on there? The launch is it something with volumes or is it something sort of internally?

It's mainly just getting up to speed with the ramp up and quality expectations. And we've got over staffing down there. So hopefully as we get through the launch then we'll get back to more normal backtrack expectations on the profitability of the program.

But it's nothing to do with the customer ebbs and flows in their launch cadence, it's more launch cadence in your plants?

Mainly, yes, it's mainly just getting through the launch and inefficiencies in our plants and getting over some the quality issues.

Okay and then just lastly, we think about all these issues, I mean as far as quoting in the backlog it doesn't sound like it's having any significant impact on the customer, your delivery to customers. So just curious are you seeing any kind of pushback from the customers on bidding or anything like that I would imagine no, but just want to make sure.

You're talking across the border specifically seating or everything.

Well, well I mean seating ADAS and what's going on in China? I mean sound like it was couple hiccups here that might make the customers not so happy, but it actually sounds like you're actually delivering to the customer so it might not be too big an issue on their side. And just curious sort of what's going on with your any changes sort of quoting or particularly around --particularly around seating but even on ADAS as well.

No. I'd say this is a normal launch. I mean it's a big program. It's a new customer. So I don't think there's any negative impact to that because we've got other launches going on with them as well. I think on the whole area of ADAS and we talked about that, this is an emerging, we've been talking this for a while. This an emerging product area; it's emerging what the volumes are going to be, what the customer is going to be doing, yes, look at lessons learned from our perspective. We just going to make sure we completely understand what the specifications are. What -- how many people we need to position for this program? So I don't think we have any difference in what we're doing other than making sure if we are quoting something we really understand the cost and the complexity of the testing requirements.

Our next question coming from the line of Peter Sklar with BMO Capital Markets. Please proceed with your question.

On the additional engineering costs that you're incurring that you've been talking about in ADAS. Does any of that relate to the Lyft partnership or is this relating more to particular programs that you're working?

Peter, good morning. This does not relate to the Lyft partnership or activities associated with it. This is the program specific.

Okay and how is the spending cadence going with Lyft? Is the cost you're incurring in line with your expectations or below above? Where you are at with Lyft?

I would say it is in line with the expectations that we had pretty much.

Right, okay. And Swamy, sorry on this issue that you're having in the China joint venture where the transmission has been brought forward one period. Just in some of your terminology I just didn't quite fully understand what the additional expenses that are being occurred by Magna. Just that you're qualifying the transmission on an accelerated schedule. Is that the issue?

Peter, I think clarification there. It's not additional expense in relation to any development there. I think we have a 6DCT250 dry clutch and that was facing out. It actually moves the date forward of this thing because the China 6 regulation and the OEM decided to try to address that much quicker in 2019 and 2020. So they have a basically a CVT transmission that has already gone through the call it the testing homologation process for China 6. So therefore that is in a much higher rate going into the vehicles before we could get our red clutch transmission into the roadmap in China.

Peter, I think, let me say it a little differently, Swamy. Sorry let me add to that or add some more to that. I think when you look at 2019 equity income, if you look at the midpoints we brought that down by about $45 million and largely relate to this one joint venture in China. And it's being impacted by just lower volumes and as I look at kind of China volume is an actual Q1 where they thought they were going to be., they were lower than our expectations. So that's certainly impact, will impact us for the balance of 2019. We're also seeing some overtake rates for our transmissions. So regardless of -- regarding volume change but assumptions was to be more DCTs being installed with a certain management configuration and what we're observing is that consumers are taking a different engine with a CVT transmission. So there's been some take rate deterioration and then there's some of the China 6 impact is impacting us in 2019 but I probably think about the bigger impact being volumes and take rates in 2019 versus China 6 and China 6 is going to be post 2019. The impact of China 6 and we should get there back to kind of you know as we get through the process that Swamy talked about start to see some of those volumes come up, but our DCT transmissions and you look at CVT, we -- it's pretty competitive marketplace. We're going to be competitively pricing our product as well to sell that product into China.

So this CVT like this higher take rate on the CVT, is this the OEM that manufactures its own CVT that you referred to before?

No, Peter.

Okay. And do you anticipate like is there the opportunity to down the road that they will start taking your DCT and just like is the opportunity for both transmissions on this program is just a matter of fighting for share if you lost the transmission opportunity on this program?

With the wider range of the torque that I mentioned to be able to address with our DCT wet clutch platform. We believe we have the opportunity to address the volume available with that OEM and in the market,

Okay. Just moving on to something else just overall as you look at your expectations for global vehicle production volumes in just about all markets. You've taken down your volume assumptions. I just wanted to understand what's behind that. Are you seeing that in terms of releases or is it more based on the forecasting services that you rely on?

Peter, I would say it's a combination of both of those, right. Releases don't tell you the whole year but you get some visibility going into the quarter. In certain markets the visibilities look better than others. I think in China you know you have releases but I'll tell you it doesn't really mean a lot because customers could change their mind pretty quickly. So, yes, some visibility shorter term so that's something that goes into take into account. We also look at the forecasters out there and together we assess kind of where we think volumes are going to be. So we've adjusted our overall assumptions downwards in each one of our principal markets to reflect those couple of items.

And in China we were already low in Q1, so some of that is a continuation of what we saw in Q1.

Yes, okay. And lastly, Don, I just wanted to ask you like in terms of the issues at the seating plant that you're ramping up. I know that plant launches and program launches have been a big area focus for you personally over the year. Like were you disappointed and what happened there? Were there some extraordinary issues that arose that you just couldn't account for?

Overall, I'm actually quite pleased with the progress we've made in our launched across the board. And you can see that as that's one of the reasons why we're seeing improvement in the Body Exteriors and Structures group. This particular launch I'd say we were a little disappointed but there's a lot --there was a lot of complexity. New customer, new plant, new employees, new product. It was just a lot of complexity which was more complicated than we had anticipated. And the quality expectations were a challenge to hit. So, yes, it was a bit disappointing. I don't think it was necessarily a launch preparation. It was more of execution in some of the details and some of the just amount of variants in the plant. So it's combination few things. So, yes, a bit disappointing, but overall I'm pretty pleased with the progress we've been making in our Power and Vision divisions and launches across the board.

Our next question coming from the line of Brian Johnson with Barclays. Please proceed with your question.

Hi. This is Jason Stuhldreher on Brian. Just two questions for me. Firstly, on the outlook. Can you talk about what sort of increment or decremental margin you are assuming just from the volume move in the 2019 outlook? Because it sounded like you expected there to be detrimental volume pressure but that was to be offset with productivity initiatives. So are you sort of assuming the lower volume kind of flows at you right now current EBIT margins? And is there any risk given performance initiatives pan out?

I think when you look at kind of margin top and bottom end, we dropped that by about 26% for the year. 0.5% of that around 0.5% is related to two items. One is I talked about as early is ADAS, higher engineering and other cost. That's about 0.4% and we brought operating income and you can do the math on that's about 0.1. The balance is points and another and how we sort of we come up with that number, it's a bottoms up, built up plan every quarter as we sit down with our management teams and review historical performance and going forward and they go out to their plants to get a whole bunch of information to develop that. That's what sums up to so I think you could draw your own conclusion about decremental margins are based on our assumptions on volumes. And from 0.1 on a consolidated basis the impact of lower volumes, for volume, lower volume so that affects on capacity and impact on margin, it just reduces sales and should reduce EBIT on the same basis but not impact margin.

Okay. So it sounds like fairly similar decremental margins there, but so that's helpful and then just last question for me on the China business, Getrag China joint venture. This is sort of the second time or so in the last year that we've seen sort of dramatic volume fall offs even in the out years. So has there been -- I guess my question is another performance initiatives to offset the lower volumes that you're seeing, but has there been any effort to like really structurally right size or to really structurally lower the size of that business whether that be consolidating facilities or shifting team organizations? And I guess the reason I ask is it sort of depends on the fluctuation of volume. Like if we were to see if there was risk to the upside for volumes maybe you would leave all that infrastructure in place versus there if there was sort of downside risk to those volumes you would really work to right-size that business. So just wondering kind of what approach or philosophy you are taking there broadly?

Hi, Jason. This is Swamy. Amongst many other things as I said we are looking at a wider torque range in the product portfolio to address it. And we believe the wet clutch DCT would be more amenable even when the market goes to a hybrid. It could have an advantage over CVT's. And we also are looking at the plants, restructuring plants for footprint and also resources that is in progress. And as I mentioned looking at new modified variants of the current products that should be more competitive for the China market. And we are already in discussions with number of OEMs for the new products that I mentioned.

Our next question coming from the line of Mark Neville with Scotiabank. Please proceed with your question.

Hi. Good morning. I just want to follow up on the ADAS costs. The decision to expense versus capitalizes, that is specific to those 2 or 3 programs and not sort of a blanket decision across that business.

Mark, it's actually on two of those three programs. So specific to two of those programs not sort of --

Okay. And then the decision now to adjust the 2021 guidance reflects some of this. Is that really just at this point just a wait-and-see approach to see how these things evolve?

Well, Mark, I think we typically don't revise three year old guidance. I say that is we have a pretty thorough bottoms up approach to coming up with numbers, we certainly update the current year. We don't update three years old, we do the business finance. So I don't have a whole bunch of information across our company but we do look at sort of significant things. And we looked at discussions we are having on this joint venture in China and we're seeing what happens at business at a $70 million roughly $70 million. In fact, in equity income, we are adjusting for that. We did look at our ADAS operations and we are an elevated cost in 2019. We're going to continue to be at elevated cost in 2020. I think we -- I think they're going to start to step down in 2020 and it seem to you is by the time we get to 2021 we've optimized everything we can by that time, sorry as we exit 2020 we should be pretty close to where we thought we were going to be in 2021. So kind of when you look, it's not much of an impact on overall Magna basis on those costs impacting Magna. So that's why we haven't taken into account or have an adjusted our 2021 outlook for those items. We don't think it's a significant impact on year-over-year. Sorry, Mark, the other thing is progress we're talking about given the timelines, these programs are launching at some point in 2021 to 2022. So we got it up to an end and get these things on the road.

Okay. How big are these 3 programs just in relation to the sizes, the whole ADAS system?

Yes. I think when you look at these programs. There are two of them our camera programs and they're using advanced technologies. We've got a lot of camera business but these are advanced cameras, got a whole bunch of new capabilities and features and using different types of chips as well. And these are going to be on high running platform vehicles and they're going to be installed on all the vehicles where these things are slated to go on. The third program is a LiDAR program, so it's going to be a smaller unit program compared to the camera programs,

Okay. That helps. Thanks. And maybe just on the Lyft, just sort of maybe the -- your plans or sort of the rationale to sort of holding the equity stake at this point.

Mark, you know we we're locked up for 180 days to consider.

Our next question coming from the line of James Picariello from KeyBanc. Please proceed with your question.

Hey, good morning ,guys. For Seating Systems, you already talked about the elevated launch cost in the quarter. Volumes are still expected to be there within the guide. So just curious what the progression of the year is from here. Is there any possibility that launch cost come in higher than what you're baking in? And then is there also a risk, maybe that new program volume is coming a little lighter relative to what -- the run rate production levels that you have baked in? Yes, any color around that would be helpful.

Yes. James, so just in terms of talk about volumes first of all, you mean we have brought volumes down globally in all our principal markets and seating is going to be impacted by the program that's on, it's resulted to generally lower volumes. Again it's program specific. We'll generally say volumes go up or down. I guess we just have to assess what happens in the course of the quarter into what adjustments if any we need to make overall in the company. With respect to the launch cost, I sort of look at this from my eyes, it's kind of -- we've got to launch, we got more cash than what we thought. We're working through that and as we progress through the course of the year that additional cost that we have been budgeted for are going to come down. And should be eliminated kind of by the end of the year. So I think you start to see a ramp down of those additional costs.

Yes. We were pretty well through the production ramped up, so it's more of getting --just getting control of our costs and reducing the cost. So I don't think we're going to see any big unexpected thing in the launch and then say some of the programs are on, we've done our best guess what the volumes going to be and we baked that in.

Understood. And then just thinking about capital allocation for the rest of the year, I mean, you have the FP&C sale now behind you. Free cash flow, slightly lower versus prior guide, but still strong. So what's your general expectation as you think about your M&A pipeline relative to maybe what you wanted to put towards buybacks? Thanks.

James, our cap allocation strategy remains consistent and unchanged. If there's a right opportunity that comes along and we'll look at it and we'll allocate capital if anything comes along. Our investment is $1.7 billion going into capital. We did complete the acquisition, small acquisition. These seating operation in Europe takes about €107 million, $120 million in cash and reflected in our -- will be -- is reflected in our overall numbers. I think you kind of do same sort of thing as if you have additional cash and that's not being invested in the business, you look at returning that to shareholders by way of dividends and share buybacks. We want to stay within certain leverage ratio, if we're in the middle of that at this point in time and we have purchased so far this year about $400 million worth of stock. And we'll continue to look at buyback stock plus we've got other uses for that cash.

Our next question coming from the line of Armintas Sinkevicius from Morgan Stanley. Please proceed with your question.

Good morning. Thank you for taking the question. When I look at the cadence throughout the year the second half implied in your guidance is either less optimistic or aggressive versus some of your peers. So I'm just curious what are you seeing for the second half? What are you focused on for the second half? That would be helpful.

Well, I guess our guidance actually looks at the next three quarters not necessarily the second half. We haven't given sort of quarterly or first half second half guidance kind of look at volumes are typically you think about first seven quarters generally if volumes are higher third and fourth quarter typically volumes are a little lower due to summer shutdown and Christmas shutdown. So that's going to have just a low impact on result sales and earnings. Vince, do you have any other sort of color you want to add to that.

No.

But from an operational standpoint anything that you're particularly focused on. Whether it's launches or anything else of that nature?

I think the one big focus is to look at what we're doing on the LiDAR programs and focus on trying to optimize our cost structure there. I think when we look at the quarter and kind of I sit back and you're not disappointed with kind of our outlook, our revised outlook. You look at Q1, it was decent. We outperformed the market in terms sales. You look at some of the segments, xx, certain things we talked about electronics, it's a pretty decent quarter. As I even look at our revised outlook, I know we're bringing volumes down. We went through all the segments, a complete view of business margins, margins are flat even though there are volume changes. We look at our Body Exteriors and Structures bringing sales down and margins are fine. Obviously, EBIT is going to be less, we've got less sales but margins are flat. Seating, the overall, we've got some volume impact, We've talked about some of the launches and that cost is going to come down. So we think about the business and for me the priorities are a couple things. We talked about this is. Those three programs and Swamy talked about some of the action plans there. And some of the action plans we've got in our joint venture China on transmissions. But rest of the business is I think doing fairly well. And you always have pluses and minuses this quarter, one versus quarter two or quarter three, but not bad.

Our next question coming from the line of David Tamberrino with Goldman Sachs. Please proceed with your question.

Hi. Just trying to understand a couple of things. You instead of capitalizing some of this ADAS, it's now being expensed but your capital expenditures for the full year didn't change. Can you help reconcile that? And then further your net income was down at midpoint by about $200 million but free cash flow for the year is only down about a $100 million at the midpoint. So maybe walk me through that as well.

Yes. I will. So, David, a couple things is we're going to just technically expense capital the way the accounting rules work as we showed us a capital expenditure. So some of the -- and addition from a financial statement perspective and then it gets written off as depreciation. So it doesn't have any impact on the amount of capital we shown a consolidated basis.

It's only incremental capital we put in.

Yes. That's right. Capitalization [Indiscernible] amounts we're talking about on a Magna consolidated basis, we're talking about around about $1.7 billion, we would lose this capital in the rounding, but it certainly does impact the overall, when I look at that ADAS program in particular the cost that we're going to see flowing through our Power and Vision Segment, net income versus free cash flow. So net income I guess you have to take the midpoint we're down a couple hundred million dollars. I think you got to take into kind of couple things. Depending on what you do with margins, your EBIT is going to be down probably about plus or minus $300 million. It's a couple things to think about. One is you've got -- sticking with our electronics group, the capital that we are expensing or the capital at engineering that we thought we were going to capitalize and now we're expensing that was already in our cash flow before it's just a way we're showing it on the statements. That cash was already accounted for in a previous guidance. So even though there's a reduction in earnings as a result of that, there is no impact to cash flow. I think it's as long start to come off, your investment of working capital should start to reverse these -- you typically invest in Q1, Q2, Q3, you recover some in Q4. Our investment is going to be less so that means just less overall cash required. And then you got to think about reduce EBIT does a tax effect to all that which reduces your tax, you got to pay which saves you some cash. So kind of when you sum all that up that results in net income midpoint going down a couple hundred million. But again cash flow midpoint going up by about a $100 million down, yes.

Okay. That's helpful and then Swamy --

Sorry. It's not straightforward to just say here's the math and just multiply this to one number. There are pluses and minuses.

Okay. And then Swamy, I know you kind of spoke through this but what exactly is going on with I guess the one camera program and the one LiDAR program? Is that the hardware? Is it --I think you might have mentioned the software required? Are you --there's just incremental validation and safety metrics that your customers looking for? Can you just dive into and explain a little bit more of what's going on specifically with each of these programs that's driving this incremental expense?

So it's actually two camera programs. And a few key points. It has a lot of advanced, on the hardware side it's call it the next evolution of the camera technology. As Vince mentioned the next step in the chips, high software content in fusion of different features coming together in the camera. Obviously leading to the testing and validation scope being much higher in terms of the requirements. I would say those are the key points that contribute mostly to what we discussed today.

I mean is that -- are you buying that through a supplier? Is that on your end where you're seeing that incremental expense? I mean obviously it's running through your P&L, so clearly it's your own incremental expense but my understanding of your ADAS portfolio is that you're -- you had a couple of tier two suppliers from a vision side from a LiDAR side that was coming up and being sold through you as a package. And what I think you're saying is that the issue is on the sensor fusion and the data that's coming off of that hardware.

I won't categorize it only as a parcel coming from the supplier. I think just like other vision systems we are taking the chip, but there is a lot of integration as well as both on software and hardware beyond the chips that we get. That is done at Magna. So I would say it's a combination right. I think there is quite a bit in terms as we said of ramp up of resources and how we are utilizing the existing manpower. So I would say it's mix. You can say it's one of the other purely.

David, when you look at the three programs, just two cameras and LiDAR program. And you looked --and there is higher than expected spending on each one of those programs. I'd say that the larger part of that overspends relates to the LiDAR program. It is any other technology where is that this technology is being commercialized as being around that. We've talked about that overspending compared to expectations in that area. There is some overspending on the cameras as well, but not as a significant as the LiDAR program. End of Q&A

Thank you. Mr. Walker, there are no further questions at this time. I will now turn the call back to you. Please continue with your closing remarks.

Okay. I appreciate everybody dialing in today and I think Vince actually summed it up pretty well. I think the things around our control and a lot of areas I actually think we're making pretty good headway. We'll have to see what happens with the economy and the volumes, given our expectations the disappointment is in the two programs that we walk through today. We continue to work hard on them. So keep everybody up to date as we get more information. And appreciate everybody dialing in and thank you. Have a great day.

Thank you. That does conclude the conference call for today. We thank you for your participation. And ask that you please disconnect your line.