Greetings and welcome to the Q4 and year-end 2021 results and 2022 outlook. During the presentation, participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. At that time, if you have a question, just press one followed by four on your telephone. If at any time during the conference you need to reach an operator, you may press star followed by zero. As a reminder, today's call is being recorded, Friday, February 11, 2022. Now, I would like to turn the conference over to Louis Tonelli, VP of Investor Relations. Please go ahead.
Thank you. Hello, everyone, and welcome to our conference call covering our 2021 results and our 2022 outlook. Joining me today are Swamy Kotagiri, Vince Galifi, and Pat McCann. Yesterday, our board of directors met and approved our financial results for 2021, as well as our financial outlook. We issued a press release this morning outlining each of these. You'll find the press release, today's conference call webcast, the slide presentations go along with the call and our updated quarterly financial review all in the investor relations section of our website at magna.com. Just before we get started, just as a reminder, the discussion today may contain forward-looking information or forward-looking statements within the meaning of applicable securities legislation.
Such statements involve certain risks, assumptions, and uncertainties which may cause the company's actual or future results and performance to be materially different from those expressed or implied in these statements. Please refer to today's press release for a complete description of our safe harbor disclaimer. Please also refer to the reminders slide included in our deck today related to our commentary. This morning, we will cover our 2021 highlights as well as our Q4 results. We will then provide our 2022 outlook and lastly run through our financial strategy. With that, I'll pass it over to Swamy.
Thank you, Louis. Good morning, everyone. We've been busy over the last few days, taking our board through our annual results and our business plans. Today, I'll recap 2021, comment on our results, and address our outlook. 2020 was a very challenging year that was dominated by the global turmoil caused by COVID. In 2021, the auto industry was severely impacted by supply chain disruptions, most notably the lack of availability of semiconductor chips. Once again, we found ourselves working closely with our customers to manage through the challenges to mitigate the impact on production. While I'm not happy with our financial results in 2021, when I sit back and think about the efforts and performance of our team, whether it be winning new businesses, launches, or other operational excellence activities, I was extremely pleased with the results we achieved.
It is a testament to our people that we managed through yet another difficult operating environment. Our culture of collaboration and execution comes through once again in 2021. In 2020, the first half of the year was severely impacted by COVID-related production shutdowns globally, while the second half saw a strong vehicle production rebound. In each of the first three quarters of 2021, we experienced sequential weakening of vehicle production as the semi-chip availability became progressively worse. In addition to the lower production, inefficiencies driven by the unpredictable production schedules of our customers drove higher than typical decremental margins. The fourth quarter saw some sequential recovery in production, but global volumes were still down 17% from the fourth quarter of 2020.
As a result of this cadence, our sales of $9.1 billion in the fourth quarter of 2021 were down 14% year-over-year. However, organic sales outperformed our underlying markets by 6% in the quarter. EBIT margin declined year-over-year to 5.6% while increasing from 2.9% in Q3. Our adjusted EPS was $0.30 for the quarter, and free cash flow in Q4 was $729 million, ending the year at $1.3 billion. Now, let us look at some highlights for 2021. Keeping our employees safe throughout the pandemic has been and will continue to be our top priority. We have been evolving and updating our protocols and facilitating testing and vaccination programs globally to help protect the health and safety of our employees.
We remain focused on three key priorities: building awareness, creating an inclusive workforce, including through training and leveraging tools in recruiting to help remove any bias during screening. To continue to cultivate a culture of learning, we have launched several new education programs for employees, facilitating further development. Among the many awards we received, Magna has been recognized for the fifth consecutive year, being named Forbes World's Best Employer for 2021. We never lost sight of the importance of operational excellence. Last year, we committed to being carbon neutral in our European operations by 2025 and globally by 2030. This should place us among industry leaders in Europe and North America. We managed through the year-long supply chain challenges while working diligently with our customers to minimize production disruptions. Our focus on operational excellence and innovation led to customer recognition.
Last year, we received our highest ever customer recognition awards, 122 in total. Now, let me comment on growth. We outgrew our market in 2021 by 4%. This exceeded the outgrowth we anticipated in our initial outlook last year. In fact, we achieved that outgrowth in each of our major regions, North America, Europe, and Asia. We launched new technologies that have significant growing addressable markets, namely eDrives, advanced driver assistance systems, and EV battery enclosures. We expect these product areas to keep driving our growth for many years to come. Finally, I would like to touch on our innovation. We demonstrated the successful commercialization of our innovation activities over the past few years. We were awarded new business in a number of core areas. This includes a recently announced Driver Monitoring System for a German-based OEM.
We won the CES Best of Innovation Award for our ICON Digital Radar, which is going into production this year. We also continued to expand our collaboration with a growing ecosystem of entities to help accelerate time to market for our innovative products. Lastly, our commitment to innovation continues. Over the past year, we increased investments in megatrend areas to position us for the future. Normally, I would be passing off to Vince, and I've heard this statement over many years. Don did it and I did it for the last quarter. He's here with us. Instead, I'll pass the call to Pat McCann, our new CFO, who will first take us through the financials. Before I do, I would like to thank Vince for continuing to be a mentor to both Pat and I. Pat.
Thanks, Swamy, and good morning, everyone. I hope everyone is staying safe and healthy. I'm happy to be speaking with all of you as CFO. I would like to start by thanking Vince, who has helped me immensely over the years and has supported me while I've prepared for my new role. It will be evident that Swamy, Vince, and I are fully aligned on Magna's disciplined returns-based approach to capital allocation. Today, I will cover our financial results for the fourth quarter and full year 2021. I'll do a shorter than usual version of our quarterly review to allow more time to cover our outlook and financial strategy. More detail on our financials is included in the appendix. As Swamy said, both 2020 and 2021 were impacted by significant global events.
2020 was affected by COVID-related production shutdowns, particularly in the first half of the year. 2021 was impacted by semi-chip shortages. Overall, global light vehicle production only increased 4% in 2021. Our consolidated sales rose 11% year-over-year. On an organic basis, our sales increased 5% compared to a weighted global production increase of 1%, driving a 4% weighted growth over market for the year. Mainly as a result of the higher year-over-year sales, our adjusted EBIT margin and EPS also rose. For the fourth quarter, global light vehicle production declined 17% as a result of year-over-year reductions of 20%, 28%, and 10% in North America, Europe, and China, respectively. On a Magna-weighted basis, production declined 20% in the fourth quarter compared to Q4 2020.
Consolidated sales were $9.1 billion compared to $10.6 billion in Q4 2020. We had strong relative sales performance in the quarter with organic sales outperforming weighted production by 6%. Largely as a result of the lower year-over-year sales, adjusted EBIT and EPS declined from the fourth quarter of 2020. As with the past couple of quarters, a more informative comparison is reviewing sequential results. Comparing Q4 to Q3 of 2021, global light vehicle production was up 21%, driven principally by China and Europe as chip-related production shutdowns subsided to some degree. Our sales were up 15% due to higher production and the launch of new programs, partially offset by negative program mix and foreign currency translation. All of our segments experienced sequential increases in sales.
Comparing the third quarter to the fourth quarter of 2021, our adjusted EBIT increased from $229 million to $508 million, and EBIT margin rose from 2.9% in Q3 to 5.6% in Q4. The adjusted EBIT increase reflected a number of factors. Higher earnings on increased sales, the $45 million provision on engineering contracts with Evergrande recorded last quarter, government R&D incentives received this past quarter, and higher commercial settlements. These were partially offset by higher input costs and increased transactional foreign exchange losses. I will now review our cash flows and investment activities. During the fourth quarter of 2021, we generated $849 million in cash from operations before changes in working capital, and an additional $502 million in working capital.
Investment activities in the quarter included $549 million in fixed assets, $105 million increase in investments, other assets, and intangibles, $63 million to finalize the LG Magna joint venture, $31 million for a small acquisition, and $45 million in public and private equity investments. Free cash flow was $729 million in Q4. We also repurchased $251 million of our common shares and paid $127 million in dividends. Growing our dividend is part of our stated financial strategy. Yesterday, our board approved a 5% increase in our quarterly dividend to $0.45 per share, reflecting the board and management's collective confidence in the outlook for our business. We have increased our dividend per share at an average growth rate of 12% going back to 2020.
Now I will pass it to Swamy for a few introductory comments before getting into the specifics of our outlook.
At our investor event last April, I articulated our go-forward strategy for growth. We are on track with our strategy to further strengthen our position in megatrend areas, drive operational excellence, and look to leverage our unique position in the industry to unlock new opportunities. I look forward to giving you the details of our progress at our investor event in May. Today, I'm gonna focus on our three-year outlook, which I'm really excited about. It reflects our go-forward strategy to remain a leader in mobility. You're going to see that we continue to increase our investments in megatrend areas and that much of the growth associated with these investments will be realized beyond our outlook period. Specifically in the outlook, we see both tailwinds and headwinds. In terms of tailwinds, we are launching content on a number of new programs, which is contributing to sales growth.
I will come back to that shortly. Relative to last year's outlook, we have an increase in business awards and are seeing opportunities in megatrend areas, particularly electrification and autonomy. With the current robust auto demand and low dealer inventory levels, we expect a favorable production environment extending into 2024. Our operational excellence initiatives are expected to contribute to margin improvement through our outlook period. In terms of headwinds in our outlook, we expect continued semiconductor supply constraints to impact production in 2022. The supply chain in general remains relatively vulnerable, which could also impact vehicle production. Our business is facing inflationary input cost impacts in areas such as commodities, labor, energy, logistics, and other areas, some of which are expected to be short-term in nature and others being more enduring.
We expect weaker operating results in the first half of the year relative to the second, primarily as a result of semiconductor availability, which should negatively impact production more significantly in the first half. How does all of this translate in our key financial metrics? We expect to continue strong sales growth through our outlook period, and we have confidence in our outlook. About 90% of our 2024 sales are already booked. In spite of inflationary input cost pressures and increased engineering activities in megatrend areas, margins are expected to expand in each year of our outlook. Our engineering investments in megatrend areas should increase to an average of about $900 million annually before customer recoveries. Capital spending is also expected to increase largely as a result of investments to support the growth in our outlook.
Lastly, free cash flow generation from our business is expected to remain strong, reflecting our operating performance and our disciplined approach to investment. This should allow us to further invest for growth and return capital to shareholders. The industry is undergoing a significant shift towards electrified powertrains. In particular, OEMs are bringing an increased number of BEVs to market. We have been communicating for some time now that the vast majority of our product portfolio is powertrain agnostic and electrification is in fact an opportunity for us. Magna has significant content on electric vehicles that are launching this year across the globe.
Just to name a few, we have over $3,500 in content on the Cadillac LYRIQ, about $2,000 on the F-150 Lightning, about $1,000 on BMW iX, about $500 each on XPENG and Smart SUVs, and around $900 on the NIO ES7. These vehicles shown are well above our average content in the respective markets. These are just some of the many vehicle launches around the world that are contributing to the sales growth in our outlook. With that, I'll pass it back to Pat.
Thanks, Swamy. Let me start with the key assumptions in our outlook. Our outlook reflects increased vehicle production in each of our key regions relative to 2021. In North America and Europe, our two largest markets, volumes in 2022 remained well below levels experienced in 2019, pre-COVID, and China production is also slightly lower. However, we expect increased production through 2024. We assume exchange rates in our outlook will approximate recent rates. This reflects a weaker euro relative to 2021, which negatively impacts our reported sales going forward. I will start with our consolidated outlook. We expect consolidated sales to grow by 7%-9% on average per year out to 2024, reaching $44.6 billion and potentially as high as $47.1 billion. The growth is driven by higher vehicle production and content growth, including as a result of many new technologies across our portfolio.
These are partially offset by foreign exchange, the end of production on certain programs, and net dispositions. On an organic basis, we expect consolidated sales to grow between 8% and 10% on average per year out to 2024. Excluding complete vehicles, we expect our organic sales to grow between 10% and 12% on average. In addition, we are expecting significant sales growth from unconsolidated joint ventures over the next few years, including from our LG e-powertrain joint venture, our integrated eDrive JV in China, and a new seating joint venture in North America. We expect our consolidated margin to expand in 2022 and then again out to 2024. Relative to 2021, our 2022 margin benefits from contribution on higher sales, lower production inefficiencies from unpredictable OEM production schedules, and operational excellence initiatives.
These are expected to be partially offset by higher input costs and engineering investments to support new program awards and to capitalize on growing opportunities in megatrend areas. We also expect a meaningful step-up in margins in 2023. This is largely driven by contribution on higher anticipated sales, operational excellence initiatives, and lower application engineering in megatrend areas. We expect additional margin expansion in 2024, primarily driven by higher sales and operational excellence initiatives. Many of the same factors that are impacting consolidated sales and margins out to 2024 are also impacting our segments. In the interest of time, we will not run through these segment details. However, they are included in the appendix, and we are happy to discuss any questions on them. Next, I would like to cover some of the highlights of our financial strategy.
We have been consistent in communicating our capital allocation principles over the years, and I would like to reiterate these now. We want to maintain a strong balance sheet, ample liquidity, and high investment-grade ratings, invest for growth through organic and inorganic opportunities, along with innovation spending, and return capital to shareholders. Over the last couple of years, our capital spending has been below normal levels as a result of the environment. As we get into our outlook period, spending reflects the capital required to support the growth in sales. We expect capital spending to be approximately $1.8 billion for 2022 and remain relatively level out to 2024. We expect further strong free cash flow totaling about $6 billion over the next three years. In summary, we are executing our go-forward strategy.
We plan to further grow our business with particular sales acceleration in megatrend areas, execute on our plans to expand margin, including through operational excellence, generate solid free cash flow to further fuel growth and return capital to shareholders, and accelerate investments to support growth on the car of the future. We hope to see many of you in May at our investor event, where we will elaborate on our go-forward strategy. Thanks for your attention. We would be happy to answer your questions.
Thank you very much. And if you would like to register a question, please press the one followed by the four on your telephone. You will hear phone prompt that acknowledge your request. One moment please for our first question in the queue. We'll proceed with our first question on the lines with Mr. John Murphy of Bank of America Merrill Lynch. Go right ahead.
Good morning, guys. Pat, welcome to the call.
Thank you.
Just a first question. If I look at slide 23, which is your life and production assumptions and slide 25, your outlook to 2024 sales, you know, it looks like your sales through from 2021 to 2024 are growing largely or essentially right in line at the midpoint with production. I'm just curious, you know, it seems like the growth of market that you had kind of fades away in your outlook, and it looks like it's complete vehicle assembly largely. But I just, you know. What's the key driver? Is it literally just the mix or what's going on there?
You know, if you go back, John, to what we were expecting in 2021, we are sort of flat relative to production, our organic growth, and we ended the year at +4%. The starting point's higher for one thing. We also said that our expectation for the 2021-2024 timeframe was, like, 1%-3% on average per year. You know, if you look at excluding the impact of complete vehicles, which has had an impact on our overall growth, we're back at the kind of 1%-3% per year in the 2021-2024 timeframe. Certainly, you know, complete vehicles is negatively impacting our overall growth rate. You know, what we're not talking about here is unconsolidated sales, which is growing significantly over our plan period.
Yep, that helps quite a bit. Just a second question. I mean, as the automakers are focusing more and more on AV and EV investments, there's this idea, and I think this makes a lot of sense, that they are going to outsource more and more parts of the vehicle, even outside those systems, which really plays into the sweet spot of Magna and your business. I'm just curious if you're seeing any, you know, incremental quoting on Class A stampings, if you will, or other parts where there might be greater opportunity for you to take on more and more of the vehicle as they focus their investment dollar, and, you know, human capital on AVs and EVs.
Good morning, John. This is Swamy. As we see today, definitely from a perspective of capabilities and capacity, we are well positioned, if that comes through. As we sit here today and look at the cadence of the sourcing activity, we don't see a significant shift as of yet, but that is to be seen. Like you said, if you look at what we have in terms of footprint and capabilities, we should be well positioned to address that piece.
Got it. Just lastly, I probably just on the outlook, one more question on the 8.1%-8.6% range. It's the same as what you were expecting in 2023. We're looking at a little bit higher revenue, you know, base. I mean, is this the ultimate margin as sort of this, you know, 8.1%-8.6% range that you think that Magna tops out at? Or is there potential over time, as you grow and the business mix maybe shifts to potentially even get higher on margins?
John, when we think about the margin here, I think there's so many components. We have to consider mix. I think the one thing that's changed year-over-year is some of the input costs have increased. When we do go out, we see significant input cost increases in 2022. Some of those costs will, you know, stabilize, I would say, as we go out through the outlook period. Some of them won't. When you think about labor, I think there's been a reset to some degree on the labor cost, whereas others will come off.
We're also gonna step up in our investments for megatrend areas, which is gonna impact our margins in the short term, but it's gonna drive growth in the longer term.
Got it. I'm sorry, if I could sneak in one more just on the Ambassador Bridge, and it's not 'cause you guys are Canadians, although you probably have a better perspective than I do as a New Yorker on what's going on up there. I mean, are you running into any issues with, you know, I mean, with. I mean, it's not shipping, it's trucking, you know, and any kind of disruption around that, or is that just a hiccup that you guys will be able to work through and the industry you think will work through?
I think in the long term, I'm sure we'll work through. As of right now, we're constantly monitoring it, John, and some of the OEM customers have had to idle or cut production requirements. They're adjusting, I should say, the production schedules, and we're kind of starting to see some initial impact in some areas versus the other, for example, JIT facilities and so on. We're watching it closely. I definitely hope that it'll get resolved quickly.
Okay. Thank you very much, guys.
Thanks, John.
Thank you.
Thank you. We'll get to our next question on the line from the line of Adam Jonas with Morgan Stanley. Go right ahead.
It's so interesting, your outlook is so balanced compared to many of your OEM customers that are guiding for, you know, really significant increases in margin over the next few years. It's a nice dose of reality. Swamy, where are you most concerned? You highlighted commodities. I mean, among the commodities, and particularly metals, what's giving you the most concern right now?
I think it's a mix a little bit, Adam, as you look at the stuff. Some of the commodities like steel, we are on resale, a significant portion of it. Some of it, you know, we have in the free market. Large part of resin also on resale. Some of it is not, especially the polyethylene-based, you know, specialty resins and so on and so forth. A little bit on aluminum and copper. Most of the times we are indexed or on resale program and the rest we have to manage through, you know, as the market is fluctuating. I wouldn't say one is significantly different than the other. There's a bunch of commodities that we are closely monitoring.
The supply is going to be one of the key things that we have to look at, and how our tiered suppliers are managing that is gonna be also an important thing to closely monitor.
Thanks, Swamy. Just a follow-up on Steyr. You have in Graz a very highly anticipated launch for this November. Was curious if that looked on track from your perspective or anything you wanted to call out there. Any update on plans or timing or milestones regarding your decision of a North American contract manufacturing location? Thanks, Swamy.
For the anticipated launch, both the teams are working together well and progressing well, I should say, Adam, right? More specifics I would leave for the OEM to comment. In terms of looking just at various opportunities in Graz, they continue. In the North American footprint, like I've said before, very open to the idea of having the footprint here. As I've always said, I think it's important to have a little bit of visibility on the product plan, even though it starts off at a lower volume. If there is enough visibility in the long term, I think we'll be looking forward to have that footprint in North America.
Thanks, Swamy.
Thank you very much. We'll get to our next question on the line from Itay Michaeli from Citigroup. Please go right ahead.
Great. Thanks. Good morning, everybody. First question, just wanted to go into some of the incremental investments you're making this year on the megatrend. I was hoping you could quantify kind of the year-over-year impact there. It sounds like that's mostly in Power and Vision. Maybe, Swamy, talk about some of the opportunities for revenue from these investments coming beyond, I think, 2024. Hopefully you can maybe quantify or talk about kinda where specifically you are investing on the EV and autonomy side.
Yes, Itay. I think, as you said, a lot of the investment that we're talking about is in that region, from an engineering investment perspective. If you look at the electrification side of things, I think if you look at the overall managed sales, by 2024, we are going to be in the $2 billion range. And in our LG joint venture that we talked about, we continue to see a 50% CAGR over the next or during the plan period, I should say. In the ADAS area, last we talked about 20%+ CAGR, and as we look at the plan period now, from 2021 to 2024, we are even seeing a 30% CAGR.
I would say the investments that we have made and the platform technologies are starting to yield results, and we continue to see that going forward. Specific areas, e-drives, you know, larger addressable market for us, like we said before, not just the all-wheel drive, four-wheel drive. Now we are looking at, you know, all drives, so that is an expanded addressable market. On the ADAS side, we have, as we said, the building blocks in terms of the sensor suite, the compute, and the software and fusion capabilities. I briefly mentioned about our radar going into production and also a program with a German OEM on the Driver Monitoring System, and we also continue to see further traction in that product line.
Itay, I think the other thing we should consider when we talk about investments in megatrend areas, there's the portion that flows through P&L as gross engineering expense. The other part that's primarily in our P&V segment, as you pointed out. The other large investment we're making is in our BES segment, and that's primarily in the form of capital as we launch battery enclosures. We're investing now for battery enclosures that are gonna be launching throughout the outlook period. We recently started the launch of the HUMMER here in Michigan.
That's all very helpful. Just a quick follow-up, and I apologize if I did miss it before, but I was hoping we can go through the bridge and complete vehicle assembly between kind of prior outlook for 2023 that you had versus the updated outlook today for kind of the top line and margins as well.
I think if you look at 2023, we would have had the BMW 5 Series in there for most of the year, and that continues to be the case. 2024 now we've brought another year. That program, because it ends in '2023, it's just not into '2024. Now, we do have the Fisker program that launches, but there's different accounting. If you recall, we've had kind of full cost accounting and value-added accounting. With the 5 Series is on a full cost basis, so a much higher unit price per unit. The Fisker program is on a value-added basis, so a much lower unit price. Even though the volumes in the plant are not that significantly different, the revenues are quite different.
That's very helpful. Thank you.
Thank you very much. We'll get to our next question on the line from Peter Sklar with BMO Capital Markets. Go right ahead.
Good morning. Just looking at your initial 2024 guidance, you're showing a lot of equity income growth, you know, over the plan period. I take it that's coming from, you know, some of these joint ventures, the partnership with LG, the partnership with HASCO. I'm not surprised that the revenue is ramping up, but I was surprised, you know, at the growth of equity income, given that there would be, you know, initial ramp periods as those joint ventures begin to build. Just wondering if you could add a little flavor on, you know, what's driving the equity income growth.
Hi, Peter, it's Pat. I think when you look at the equity income, what I would consider, you're right, a lot of the growth is coming from those joint ventures. What you have to consider is where we are today is we're investing heavily via engineering spend to launch a lot of these programs in the EV markets. When we get out to 2024, a large portion of these programs will be launched, generating revenue. It's a combination of lower application engineering in the future, combined with margin on sales that are gonna be generated.
I mean, the LG joint venture already has sales, and it's ramping up pretty significantly, so there's investment there. HASCO launched the Volkswagen program last year, continues to ramp up, and there's another program that launches next year. It's gonna start having more higher sales, and so there's a change in the results as a result of the eDrive, the sales being much higher.
Okay. Another question I had is, I'm a little lost on how many eDrive awards you've received and have announced, like, just I forget when it was. I think it was last week or recently, you issued the press release on the Volkswagen platform, where you're providing the secondary drive. As I recall, last time you spoke, you had three major eDrive awards, and it's. Is the Volkswagen program you talked about last week, is that part of that, or is that a fourth program? Maybe you could just review where you are on eDrive awards.
Yeah, Peter. Happy to do that. You're right. The Volkswagen program is the first eDrive program, and we have talked about that before. We have another program, as I just said, that's launching in HASCO next year. That'll be our second. Last year, we were awarded two additional eDrive programs. That includes both the primary and secondary drives. We have four currently booked. Lots of conversations. In fact, there's an acceleration in conversations with customers over the last 12 months, and that's mainly due to all the focus on EVs. Certainly the LG partnership is a driver there. We're looking at a bunch of additional quotes for this business.
Okay. The LG partnership, is that for components for the eDrive system, or will the joint venture do the entire eDrive system or a bit of both?
It's both, Peter. If you recall, it's for components, but also with any Japanese or Korean customers, they're responsible, the LG joint venture is responsible as the tier one on the eDrive side.
Okay. Just lastly, on the complete vehicle assembly where your results were, you know, pretty strong in terms of operating income, you attributed that partially to government research and development incentives. I'm just wondering what they related to and, you know, what was the magnitude? You know, those incentives must have been pretty significant if you called them out.
Yeah, Peter. They're basically R&D credits similar to what you would see here in Canada. The way this program's structured in Austria, they do run through EBIT. The number is in the range of about $20 million, and it's a little bit more significant than we're used to because it covers out of period amounts as well.
Yeah. Okay. Thanks, Pat.
Thank you.
We'll get to our next question on the line. From the line of Chris McNally with Evercore ISI, please go right ahead.
Hi. Thanks so much, team. Just to follow up on the margin questions for Power & Vision and Body. On Power & Vision, you talked about the engineering upspend in 2022. Could you just talk about is that the majority of the margin hit year over year or, you know, is it equally shared with things like component costs?
Can you repeat the question, Peter? Sorry, Chris?
Yeah. The down margin year over year in Power & Vision, you talked about the increased spending for R&D, ADAS programs. Is that the majority of the hit or, you know, if we were to rank order components, you know, higher chip prices and things like that are also a headwind?
Just trying to find the right page, Chris, you know, to get to what you're referring to, if you would say.
If you look at Power & Vision, I think what you're seeing in terms of the big impacts to the margin are gonna be the inflationary input costs. A big chunk of the engineering spend is coming through in 2022. Those are the two biggest drivers of the decrease in the margin in 2022.
Okay. Perfect. Then Body, where obviously, you know, things normalize pretty quickly next year. Could you just talk about, you know, how raw materials are flowing through? Obviously, you know, you have steel recovery, and you also have steel scrap. You know, just talk about some of the tailwinds there that get back your margin, you know, to sort of this 8%+ typical range.
Hi, Chris. It's Pat. When I think about the BES segment, you're right. It's primarily a steel story with some resin on the exterior side. Specifically on the steel, we are, you know, primarily covered via resale or indexing programs, and we do have a benefit of being able to resell scrap steel on the market. Those markets tend to go together, so as we see steel coming off in the future, scrap recoveries will probably move in tandem, maybe a little bit quarterly delay or whatnot. I think the biggest driver when you look at the margin increasing from the 5.7% at 2021, it's really driven by higher sales. The other factor is we're expecting some stability to come back into the production schedules from our OEM customers.
If you recall, in 2021 we did have some fairly high decrementals. We have these big capital-intensive plants, and when we return back, I think that's driving the majority of that improvement.
Okay. That's great. Lower risk on raw. Then my final question just on Steyr. I think it's been asked a couple of times, but just wanted to clarify. You know, in your slides, I think on slide 53, you have the volumes, you know, basically in like a 130,000-140,000 unit range for 2024. As far as I know, I think the capacity is around 200,000. Is the Fisker number in there? Because, I guess, what I'm trying to wonder is, with the BMW rolling off and all the opportunities you have, could you fill that capacity, you know, over the next couple of years? Or are we getting close to the point where you'd make a go, no-go decision on a new North American facility?
Chris, I think I would say, again, depending upon the mix and what the requirements are in the assembly and the paint and so on, I would peg the capacity roughly to be around 170-180 in Graz and you know, similar number in our joint venture in China. I think as the BMW rolls off, we talked about the Fisker just starting at the end of this year and slowly ramping into 2023 and 2024. There is a little bit of a transitional time as BMW comes off, right, and Fisker ramps up. We continue to have many discussions on different variants and OEMs, you know. It's a lumpy business. It goes through the cycle.
you know, we're having a whole bunch of conversations to utilize the capacity appropriately.
Fisker is in.
Okay. Fisker is in there. You know, there's only maybe 30,000 capacity there. If another big program came, you would need significantly more capacity. Okay. Thank you so much, guys.
Thank you. We'll get your next question on the line from Dan Levy from Credit Suisse. Go right ahead.
Hi. Good morning. Thank you for taking questions. First, I wanted to go back on one of the earlier questions of you know the fact that the margin guide for 2024 is flat versus 2023 despite the higher revenue. I think you mentioned increased commodities, and I assume that you know that's just a broader catch-all for input costs. Maybe you can just elaborate a bit more on that. If we're just thinking about input costs or cost inflation you know what's in that bucket? How much cost inflation did you see in 2021? What are you assuming for 2022? What are you assuming beyond? And then you know what's the mitigation? What are you assuming on mitigation of those costs, or are those costs all sticky?
Sorry, Dan. It's Pat again. I think your statement is correct. I would view it primarily as just higher input costs. When we think about those higher input costs, it's gonna cover items such as commodities, whether it's steel or resins. When I talk about steel, obviously that's on a net basis. We have resin, we would have copper, aluminum. But we also have areas such as freight, energy costs. We're seeing an uptick primarily in Europe. Outside of, you know, third party costs, we're also seeing an uptick in labor costs. The labor costs in 2021 were primarily more in the form of retentions or whatnot. What we're seeing as we go into 2022 is we are experiencing higher than historical wage increases in various parts of the world.
Coming back to the numbers, if you think about 2021, you know, if we go back compared to 2020, our uptick of input costs is probably in the range of about $80 million. Of that $80 million, $50 million related primarily to commodities and third party costs, and $30 million would be primarily labor. We roll forward into 2022, the additional uptick is in the range of about $275 million, and that split would be $190 million on commodities and the balance on labor primarily.
And then into-
Sorry, Dan, just don't wanna cut you off, but sort of the first part of your question when you're looking at the margin being flat from 2023 to 2024, when you start thinking about commodities, you know, they tend to come off. Labor's stickier. When you look at 2023 to 2024, I think we do have an uptick on our labor costs that is gonna stick.
We do have, you know, an uptick in engineering through that period. I mean, that's impacting the business in the short term.
Okay. You're assuming full mitigation of the commodities or some of the commodities to come off, correct?
Yeah. We've assumed in our plan that we have some recoveries. The numbers I pointed out are on a net basis.
Oh, okay. Thank you. Next question is just on the LG JV, and I see the Power & Vision equity income, and it's coming up. Maybe you could just provide some comments on the underlying profit, 'cause I think, Swamy, you mentioned earlier that, you know, it's 50% CAGR, but if I just compare the equity income from 2021 to 2024, it appears like it's a slight uptick. You know, is that just a reflection that you're getting the revenue but it's still not a steady state margin by 2024?
I think it's fair to say that we're still investing in it when we get to 2024. Unfortunately, we don't control the joint venture and we're not able to get into, you know, what the profitability is. I mean, clearly we're in heavy investment mode, and over time as sales grow, we'll get contributions, but we can't comment on the impact. We also have in our equity income, one of our joint ventures, which is planning pretty conservatively. It's conservative on the amount of recoveries that they intend to get or expect to get from customers, so that's impacting equity income in the short term.
Okay, thanks. Just lastly, maybe you could just provide a quick comment on the free cash. I, you're guiding to something flat to slightly below $21. I realize a big part of that is, you know, higher CapEx. You know, it seems like the EBIT increase should more than offset that. Maybe you could just provide some comments on the free cash dynamics. Thank you.
Just on the free cash flow. Again, I think when you put in perspective of the range we're talking for CapEx, I think that investment is pretty significant compared to the delta in profitability.
I'm just getting notes passed over to me here. When you think about our capital spending, the other piece we have to consider is we talk about capital, and this would be capital where if you go to a plant and the tag says Magna on it, there's another significant increase, and it's primarily we get into the megatrend areas and you talk about battery enclosures. There's a significant amount of investment of customer-owned tooling. When we're guiding that number out, we're seeing, you know, a $50 million-$75 million increase in that number as well.
That's the other. You'll see that in other assets.
Got it. Okay, thank you.
Thank you very much. We'll go to our next question on the line from Mark Neville with Scotia Capital. Go right ahead.
Hey, good morning, guys. Just wanna make sure I understand, and sorry to go back on this. What's happening in complete vehicles? Volumes will be flat. Sales are down, but that's Fisker accounting. You also have the BMW rolling off in 2024. Is that correct?
BMW rolls off late in 2023, or second half of 2023.
Okay. There's a different accounting for Fisker. Is that right too?
Yeah, we talked about even last year, we're accounting for it on a value-added basis, and that's
Okay
Yeah, that's a lot lower unit price per unit than we are with the rest of our programs, including the BMW 5 Series. Engineering is also down a little. We've been generating a lot of engineering revenues, and we're expecting that to come off a little bit from the high levels we've seen over the last couple of years.
Okay. If given the Fisker accounting, if it's just value-add, shouldn't we assume or wouldn't normally the margin be higher?
Yeah, the margin is higher. There are still some elements in there of goods that are included in the unit price, which you know keeps the margin down a little bit, but it is higher. It's just there's a lot of factors that are going through that line. You know, we highlight a few of them in the appendix there, but it's more than just that Fisker that's going in there.
Right.
Mix is negative. There's some input costs that are impacting the margin, et cetera.
Okay. Pat, you threw out some numbers, just in terms of inflationary pressures. I think you said $275 million for 2022. I missed the split.
Oh, sorry. Yeah, so just to be clear, so it's $275 incremental versus 2021 on a net basis.
Yeah.
The split is $190 on commodities or third-party costs, and then $85 would be primarily labor.
Okay. I'm just curious what sort of steps you can take, if any, just around the labor and energy. Again, I appreciate commodities move around, but I guess labor feels a little more structural. So what are some of the things you can do to sort of push that through or deal with that?
It's a mix, I would say, right? You know, some of it is continuing discussions with the customers, looking at productivity improvements within our operations. There's not one answer. You know, we look at continuous improvements and VAVEs, and that's an ongoing exercise going forward to it. Some of it will be recovered in the new quotes as we go forward.
Right. One last question. Just in the 2024 outlook, understanding there's no comments around M&A, but just curious to get your sort of updated thoughts, there. Thanks.
Yeah, I think, you know, like I always said, we look at the, you know, the geography, the customer, and the product strategy overall and try to look at what is the right way to go at either organic or inorganic. You know, if the answer happens to be inorganic, then we look at what's the right approach to do that.
Hey, Mark, Vince, first time I'm gonna say something on this call, kind of more my area looking at overall strategic initiatives with Swamy. You know, on the M&A front, we typically do not build anything into our outlook, right? We only build in M&A that has happened or we've got a contract in place. Certainly with the strength of our cash flow, our balance sheet strength and what's happening in the industry and the evolution and how well we're positioned, you know, we obviously, as you can imagine, look at a whole bunch of things and we have an overall strategic approach to our business. With the right opportunities, you know, you shouldn't be surprised if we do use our balance sheet.
We've used it in the past, we expect we're gonna continue to use it in the future to strengthen our overall product portfolio to support our customers.
Got it. Thanks, and happy to get you on, Vince.
Thank you. We'll get to our next question on the line from Mark Delaney with Goldman Sachs. Go right ahead.
Yes, good morning, and thanks very much for taking my questions. The company's outlook for global auto production looks pretty consistent with IHS. It is above some of the other auto tier one supplier guidance. I'm hoping you can elaborate a bit more on how you're deriving your outlook for production. How closely does it align with the OEM forecast that you're being given, and are you trying to factor in any conservatism given all of the supply chain issues?
I think if you look at 2022, our outlook on a global basis is about 6% growth versus 2021. In North America and Europe, I think we're a little bit more aligned. If you look at 2024, my reflection is that we're still a little bit conservative relative to IHS, at least in North America and Europe. I mean, we look at external forecasters. We're definitely look, you know, have our ear to the ground about, at least in the short term, what we're hearing from our groups and you know, what they're hearing from their customers. I mean, it's a combination.
We have to put a stake in the ground at a point in time, and we don't know, of course, what others are doing. We look at the analysts as well and where you guys are at, what you guys are expecting, and we come up with a collective view on outlook, and then we finish our plan. That's kinda how we do it.
Got it. That's helpful. My second question was on Optimus Ride, an acquisition the company did, relatively recently. Maybe you can talk a bit more on the assets and IP that acquisition is bringing into Magna and how you plan to incorporate it into the development of the company overall. Thank you.
Hi, Mark. We had talked about continuing to look at different areas based on product strategy, and we have done a few things to continue to strengthen our foundation in ADAS and software in general. With this acquisition, we welcomed about 130 employees there. We felt the capabilities and the knowledge they had would add to what we're doing in, you know, the feature function development and so on. You know, not commenting specifically on the IP, but it really adds to the depth of the software in general and the ADAS piece in specific. We will maintain the office in Boston.
It's a rich area in terms of the ecosystem of economic institutions and just the software talent, so we'll continue to grow that as a region.
Thank you.
Thank you. We'll get to our next question on the line from Colin Langan from Wells Fargo. Go right ahead.
Oh, great. Thanks for taking my question. I'm a little surprised by the commodity cost increase going from $50 million to $190 million, particularly as steel is heading in a downward direction or has been. What are the big components of that $190 million increase, if it's not steel?
Hi, Colin. It's Pat again. When you think about the commodity increase, I think I'd covered off a few of the major items. Obviously, resins, it'll we have much less resin on a resale program or indexing program, just given the nature of the product. It's a harder, you know, it's a harder product to hedge against, so resin's obviously a big part of it. The other big part is energy that's flowing through. We're seeing that in Europe, a lot of the input costs. What we're seeing as well is when you look at energy and some of these input costs, they're coming through the supply base as well in the form of surcharges, which are a little bit harder to control.
Specifically regarding steel, if you think about steel, I understand steel prices have been coming off pretty steadily since towards the end of Q3 of last year. Really the timing of your contract and when you lock in is gonna drive a lot of that value. It's a bit of a three-party negotiation when you're dealing with your customers and the mills, and we're in the middle. When you lock in those contracts really drives your steel pricing on a year-over-year basis.
The prices are coming down, and these scrap sales are lower as well, and that's kind of baked into there as well.
Okay. When I look at growth over market, if you look 2021-2022 and I take out assembly, I'm coming up with something like an 11% growth with your outlook for North America and Europe up 16%. It seems like you're underperforming this year. Is that right? Is that just assuming some sort of platform mix drag relative to geographic benefit? Well, one, are you actually underperforming the market this year? Then two, is that any color on what platforms maybe are dragging that growth over market down?
I don't think there's any particular plan. I think, you know, we give a range for our growth rates. Last year we were kind of thinking the same thing. We started the year kind of close to flat and we ended up at plus 4%, so the base is higher. You know, it's just a mix of programs that we have that, you know, in the business that start in the position we still think excluding Steyr, we have growth in the entire period. You know, we've also got [Crystal] that's so we've also got a disposition that we did in 2021, which is impacting overall sales.
Okay. Anything in particular in Power & Vision? That one seemed to have the lowest growth year-over-year.
Well, Power & Vision in particular had really strong growth over market over the last couple of years. We are 9% over the market in 2020 and 4% last year, so the base is certainly high there. We have businesses in Power & Vision that are pretty established, and so it isn't always gonna grow faster than market. It just depends on the year, just a mix of programs and business.
Okay. All right. Thanks for taking my question.
Thank you. We'll get to our next question on the line. It's from Rod Lache from Wolfe Research. Please go right ahead.
Hey, this is Shreyas on for Rod. Just following up on that Power & Vision question. You know, I know it obviously houses a lot of the secular growth elements of the business and, like ADAS and eDrive and, you know, you talked about consolidated revenues up 9%-10% through 2024. You know, the market is up 9%, so a little bit of outgrowth. I realize, you know, the JV part of the business is growing rapidly, but are there parts of the Power & Vision business that you expect will grow a lot slower over these next few years and maybe even shrink, that you can talk about?
Power & Vision has we have the mechatronics, mirrors, lighting, ADAS, and in the powertrain, it's a combination of our transmission business and all-wheel drive, four-wheel drive, and the eDrives. There's kind of some of the areas which are growing fast as we talked about with the rest of the market. Some of them are stable and have a very long runway for the next ten years, which gives the stability, but those things are not growing as much as the other areas. We cannot look specifically at each of the product line, for example, the mirrors that continue to grow with the market. Every vehicle has that. We are looking at the combination of the mirrors and electronics in the Driver Monitoring System.
That's, you know, turning out to be a new product line. You can't really put a specific number on each one of these things. It's a mix. I think as time goes on, it evolves, right? Some product lines will evolve faster than the other.
The segment that's seeing the fastest growth in unconsolidated sales is in our Power & Vision group, right? Due to the LG joint venture and the HASCO joint venture in particular.
Okay. You know, you mentioned engineering spending is growing to $900 million. Yeah, Magna's engineering spending is growing to $900 million in 2022. What was that spending in 2021, and what are you assuming for 2024?
We're talking about average annual numbers over the plan period. If you look at just the average annual numbers, I would say it's about a $300 million increase as an average from the last plan period to now.
Right. That's gross spend. That's before recovery from our customers. Yeah.
Basically you're saying that it would be up to $1.2 billion by 2024 versus the $900 million in 2022? I just wanna make sure I understand.
No, no. We were just saying that we were expecting about 600 on average overall in our last outlook over the three-year period, and now it's up. There's an uptick to about 900 on average over that period.
Okay, understood. Thank you.
On the growth side, growth spend.
Thank you. We'll get to our next question on the line. It's from the line of Brian Johnson with Barclays. Go right ahead.
Thank you. A lot of my questions have been drained already, so I wanna ask kind of a bigger picture one. You know, one of your large competitors that is considered a role model of the industry, Aptiv, recently made a large and frankly expensive software acquisition. Maybe this is a chance for Vince to talk a bit. You know, how are you thinking about the role of software overall at Magna and potentially the need for acquisitions, which of course have been very common in multi-industry space, to help you get there?
Yeah. I think, Brian, good morning. Software is such a wide topic, and it is put under a broad umbrella. If you look at the software capabilities and application, it's different in different product areas. For sure, what you said is true, that software will define a large part of the vehicle going forward. Given that overall statement, we continue to look at what software and what role does it play, whether it's ADAS or whether it's mechatronics, whether it's powertrain and so on. We continue to look at each of the specific areas of what the application software capabilities are, and therefore, you know, the investments, whether organic or inorganic, to complement that. At a base level, there are some of the electrical architecture, like we did with Fisker, or with our Steyr business.
We continue to look at the holistic view of what the vehicle is going to be, and we continue to add to that capability, right? I think one of the unique things in Magna, which I think should be considered a role model, is how we can actually integrate, and think holistically of a whole vehicle and what each system means, right? That's how we look at it.
Does that mean you'd wanna be active across the software stack, or are you thinking about specific domains or applications where you really wanna focus your software expertise?
We believe that we have to have a system viewpoint, given our engineering, full vehicle engineering and full vehicle manufacturing, and given the domains that we have, we look at domain specificity also, right? Given our portfolio, we continue to look at all of them. You know, how the stack develops and what OEMs will take on versus what the suppliers will take on is evolving, and we continue to track that.
Okay, thanks.
Tommy, one more question.
Certainly. We'll proceed with our final question from the line of Michael Glen from Raymond James. Go right ahead.
Well, thanks for getting me in. You made the comment on the 2022 guidance regarding the 1H, 2H dynamic. Can you just provide a little bit more clarity on, like how different will the two periods be as we're modeling this out?
Well, I mean, Pat's just having a look at the overall numbers. We don't provide quarterly guidance, but definitely the impact that the chips is gonna have is gonna skew what you'd normally see as a stronger first half versus the second half.
Okay. 'Cause coming at like Q4 at the end of the day, you came in at $1.30 in EPS, and that was kinda well ahead of what consensus was forecasting. Are you expecting something different in Q1 versus what you saw in Q4? Does it get a little? Is there a little more pressure in Q1 that starts to take place?
We're not gonna get into the details of the earnings or the margins in Q4 versus Q1. We don't provide that outlook. Like I said, the direction was more related to the volumes.
Mm-hmm.
Volumes in the first half versus the second half. We can't get into the details of what we expect in the first quarter or the first half on margins.
Okay. Given where the free cash flow outlook is, some thoughts on how you would proceed with the buyback in 2022.
Mike, we do have an open NCIB where we're able to buy up to 10% of our shares at any point in time. You know, we have been active in the market. In the quarter just passed, we did purchase $250 million. You know, I think it's gonna be consistent with our liquidity or our financial strategy, which is our number one priority is to grow the business organically and inorganically. If opportunities are not there, we're gonna continue with the share buyback. When I think about the share buyback, what's nice about the buyback is we can turn it off.
If we do have an opportunity that comes up that is significant, we can turn it off, and we have turned it off in the past, when we have looked at acquisitions, and I think we're not gonna change that strategy going forward.
Yeah, Michael, it's Vince. Just to add to that, I mean, I've been part of this capital strategy kind of, and how we evolved it over the years. It's been pretty consistent, kinda, you know, we look at a leverage ratio, we look at the macroeconomic environment, we look at the opportunities that we see, and we gotta make sure we have enough liquidity. And to the extent that there's excess liquidity, you know, we've demonstrated over time that when we turn that to shareholders by way of buybacks. But as Pat talked about, nice thing about the buyback is you got flexibility turned on and off depending on the situation. And you know, our strategy in that area hasn't changed.
Great. Thanks for taking the questions.
Thank you. Mr. Kotagiri, there are no further questions. I'll turn it back to you.
Thank you. Thanks everyone for listening in. I know we have had two straight years with a difficult production environment and industry challenges still continue to persist. However, we remain confident in the strength of our business model and our ability to grow and generate earnings and free cash flow to create significant long-term value for shareholders. We stay focused on executing our go-forward strategy and look forward to seeing many or all of you in Detroit at our investor event in May. Stay safe, stay healthy, and enjoy the rest of your day.
Thank you very much, and thank you everyone. That does conclude the call for today. We thank you for your participation as we disconnect your lines. Have a good day, everyone.