Magna International Inc. (MGA) Q2 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the Second Quarter 2020 Results. During the presentation all participants will be in listen-only mode. After which we will conduct question and answer session. [Operator Instructions] As a reminder, today’s call is being recorded Friday, August 7, 2020. Now, I would like to turn the conference over to Louis Tonelli, Vice President, Investor Relations. Please go ahead.

Thanks, Tommy. Hello, everyone and welcome to our second quarter 2020 conference call. We will have formal comments today from Don Walker, Swamy Kotagiri and Vince Galifi. Yesterday, our Board of Directors met and approved our financial results for the second quarter ended June 30, 2020. We issued a press release this morning for the quarter. You will 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 have included in the appendix reconciliations of certain key financial statement lines for Q2 2020 and Q2 2019 between reported results and results excluding unusual items. Our quarterly earnings discussion today excludes the impact of unusual items in these periods. Don will comment on restructuring we recorded in the second quarter. Please note that when we use the term organic in the context of sales movements we mean excluding the impact of foreign exchange, acquisitions and divestitures. And now, I will pass the call over to Don.

Thanks, Louis. Good morning. I hope everyone is staying safe and healthy wherever you are today. Before I start, I want to reiterate that the health and safety of our employees remains our top priority and Magna. We have been reintegrating employees back into our plants and offices using our protocols, assessment tools and guidance documents. It was a monumental exercise to plan, coordinating and implement the resource as a company and as an industry, I believe we responded extremely well to the challenge caused by the pandemic including being a leader for other industries to follow in terms of safe and successful operational restarts. During the second quarter of 2020, our most significant markets of North America and Europe experienced year-over-year declines, both in percentage and absolute volume terms that far exceeds the worst quarters that we saw during the great financial crisis more than 10-years ago, and the worst decline that I have experienced in my 40-years in the auto industry. Industry environment has been improving off these lows, vehicle sales and production levels in our key regions were better sequentially in May and June. As governments around the world started to ease lock downs, and as auto sales began to recover. Vehicle sales trend continued upward in July and we expect a significant improvement in our sales, in the first half to the second half of the year. Nevertheless, general view of the industry is the production trend line over the next few years will be lower than previously anticipated. This prompted us to initiate and in some cases accelerate the timing of restructuring plans to right size the business to align with our updated expectations for the midterm. Across the company we have been taking difficult but necessary actions to strengthen our business for the future. We recorded a 168 million charge in the second quarter substantially related to this restructuring. As expected for the second quarter, our sales reflected the severe production decline following 58% compared to Q2, 2019. As a consequence, we posted our first operating loss on a normalized basis in 2009. However, underlying the discouraging results are a few encouraging elements. Our detrimental margin associated with COVID-19 was about 22% reflecting our efforts to reduce and defer discretionary costs. We conserved additional cash by reducing capital spending, and we expect the actions we undertook in the quarter to lead to an improved cost structure and detrimental going forward. At the same time we continue to invest to secure a future and to ensure that we can successfully execute in all upcoming launches. While we remain in relatively uncertain times, we are confident that we have the balancing, the leadership and the right operating structure to allow us to remain nimble and responsive to whatever the future holds in the short and long-term. Lastly, I want to comment on an important recognition from our largest customer. In late June General Motors recognized Magna was six 2019 Supplier of the Year awards, the most ever first supplier in a single year. The Supplier of the Year awards recognize GM's best suppliers that consistently exceed expectations creating outstanding value or introduce innovations to the company. Magna won Supplier of the Year award across our system segments for our mirrors, driveline systems, truck frames, fascias and seating systems as well as an innovation award for our freeform seat trim technology. I'm very proud of these accolades as they recognize our ability to provide solutions to the many challenges faced by our customers. With that, I will pass the call over to Swamy.

Thanks, Don. Good morning, everyone. I'm happy to report that we were able to achieve safe and orderly restarts in all of our operations around the world. Plant closures varied inland with most plants shut down for several weeks. Overall the mood and morale at our plants upon return to work has been positive. With respect to our restarts, capacity utilization in both China and North America are getting close to where we thought we would be at the beginning of the year in this timeframe. Europe is a lagging behind these two regions, largely reflecting the softer vehicle demand environment compared to China and North America. While we have seen a number of delays, and a few program cancellations from our customers at this point, we don't expect these to have a significant impact on our business growth relative to the market over the next couple of years. One of the concerns we had a few months ago was the status of our supply base. We noted on our Q1 call that we were working closely with our suppliers to ensure a safe and timely restart. While we continue to track a number of suppliers. We have mitigation plans in place and to this point, have experienced no major supply base issues impacting our operations. Our operations have been able to manage the transition to a new normal. Our Smart Start Playbook has been an excellent foundation and has become standard operating procedure. The protocols put in place have been well received and adapted by our plant employees. We have been able to manage the production ramp up without significant disruption to our production efficiency. However, we are not stopping there, a team of varying backgrounds from across Magna looks ahead to develop recommendations on how operations could be adjusted to stay prepared, especially if a second wave hits or this becomes a seasonal illness. The team closely examine what may need to be done in our global operations over and above our current Playbook and incorporated these into a regular operating mode and policies. We are staying prepared to keep our employees safe and protect our business. While our leadership team was addressing the short-term needs of the business, we were also looking and planning much further ahead at what our Company, industry and society may need in the future. We continue to monitor ongoing trends and potential new trends. And I believe Magna has the structure, people, Technology Building Blocks, and investment strategy to remain a leader in mobility. Lastly, I want to announce that Sherif Marakby has joined Magna as Executive Vice President of Research and Development. Sherif, will manage all aspects of Magna's innovation and new product development strategy and related activities. Sherif has been in automotive and technology industry for 30-years and comes to Magna from Ford Motor Company where he held a variety of Product Development and Engineering leadership positions. He has extensive experience in electrification, having led the full team in developing your battery electric vehicles and hybrid electric vehicles. Sherif, also served as President and CEO of Ford Autonomous Vehicles LLC, and was on the Board of Directors for Argo AI. Ford self driving technology partner. Additionally, he spent time with Hoover as Vice President of Global Vehicle programs, leading the integration of their autonomous software into production OEM vehicles. We are really happy to have Sherif as part of our management team. I will now pass the call over to Vince.

Thank you, Swami. And good morning, everyone. I will provide a fairly high level summary of our quarterly results today. Rather than go through a lot of detail, including on our segment results, which you can find in our MD&A, particularly meaningful given the severe sales declines, I will spend some time addressing what are our outlook implies about the second half of this year. As Don mentioned, we experienced the worst year-over-year decline in vehicle production that we can recall during the second quarter of 2020. Global vehicle production declined 42% year-over-year, but more significantly defined 70% and 59% in North America and Europe, respectively, our most important production markets. We estimate that COVID-19 related shutdowns negatively impacted our second quarter results and sales in particular by approximately 5.5 billion and our adjusted EBIT by approximately 1.2 billion. This represents a detrimental margin of approximately 22% reflecting strong cost control across Magna's operations. We have included in our appendix a breakdown of estimated COVID-19 related sales and detrimental margins by segment. In addition, equity income was negatively impacted by the COVID-19 related shutdowns. Our second quarter, total sales were 4.3 billion, a decline of 5.8 billion or 58% from the second quarter of 2019. In addition to the COVID impacts, our sales in the second quarter of 2020 were negatively impacted by the end of production of certain programs, currency translation, which was a $76 million headwind and net customer price concessions. On an organic basis in Q2, our regional sales in North America, Europe and Asia, each outperformed vehicle production in their respective markets. However, as a result of regional production mix, our organic sales underperform, the change in global vehicles production in the quarter. Recalled that we far outperformed global production in Q1 impart due to significantly lower production in China, where Magna is relatively less represented. On a weighted basis our organic sales slightly outperformed global production. Adjusted EBIT decreased 1.3 billion to a loss of 600 million sustainably reflecting the decline in global vehicle production due to the COVID-19 related shutdowns. Also contribute to the decline in EBIT was lower tooling contribution in the quarter compared to the second quarter of 2019, higher engineering cost in our ADAS business including retroactive social tax costs, net provisions for customer claims in the quarter and higher net warranty costs. These were partially offset by lower spending for electrification and autonomy, as well as favorable assembly program mix and the benefit of cost cutting initiatives in our complete vehicles segment. Our tax recovery was booked at 16.9% income tax rate compared to 23.5% of pretax income. In the second quarter of 2019, the tax recovery was lower than our typical tax rate, primarily as a result of an increase in losses, not benefited in Europe. Net loss attributable to Magna was 511 million compared to income of 509 million in Q2 of 2019 reflecting the lower EBIT higher interest expense and the impact of the lower effective tax recovery rate. Diluted loss per share was a $71 for the quarter compared to EPS of a $59 last year. So the time reflects the lower net income and the negative impact of 7% fewer shares outstanding. We estimate that the lower tax recovery rate costs us about $0.15, assuming a tax rate of approximately 24.5% that we expected when we last provided an outlook in February. Now I’m going to review our cash flows and investment activities. During the second quarter of 2020 we used 1.2 billion in cash for operations, representing a 2.2 billion swing from the second quarter of 2019. 1.2 billion of the change is a result of reduced earnings due to the lower sales. 934 million as a result of an increase in non-cash working capital. You may remember from the first quarter that given the COVID related shutdowns and our corresponding sales decline, we generated cash from working capital in the quarter when we normally invest working capital through the first half of the year. We said on our Q1 calls that we expected this to reverse as we restarted production at various facilities around the world. Customer payment delays, the payout of our 2019 employee profit sharing plan, recoverable wage subsidies and a shift from a tax payable to a tax receivable balance, which all aggregated to about 500 million together with the ramp up of production represented most of the change in non-cash working capital in the quarter. However, we expect to recover much of our working capital investment by the end of this year. To the late customer amounts were collected shortly after the second quarter. Investment activities amounted to 243 million, including 169 million in fixed assets and 72 million in investments, other assets and intangible assets. Free cash flow was negative 1.5 billion in the second quarter. In addition, we returned 216 million to shareholders in the quarter through the payment of dividends. Despite the significant use of cash in the quarter, our balance sheet remains very strong. At the end of the second quarter, our liquidity stood at 4.1 billion, including over 600 million in cash. In June, we completed an offering a 750 million of 10 years senior unsecured notes during interest at 2.45%. This debt phrase provides additional financial flexibility at a very low rate at a time and then debt markets were highly receptive. Our adjusted debt, adjusted EBITDA at the end of the second quarter stands at 2.35 times. As anticipated this is above our target range given the severe decline and EBITDA particularly in the second quarter. We will likely stay above the target range in the short-term but expect the ratio to normalize back in range in the second half of 2021. Yesterday, our Board approved the second quarter dividend of $0.40, reflecting our collective confidence in our liquidity and our future. Now, let me turn to our outlook, which we reestablish this quarter. As always, our outlook is based on a set of vehicle production assumptions. Compared to other years, there is a higher degree of uncertainty surrounding future production, given risks associated with consumer demand, increasing COVID-19 infection rates, supply chain or other production challenges and other factors. If actual productions vary significantly from our assumptions, our results may also vary significantly. Rather than repeat the outlook already in our press releases, I will make a few observations regarding our implied second half outlook in comparison to the second half of 2019. Vehicle production is expected to be down approximately 5% and 10% in our key markets of North America and Europe respectively. Overall, we are also expecting global vehicle production down approximately 11%. We believe our expected second half stacks up well, particularly given these production declines. Our total sales range implies sales at worse, down 9%, and a best 2%. Our EBIT percentage range implies an EBIT dollar range of about 1.0 5 billion to 1.25 billion, compared to 1.15 billion in the second half of 2019. And our free cash flow range for 2020 is between 200 and 400 million, implying a range of 1.3 to 1.5 billion for the second half of 2020 compared to last year's very strong second half of 1.4 5 billion. Lastly, comparing this outlook to our February outlook, we now expect second half detrimental margins to be under 20%. This solid outlook reflects the combined actions we are taking across our business to mitigate the impact of the current environment we are facing. Thanks for your attention this morning. We would all be pleased to answer your questions at this time.

Thank you. [Operator instructions] And we will get our first question on the life of John Murphy of Bank of America Merrill Lynch. Please go ahead.

Good morning, guys. And thanks for the outlook. It is very helpful. And my first question, Vince is we look at this in performance in the quarter detrimental of 22% was impressive, but getting to just down 20% in the second half of the year is obviously is obviously even better. And I'm just curious, as you are looking at this first, any actions that you think might be sticky as the world normalizes, which means any earnings might be a little bit better than expected as the world normalizes. And Second, sort of in the same vein, we think about incremental on these upsize overtime, are they going to near these new detrimental or could they potentially be higher and how would we think about incremental as sales and production actually start rising presumably in 2021?

Yes, John, it is a really good question. It is kind of difficult to answer that in isolation I think you got to consider a whole bunch of things. You know I think when you look at the restructuring actions that we took in Q2 or commenced in Q2 and they are going to wrap up by the time we get to the end of the year, most of them, I think what you are seeing in the second half of the year, is the benefit of some of those actions already impacting positively are detrimental margin. But we don't get to the true benefit of all those activities until we get into 2021. So, we will continue to see that mixed cost structure reduction, helping us in 2021. You know I think if you look longer term, and you start thinking about what happens overall volumes and how fast do they grow, and in what regions and what happens to the incremental margins going forward. You know at some point, you are going to be approaching average margins as a business grows at are the significant rate. That is why I think you can - just answer that question in isolation. You have got to look at all the factors, sort of what regions are you growing? How fast are you growing? What is your absolute level of growth in sales. But, I think when you look around the organization and you think about our culture, which we don't talk a lot as much as we should. Our decentralized operating system with our general managers focused on what they need to do to run their plant efficiently, what costs is required and what costs can they take out and you kind of put that all together and makes a pretty significant difference in our overall results.

Okay. That is helpful. And then just the second question, Don as you look at the environment for new contracts or the bidding environment from your customers. I'm just curious, what the pace of activity is maybe normalizing as everybody kind of working through the crisis and hopefully, getting back up in running and also thinking just about launches in the near-term for some - in your backlog. Just curious if there is anything more disruptive than sort of two to three months, delays from COVID as things were down on the launch side of earnings, sort of near-term issues or maybe even opportunities.

For the most part people work pretty effectively through the down period. There was some delays where you couldn't get people in for physical testing. So what we are seeing a few program delays from the customers, most of them are relatively short. There has been a couple of cancellations. We are not talking about them, the customers can, none of the big programs we have got. The discussions ongoing on winning new contracts, a little bit of a delay, but not particularly. So I was pleasantly surprised that we were able to keep on top of our launches. We just went through a quarter reviews globally. Don't see any unusual spike and sort of running up against concerns on new launches. So in pretty good shape. Swami you are probably closer than I am in certain of your area. So you got any other comments there?

No Don, I think you covered it pretty much, small delay here and there, but nothing that I would say material that would affect the business going forward or the launches that are ongoing right now.

Yes we talked about in general, the move towards electrification is pretty consistent what we saw before. I think the times level two, level 2.5 continues, that is a big Fulton market spending and on the levels three, four and five are certainly slowed down when everybody was trying to conserve cash. But I think the customer still has to be awarding contracts so they can, they can hit their launches. So not no big, huge delays there.

And keep in mind, to the extent that we have contents on the old program that gets expanded, that really mitigates the potential loss of business from launches that are delayed.

Got it. And then just lastly, real quick on acquisition opportunities. I know the leverage might be a little bit higher than your target range, but just curious what is out there, have there been any new opportunities that have availed themselves because of the stress and sort of what does the landscape look for you guys? And what are you looking at most specifically as you kind of go through the funnel of opportunities.

I don’t want to comment anything specifically, obviously, but generally - unless there is a huge second wave that we don't anticipate, we went through a cash position I think would have been difficult to try next year in vague and as was addressed distress situation during the downtime -for the downturn. We are continuing to look at things more in technology areas where we want to add some capability. We can have the ability to, we continue to pay the dividend, we stop the buyback and we should be back to pretty healthy from a cash flow standpoint going forward. So we have the ability to move on some with we think it is expected prices - comments specifically, but we are continuing to look at pretty carefully what technologies we want to grow and where we want to be located around the world.

Got it. Thank you very much.

Thank you. And we will go to next question from the line of Peter Sklar of BMO Capital Markets. Go ahead.

Good morning. Question on the detrimental margin of 22% in the quarter. As you know, there were various government subsidy programs in regions where they subsidize wages and other programs as well. Was that a meaningful amount and would that have had a positive impact on the detrimental margin or were those subsidies at Magna would have received relatively minor?

Peter, good morning, it is Vince. In terms of the amount of subsidy that we booked, particularly in Canada, probably higher than what we were anticipating. As you know, there was some progress in Canada where we were encouraged to key people on our payroll, even though they weren't working. So, we are incurring costs that we otherwise wouldn't and had a reimburse them from the government. So that kind of a net zero to us. So I think if you back all that out. And you look at the benefit of the government programs on our detrimental margin, it is really not significant at all. Obviously share amount of recoveries is larger, because, as I said, inactive employees that we brought back on payroll, but didn't really have a significant impact on overall detrimental. Recall that when you start looking at the bucket of – I look a detrimental margins from an operation standpoint, then I look at the costs of inactive labor, government support. And then the other part we have got in all that is the cost of PPE in the quarter. It is kind of hard to get an exact number. We are probably of those $35 million of additional PPE costs in the quarter, some are going to be obviously, reoccurring with masking and sanitation fluid. Part of it is one time. But you I kind of look at that other bucket of costs that are pretty well - of zero Peter. The big change when I look at detrimental margin has just produced sales and cost of producing those sales, including SG&A and other related costs.

Okay. And, Vince, like you touched on this a little bit in a previous question, but like your detrimental margin was 22% in the quarter, but in your guidance, like you are guiding for detrimental margin of under 20%. So I'm just wondering why it is not the same on the way up, as on the way down or just being too precise, it is really the 22% and 20% are really the same thing?

I think about it, Peter, as it is an improvement. You remember, last quarter we talked about, kind of for the last nine-months of the year, we thought the low 20%. I think when you look at even Q1 and Q2 on reduced sales and reduced EBIT, we are running about 22% detrimental, a little higher in Q1. But I think in total about 22%. And how we came up with that number is, we looked at our outlook we gave in January, which is where we think we are going to be and we looked at the reduced sales as a result of COVID in Q1 and Q2 and the loss operating income and that is a 22%. When you go to the second half of the year, again, we are looking at the reduced sales compared to where our outlook was in January. So, sales are down because volumes are down and EBIT is down and detrimental on that is going to be less than 20%. So, if there was no change in our cost structure, that detrimental would be around 22%, because we have taken some action to right size the business, we are seeing the benefits of that, by way of a reduced detrimental margin.

Okay. And then lastly, Vince, can you just, based on your guidance, Magna is going to be back to profitability in the second half generating good free cash flow. Can you comment on the NCIB and what your thinking is in terms of resuming the share buyback?

Yes, Peter. Yes, it is a topic of discussion at every Board Meeting in terms of capital structure and levers and kind of what we want to do with the balance sheet and opportunities we have and so on. You know from my perspective and the Boards and the rest of the Management team supportive. I still think there is some uncertainty with respect to where volumes end up for the balance of the year, we expect to generate some pretty significant amount of cash flow. I prefer just point in time to kind of step back from the buyback, let's get through this year, let's look at our business plan. Where volumes sort of shake out next year, and then we can think about starting to resume the buyback in 2021. Now, again, you know we want to get through the quarter and things look a lot different and I have a more positive view on things and our actions could change. But that is our thinking at this point in time.

Okay. Thanks for all your comments.

Thank you very much. We will turn to next question on the line from James Picariello from KeyBanc. Go ahead.

Hey, morning, guys. Just to clarify on the second half guide, which is, of course, appreciated. So, the implied back half, you are looking at 650 million lower sales. I think the comment was just made that that drops through at a 20% to 22% detrimental. Also that is 150 million in loss to EBIT for the back half and then we get back to flat year-over-year driven by the structural savings. Is that a fair assessment?

Yes, so, I think if you look at the slide deck that we posted, you are looking at EBIT - the mid range of our implied outlook is the same as 2019, because our range is 1.05 to 1.25. On overall sales, depending on where it could be about flat. So, yes, if you look into 2021 and we still need to do our business plan, what we are going to get incrementally in 2021 is the benefit of the restructuring we are doing in 2020. So that should be accretive, you there is going to be a whole bunch of other things taking place in 2021. Yes remember some of the things we talked about the beginning of the year, we are focusing on underperforming operations, we are expecting some contribution from that. We are expecting some contribution from reduced engineering costs on the three advanced ADAS programs that we are working on and so on. So there is a lot of moving pieces into 2021, but certainly the restructuring activities we are taking in 2020, will continue to benefit us in a bigger way in 2021.

Got it. That is helpful. Question on fleet vehicles, the margins are continuing to improve on down sales as there is a recovery in the back half. Should we expect margins similar to maybe second half of 2019, or do they continue to as a first half run rate here.

You know we haven't given a specific guidance on segments. Just give the level of more uncertainty on overall production volumes given other years. But what I can talk about on the complete vehicle business, if I think about the very first half of the year, just a couple of things that have benefited us. One is we have had some favorable mix within just using assembly programs, depending on what vehicles are being sold and trim levels. If that continues that should be positive year-over-year. Our Magna Steyr Group, undertook a huge review of their overall processes and cost structure. And as a result, we are seeing the benefits of those cost saving initiatives impacting us positively in Q1 but more so in Q2 and that is going to continue in Q3 and Q4. So that is different from where we were last year. The other unusual thing with our business in Magna Steyr in a lot of our programs there, we get a fixed cost recovery regardless of the level of production. So when you start thinking about incremental and detrimental, we don't have the same level of operating leverage that we do in our production division. So that could impact ultimately where margins end up at Magna Steyr. So again, a lot of different sort of ingredients there impacting margin. I guess the final point on Magna Steyr, if I thinking about the business this year and last year on the engineering side, we have been getting a lot more work and we have been generating some decent margins on that. And given that engineering is a bigger proportion of overall Magna Steyr because of reduced volumes, it is having a positive impact on average margins in this segment.

Got it. Just to clarify, on the restructuring efforts, 168 million charge in the quarter, is that something that possibly continues through the second half or is that a charge that reflects the entire effort possibly, potentially?

I think it is substantially all there. There is going to be some costs that are going to trickle into Q3 and Q4 depending on when we are going to be able to recognize them from an accounting perspective, but the bulk of it - substantially all of it has already been reflected in our accounts in Q2. Remember some of that spending is not going to take place until later, but we have been able to recognize that costs in our financials for the second quarter.

Is there a typical return you get on your restructuring efforts in terms of savings verse costs, is that typically?

It depends what region, if you are letting some people go in certain regions, the cost of severance could be pretty significant. In other regions, it is a little less. So it really isn't - there is a typical probably by reason, but not typical across the organization. When we look at the restructuring, there was about 150 million of it was restructuring, the balance of it was asset impairments across a number of our operations. That 150 million as we get into 2021 should translate into about a $200 million annualized savings in costs on a run rate basis. So we will pay back the restructuring costs in less than 12-months.

That is very helpful. Thank you.

Thank you very much. Our next question on the line is from the line of Dan Levy with Credit Suisse. Go ahead.

Hi good morning everyone, thank you. First, we know that the GM large truck program G1X factor that is your largest platform. And if you look at the schedules obviously usually come from the fourth quarter from the strike and they are producing everything they can, I think their volume is going to be up in excess of 30%. So the extent that that volume materializes, could you give us a sense of what type of incremental margin you would see on that? Is it fair to say that that is contributing nicely to the comments that you have given on the second half detrimental sub 20?

Well Dan, we are not going to comment on incremental margins or margins in general on any programs, so it can't help you there. But you are right in terms of sales, it is definitely strong and it certainly contributing to, what we see is the opportunity for good organic growth in the back half of the year. So it is a big program, as you said, we got about $1200 of content on a new K2 XX versus, or the new GM platform versus the old one.

And as they are going all out, is it fair to say that your - I guess directionally, your contribution margin on that now is comparable to what you would have done in the past? Are there any inefficiencies as you are trying to squeeze as much out of that?

Yes, we never talk about where we are. But, we have done this program, a lot of content we have had in that program for several generations. So, just to be typical going forward, I wouldn’t want to comment on that particular program.

Okay great. And then just as a second question. A question on the broader EV landscape that we are seeing in the role of complete vehicles and we always seeing some - obviously a lot of headlines with EV startups and there is a lot of questions of those who want to go as that light. Are you having incremental discussions across the automotive landscape being it with established automakers or with startups about complete vehicles and how does that vary regionally, what is the role of complete vehicle as this landscape is clearly shifting?

Don if you want me to answer this? Good morning, I think as a part of a normal process, we go through discussions with our various OEMs from a product landscape perspective, and as part of that, obviously the EV discussions out there from the customers that are traditional, as you said. And because of a Magna dire, we do have a lot of touch points with the so called new commerce that you talked about, which gives us also a pretty good visibility on what the other new commerce or, the future is being talked about in terms of EV. Form our product strategy perspective we talked about the different building blocks and platform strategies that we have from various subsystems of the power train. And we are able to address that and as you know the design cycles are long enough that we have a good visibility and be able to pivot as we need going forward.

Yes. Just a couple of additional comments, if you think about a new entrant or a new mobility player, typically it is electric. But depending on what they are doing, they would be looking to hire for engineering and program management, which is a huge undertaking for anybody new in the business. And that can be anywhere globally. And on top of that, it is going to be leading to contract vehicle manufacturers that have big facility in Europe. We have also had a good start-up in our joint venture we have four electric vehicles in China and that is working well. So, geographically, we would be more likely to be able to do something from manufacturing standpoint in China or Europe and Germany, we can do it anywhere.

Okay, and as we are thinking about going forward, would you expect the discussions to accelerate more with you legacy OEMs that, don't want to put in place the added capacity or is more of the incremental discussion on your end going to be with start-ups that just want to go asset light?

I think it is both, and it is hard to predict what is going to happen part of it will be dependent on what happens in vehicle volumes and what specific car companies want to do from restructuring their capacity utilization. I think going forward to the extent that people know what the market is going to do, they want to try and have it so they are running your facilities pretty close to 100%. And then utilize people like Magna Steyr for excess capacity. So, it is difficult to answer that unless we had a real crystal ball that says what the volumes are. And we are also pretty careful who we take business on. There is a lot of different start-ups talking about what they are going to do and how much money they raise, and a lot of people fail. So, we are pretty particular in we take business on for. But I do think mobility is something that Swami and his team are looking at pretty carefully. And I think there is going to be different opportunities coming up with some new entrance.

Great. Thank you.

Thank you very much. Next question on the line is from Itay Michaeli from Citigroup. Go ahead.

Great. Thanks for Good morning, everyone. I just want to go back to the longer term margin question. I mean, it looks like the second half guidance implies that you kind of get back to 2019 margins on a still fairly lower revenue base. And I think you mentioned additional restructuring benefits and other potential tailwinds next few year. So, as we think about the big picture, did you think the earnings power of the company has increased to this downturn that when if we do get back to your prior 2022 revenue objectives, whenever that might be that the margins could end up being higher than what you originally thought.

Yes. I don't know if Vince wants to comment on it. I guess one of the things we have been working on we are looking at world-class manufacturing is - I don't think we are going to be getting a lot higher margins on our traditional business there, pretty well where they are. As we bring new technologies to market that when we can usually get higher margins and we have been spending a lot of money in the electronics area, in the power train area, as well as a lot of other new products. That is where we are particularly pleased to see the number of awards we won from General Motors, because it is fairly representative of what we are offering to a lot of customers that they are recognizing innovation and execution. So margins can be affected by our cost of non-quality and getting a lot of non-value-added costs out of our Company. And we have been working really hard on that. So there is a lot of moving pieces, but I think we are making good headway on our cost manufacturing initiatives.

Yes, Itay it is Vince. I think as you assuming you get back up, when we get back to same volume and same sort of revenue couple of years given what IHS is thinking about overall global production volumes. Our mix of business, I got to believe would be different than what we thought just in January. But I sit back and think of it your question and what I saw happen in the organization is certainly right-sizing the company for what we see in the short mid-term from a cost perspective. But the relentless focus on world-class manufacturing and the time that the plants were down, I think gave us an opportunity to reflect on things a little harder, a little differently. I think there are processes and costs that we took out that probably would have come out at some point down the road, but those have been all sorts of accelerated and taken out. So I think that is an incremental, but how that kind of matched up to when revenue sort of come back. Again what our mix of businesses, what programs we got awarded, what new programs we are working on. I mean, those all come into play and I just don't have the visibility right now to venture at a couple of years out.

That is all very helpful. Just a quick follow-up Vince, I mean like you mentioned that you expect to recover most of the working capital this year, any high level view on what you may be able to recover in 2021 kind of unrecoverable working capital and other timing, differences affecting cash flow.

So is that 2021 or 2020? Let me answer with respect to 2020, when I looked at the investment in working capital in the second quarter is about $930 million. It was more than I expected. During the healing back the skin on - so the customer payments, we got that back in July. When you think about these government grants, net basis on a P&L perspective was pretty neutral. But it is a pretty significant receivable that we have got that we should be getting that Q3, Q4 income taxes from being a payables or receivables that will flow fast. Remember that we also generated cash in Q1 from working capital, it was really unusual. So that all comes back into as a use of cash in the second quarter. And remember, we also had - it was about a $200 million collection of receivable in Q4 of last year that we should have got in Q1. So kind of think about where we end up at the end of the year. I think if we weren’t thinking about that $200 million of cash that we collected in Q4 versus Q1 I would have felt we probably recover all of it. So, are we sure to $100 million or $200 million of that because of the pull forward of cash into Q4 could be, but because of some other payment that we get in early in Q4 of 2020, so net we are going to get substantially I think all that back by the time we get to Q4 of 2020.

Great. That is all very helpful. Thank you.

Thank you very much. Next question on the line is from the line of Rod Lache with Wolfe Research. Go ahead.

Good morning everybody. I wanted to follow-up on just this significant amount of capital being raised by EV startups. It is something that - clearly the investment community believes that that has implications for the competitive landscape in auto. And I'm wondering if that is actually influencing you in terms of the risk that you are willing to take with regard to some of these startups. As we look at that, and should we be thinking that there is greater potential for expansion in complete vehicle assembly in North America and at least relative to what you have done so far?

Well, we really haven't done much in North America so far. We have an investment which we talked about in [indiscernible], and we are doing some work with them. We have had a good relationship with them, but it is a relatively low volume. It is a bit like the chicken in the egg, as far as vehicle assembly work in North America. We continue to have requests or questions from potential existing customers who want outsource some low volume programs as well as some new startups. But you need a certain volume to justify the capital even if it is account yield. I think if we had a sheet of paper with all the potential new entrants into the market, how many will succeed? What would the volumes be? I do think there will be some people who will be successful. Will they be then joint venture or bought by somebody else, it is hard to say. I don't see a huge volume in the new entrants relative to the size of the market. But Swamy do you have any other thoughts?

No, I think that you kind of addressed it Don. I think Rod, the EV market is kind of still evolving, just not only from the start up, but also the architecture perspective for different OEMs. So we can look at the landscape and be able to evaluate and I'm sure there are opportunities like Don said, as we engage with a Magna Steyr and also help the product roadmap from the component subsystem perspective.

Okay, and thanks for that. And hoping just Vince if you can clarify, you put out longer term margins I think for 2022. Let's forget about this the timeframe, but the margin was 7.6% to 8%. Just based on the $200 million of additional savings, if you just divided that by the 20% detrimental the margin, is it reasonable to conclude that you could achieve that same level of profitability with a billion dollars of lower revenue? Or were you basically implying that a lot of what we are seeing right now is essentially pulled forward from your future plans.

Rod, I think when you look at some of the things that we talked about in Q2, part of that is a pull forward. So, they would have been factored into our outlook that we gave for 2022 back in January this year. Part of it is actually incremental activities that we undertook, - my comments about give us a time to kind of reflect on what we are doing and we are doing things a little differently. That wasn't enough -. So, that is incremental to whatever we would have talked about in the past.

Okay, so just to, to kind of summarize on that point, when you provide a margin target like that, it sounds like that is kind of a floating target a bit. It is really contingent on the mix in the size of the business. It is not like you are not doing the reverse exercise and saying, look, based on the capital we committed, we have to reach this kind of profit and find some other way to get there. Is that fair?

So you are talking about 2022, sorry I just confirmed.

Yes. So how, how do we read that? That kind of a target?

Well, let's go back to when we talked about January, and we pulled our guidance, obviously, but when we talk about January, wasn't a target Rod. It is based on our bottoms up business plan. Based on businesses been awarded substantially been awards, the high potential that we are going to get awarded, and based on production volume assumptions, it is based on mix, it is based on exchange rates. So, even if you get to 2022, and exchange rates are different, our production is higher or lower in a particular region, our mix is a little different, that could impact our ultimate numbers. But it isn't a target. And we talked about in January, by segment, what was going to happen a margin and why it was going to happen to margin and there was a whole bunch of reasons, depending on the business unit, why margins, were going to move. Part of it was underperforming operations, part of it is start up of new business, when you think about some of the investments, we are making, electrification and [autonomy] (ph), that business starts to come on. We are going to have revenue which in some cases, we don't have today where we have cost. So, that is all going to add to margin improvement.

Okay. Thank you. Thanks for clearing it up.

Thank you. Okay, the next question is from the line of Chris McNally with Evercore. Go ahead.

Great. Thanks so much and great results, guys. Maybe the first question, some of the questions already been answered. If we think about some of the “problems” of 2019, some of the issues you had around seating, the innovative contracts, Getrag in China. Could you talk about maybe a little update about how many of those have we actually cycled through the benefit. It looks like probably on TV that you have gotten some of the fee issues back from the contract. But just maybe an update, if there is more savings or improvements to come, particularly Getrag in China, where that is a multiyear sort of recovery.

Well, I think if you look at, let's break that up, you look at some of the underperforming operations that we talked about last year. And we were on track to see some improvements. Obviously reduce losses from COVID-19 is a challenge for all of our plants. But, what we have seen from an operational standpoint is that in both of the operations in North America. We have continued to see improvements, I think one of the particular reason, even with lower sales were a little bit better than where we thought, on an absolute basis. So that that is a good story. I think when you look at, you talked a bit, I think some electrification or electrification spent it is an investment because we have got programs coming in the future and technology and continued discussions with customers. I mean, that just continuing to be invested and curved for the right reasons. On our ADAS business and we talked about some overspending in 2019, look at where we are for 2020. I would say we are probably a little bit behind where we thought we were going to be a little bit additional costs overall. But again, as we get into 2021 and start to ramp up, that should go away. Form China and Getrag standpoint, obviously we have been impacted by COVID-19, there has been some restructuring in some of the joint venture to that take some cost out. I would say one particular joint venture, just probably a little bit less volumes and what we were anticipating even with the restart of overall production volumes in North America. So that is probably going to be a negative shorter term going forward than what we had had anticipated in the past. But overall, we are pretty well on track everywhere across the organization, if you take COVID-19 into account.

Great. And then just like a quick one on Steyr, you talked about obviously the benefit in Q2 as a result of some of the cost you mentioned, maybe continuing, I think Q3 and maybe second half, and should we start to think about this moving pieces, but as a 3% plus sort of margin business you have been moving in that direction for several years, I guess that is the first part. And then the second part that, you know, on the back of that EV question, I think was asked earlier, if there were programs that 40,000 to 50,000 of potential volumes, is that sort of the right hurdle for the kind of visibility that you need would, how many of your programs are in that sort of area in Q1, just thinking about the potential to grow this business, you know, well, beyond the six billion or seven billion that has been historically.

We have an existing plant. We could look to programs that are 5,000, 10,000 units because they will fit in there. If we are going to looking at a justification of a new facility, you want to get up to 80,000, 100,000 and ideally that is probably three programs, 20,000, but it never comes that cleanly. So I think there are some opportunities with some new startups, but it really comes down to what is the vehicle, you need the painting shop. Is it a Greenfield? Is it a Brownfield? So, from a margin perspective, we have complete vehicle manufacturing and the margins are pretty low because of all the bought in components. We also have engineering, and I do think there is opportunities for good engineering contracts, especially with some of the new entrants, because of the capability out there. So, comment on the whether we can get 3% or not. But I have been very pleasantly surprised, but it is a nice to see the efforts and the results we have been getting out of our reengineering and the manufacturing initiatives in Steyr and that typically in the existing facility over in Europe.

Chris, I think when you look, just we are not going to give guidance on where, any one of our segments including complete vehicles for this year or for the next couple years. We will do that again as we update our business plan in January. But in my commentary about margins, there is things that are going to move at any one quarter. It is going to be the mix of programs within our complete vehicle business. It is going to be a Don talk a bit, the level of engineering. What in my mind is incremental and we have seen a change or a really good job is focusing on some cost saving initiatives and we are seeing some handsome dividends on that and that is going to continue. That seems - to kind of we are thinking even a year ago.

Fantastic. Thank you.

Thank you very much. We will our next question on the line from Richard Hilgert with Morningstar. Go ahead.

Thank you. good morning everyone. Thanks for taking my question. I would like to drill down a little bit more on the complete vehicle two, we went from a 2.4 adjusted EBIT last year to a 4.7 this year. Revenue from the segment was down almost 50%, but you went from 43 million to 44 million on the adjusted EBIT. Can you kind of characterize for me, please, you talked a little bit about the favorable mix. You talked about the fixed cost recovery. You talked about cost reduction in the group. That 44 million on that much of a drop in revenue. Can you talk a little bit about where most of that came from? Is this something that was all cost reduction driven, and then partially the fixed costs? Or is it more of the fixed cost recovery that and a mix that drove that?

Yes, I would say that the biggest impact is going to be through this is you have got mix is probably the most significant impact on us. And that is a trim levels and types of vehicles that are being produced and the amount of contribution that we have on that. I would say followed by some of the cost saving initiatives. What is a little more challenging and I have got a summary here to try to figure this all out is. The impact of some of the fixed costs arrangements that we have with our customers. So you going to have sales coming down. And we have got fixed cost recoveries so you think margin would come down, or profit would come down more than it actually has. And that is because of the support we have under those fixed cost recovery contracts. But Richard, keep in mind, when the sale starts to go up, you also see the fact that you have a fixed cost recovery that you don't have that operating leverage. So those are the factors that are impacting us and we keep on talking about is like there is been some more engineering work that this group has been doing in particularly over the first half of this year. Margin years a big part of and working-from-home, and we have seen some efficiencies in the results of that. So, that all contributed to the growth and profitability and growth in margin percent and Magna Steyr in Q2 of 20% and Q2 of 2019.

Okay, great, thank you. That is helpful. And then on the other segments on the detrimental. Pretty much good performance there across the Board everything under 30%. But seating dropped from the 30s in the first quarter of 2018 in the second quarter, and body exterior, structures stay fairly constant or in the mid-20s. But then power envision just about doubled from 15 to about 28. And I recognize that seating is more of a less capital intensive business. On a high level basis, just looking at the different segments and given the entrepreneurial spirit of the company, I mean, this seating performed better in the second quarter because of the individual plants doing more cost cutting versus the other segments, or can you kind of just go through what is the difference there between the segments that drove the kinds of performances there?

Well, I think the first thing you got to remember Richard is that the level of capital intensity by segments is different. So you are going to have a different detrimental an incremental as sales move around. In our commentary as well as if with the kind of gone through our MD&A. There are some items that are impacting segments that are not COVID related. If I think about our body exteriors and structures group, I would say there is probably a couple things that kind of stand out, couple things just balance each other out. But last year was a heavy launch year for this group, and there was some more tooling contribution last year and there was this year. So, that is the negative, if you look at an a year-over-year basis, I'm not looking at sequentially, not at year-over-year. We did talk about some provisions for some customer claims. And we have the plus and minus every quarter, they are more significant than what they would typically be and they are sitting in our body exteriors and structures group]. So, that is a negative, which is going to impact overall, detrimental margins. In our power and vision group, when I think about kind of detrimental other than COVID. We talked about social security taxes, difference in our view on consultants and some other employees or independent contractors, and we have looked at provision for social security taxes, which amounted to about $15 million in the quarter, which is reflected in our power and vision group it is our electronics group. So, that is one thing that impacted us and warranty was a little higher this quarter versus the prior year quarter. I think exceeding an equity income. What you are seeing is some continued progress on some of the underperforming operations and when we were struggling last year, an action plan was put in place, even with this volume we are seeing some improved performance, which is what we are expecting and what the team is focused on that. I think that covers some of the kind of unusual type items that are impacting detrimental, that is just the focus everyone is having on cost structures across the organization, which is having a positive impact on profitability.

And seeding also was launching the business, business in Europe. So you got normal pull through on the launch that is offsetting COVID impact.

Okay. And then given the guidance for the second half, I'm assuming that, when we are looking at where the different segments have opportunity to improve, it looks like then body, exterior structures and power vision would be the ones that probably improve in the second half versus the seating and complete vehicle.

We are not providing details by in terms of improvements in the back half by segment Richard. Sorry.

Okay. Great. Thanks.

Thank you very much. And we do have one more question in the queue from the line of Michael Glen with Raymond James. Go ahead.

Thanks for squeezing me in. Guys could you just give an update on Getrag in terms of what you are seeing from the hybrid transmission product, and as we think about a lot more fully electric product coming to market, will that have some implications for customer demand on the hybrid side?

Swamy, do you want to take that?

Yes Vince. I think, talking about the NAV credits and how China is looking at it in terms of including hybrids in the credit side, I think it will be a positive influence we believe. In addition to that E-Drive and looking at DHD is going to the hybrid dual clutch transmissions and the product of the DHD in the future. We see that as a positive trend for the product line in China. When I say that for transformations, whether it is the JVs or overall in general for the product line of transmission for us.

Okay. Are you able to give some commentary on Europe as well?

Yes. In terms of specifically to this I'm assuming, and I think Vince has mentioned in the past, we have seen pretty good progress and traction in terms of the product line, in terms of transformations, not just DCTs but also the HDT part of it, which is the hybrid transformations. And there is some, good activity with customers even on the next generation, which is the DHD I talked about. So definitely much higher attraction and interest in several programs in Europe as we speak.

You will recall it Michael, at our Investor Day we talked about a couple of programs in Europe on the HDT side. So it is going well.

Okay. That is it for me. Thanks.

Thank you very much. Mr. Walker we have no further questions on the line. I will turn it back to you.

Okay. well I appreciate everybody dialing in this morning. It has been a very interesting year to say the least. And Q2 is a complicated quarter from a standpoint. But overall, I'm fairly optimistic. We have had some - continue to have good activities and good results in our innovation activities both in the product and the process for making good headway in a world-class manufacturing, reduced number of losing divisions and launch concerns. We have continued with the big priorities and the company, sustainability is a big push from the company or diversity inclusion activities. The restarts gone extremely well, we talked about the launches seemed to be going well. We have had to make some tough decisions, but that business we will be getting some payback on that. So overall, I'm really happy with the efforts and the cooperation we saw throughout the company in a very difficult time trying to keep people safe and comfortable working, also in the execution of everything we are doing. So, I'm really looking for forward to seeing what the future brings in the area of new mobility, whether it is new customers or new products or new revenue models. So, thanks everybody for tuning in and hope you have a great day.

Thank you very much everyone. That does conclude the conference call for today. We thank you for participation. You may disconnect your line. Have a good day everyone and be safe.