Greetings, and welcome to the second quarter 2022 results for Magna International. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Friday, July 29th, 2022. I would now like to turn the conference over to Louis Tonelli, VP Investor Relations . Please go ahead.
Thanks, Silvana. Hello, everyone, and welcome to our conference call covering our Q2 2022 results. Joining me today are Swamy Kotagiri, Vince Galifi, and Pat McCann. Yesterday, our board of directors met and approved our financial results for Q2 2022. We issued a press release this morning outlining our results. You'll find the press release, today's conference call webcast, the slide presentation to go along with the call, and our updated financial review all in the investor relations section of our website at magna.com. Before we get started, just as a reminder, the discussion today may contain forward-looking information or forward-looking statements within the meaning of applicable securities legislation. Such statements involve certain risks, assumptions, and uncertainties which may cause the company's actual or future results and performance to be materially different from those expressed or implied in these statements.
Please refer to today's press release for a complete description of our safe harbor disclaimer. Please also refer to the reminder slide included in today's deck related to our commentary today. With that, I'll pass it over to Swamy.
Thank you, Louis. Good morning, everyone. Happy to be here to provide a general update on Magna as well as our Q2 results. Key takeaways from today's call, continuing challenges have impacted our Q2 earnings. However, results were in line with our internal expectations. Once again, we generated organic sales outgrowth of rated light vehicle production in the quarter, a trend we expect to continue in the second half of the year. We modestly increased our outlook for 2022 sales despite the recent strengthening of the U.S. dollar, and we continue to make progress in our go-forward strategy which will drive our business for years to come. I will briefly cover the current dynamics impacting the industry. We continue to experience supply constraints, including semiconductors. The China COVID lockdowns in the quarter created further supply chain bottlenecks that are still being felt in the industry.
We do expect constraints to continue at least throughout 2022, but expect improvement in the second half of the year relative to the first. Input costs remain at elevated levels. We remain highly focused on obtaining cost recoveries, have had some success, and we continue to have discussions with customers at various stages at various levels. The stronger U.S. dollar relative to other currencies in which we operate, particularly the euro, is negatively impacting our reported results, and there is some risk going forward that high inflation and rising rates will impact auto consumers. In terms of tailwinds, dealer vehicle inventories remain low and underlying auto demand is relatively strong and constrained by the tight supply. These factors support improving production levels in the second half of 2022, particularly as semiconductor availability improves and the Chinese government recently announced economic stimulus that should help drive auto demand.
Our second quarter earnings were in line with our expectations. Relative to the second quarter of 2021, consolidated sales were $9.4 billion, up 4% compared to a 2% increase in global light vehicle production. On an organic basis, sales were up 12%, representing 4% growth over market. In fact, our organic sales grew faster than production in each of North America, Europe, Asia, and South America. EBIT margin declined 240 basis points to 3.8%, substantially as a result of higher net input costs. We also had operating inefficiencies at a Vecsés facility in Europe. The inefficiencies negatively impacted the second quarter by about 25 basis points. Our adjusted EPS fell to $0.83 for the quarter.
On a U.S. GAAP reported basis, EPS declined to a loss of $0.54, reflecting a non-cash impairment charge on our investment in Russia that amounted to $0.24. Free cash flow was $52 million in Q2, down year-o ver- year, but up $151 million sequentially from the first quarter of 2022. During the quarter, we repurchased 3.5 million shares using $212 million in cash and paid out another $130 million to shareholders in the form of dividends. While we are keeping our focus squarely on the short-term challenges we are facing, we continue to invest and prepare for the future.
Back in May, we held an investor day in Pontiac, Michigan, where many of you had the opportunity to experience firsthand some of our leading-edge technologies. At that event, we also provided an update on our progress with our go-forward strategy, which focuses on accelerating deployment of capital towards high growth areas, driving operational excellence, and unlocking new business models and markets. We rolled this strategy out a year ago, and I'm pleased to report that we are executing on that strategy, and in many areas, performing even beyond our previous expectations. We highlighted that as we accelerate deployment of capital towards high growth areas, we are on track to meaningfully shift our portfolio in these areas as our business continues to grow from 18% to 24% of our business by 2027 based on our plans.
We also highlighted how we continue to drive operational excellence through digitization and factory of the future tools. We believe these actions will ultimately allow us to continue to win business, manage ongoing price pressures, cost inflation, and contribute to margin expansion. Lastly, as we examine the broader market for mobility, we see an expanding ecosystem for us to go beyond the traditional supply and manufacture of vehicles, and we see a lot of opportunity to participate in this growing market. The current operating environment is challenging. However, we are managing through it, and I'm excited about what the future holds for Magna and our shareholders. With that, I'll hand it over to Pat to take you through the financials.
Thanks, Swamy, and good morning, everyone. First, I'll start with a detailed review of the quarter. Global vehicle production increased 2% in the quarter, driven by North America, which was up 14%, partially offset by China and Europe, down 5% and 1%, respectively. Our consolidated sales were $9.4 billion, up 4% from the second quarter of 2021. The increase was primarily due to higher North American vehicle production, higher assembly volumes, the launch of new programs, and price increases to recover certain higher input costs. These were partially offset by the negative impact of foreign currency translation, lower sales in Russia, net divestitures, and customer price concessions. On an organic basis, our sales increased 12% year-over-year, representing a 4% growth over market in the second quarter.
Adjusted EBIT was $358 million, and adjusted EBIT margin declined 240 basis points to 3.8%, which compares to 6.2% in Q2 2021. The lower EBIT percent in the quarter was substantially due to higher net input costs. Other items that negatively impacted margin were operating inefficiencies and other costs at a facility in Europe, reduced earnings on lower sales in Russia, a favorable value-added tax settlement in Brazil in Q2 of last year, lower tooling contribution, and lower equity income. These items were partially offset by higher favorable commercial settlements, lower net warranty costs, and divestitures of loss-making entities. Equity income was down $19 million year-over-year to $25 million in the quarter. The decline reflects reduced earnings on lower sales and higher net input costs at certain equity accounted entities and electrification spending in our LG JV.
Our adjusted effective income tax rate came in at 24.9%, in line with our Q2 expectations, but higher than Q2 of last year. Net income attributable to Magna was $243 million, compared to $426 million in Q2 2021, reflecting lower EBIT, higher interest expense, and a higher tax rate. Diluted EPS was $0.83 compared to $1.40 last year. The decrease is the result of lower net income, partially offset by a lower number of shares outstanding. The lower number of shares outstanding primarily reflects the impact of the purchase and cancellation of shares during and subsequent to Q2 of 2021. I will now review our cash flows and investment activities.
During the second quarter of 2022, we generated $560 million in cash from operations before changes in working capital and invested $139 million in working capital. Investment activities in the quarter included $329 million for fixed assets, an $80 million increase in investments, other assets, and intangibles, and $2 million in public and private equity securities. Overall, free cash flow was $52 million in Q2. We also repurchased $212 million of our common shares and paid $130 million in dividends. At the end of the second quarter, our adjusted debt to adjusted EBITDA was 1.48, and our liquidity remains strong at $5.2 billion, including almost $1.7 billion in cash. Next, I will cover our outlook.
We have held our production estimates in line with our previous outlook, and we assume exchange rates in our outlook will approximate recent rates. Given recent currency moves, we now expect a weaker euro, Canadian dollar, and renminbi for 2022 relative to our previous outlook. We have increased our expected ranges for BES, Power and Vision, Seating, and consolidated sales, largely reflecting improved program mix, partially offset by the strengthening of the U.S. dollar, in particular relative to the euro. Our Complete Vehicles segment has also improved mix programs. However, this benefit is more than offset by our assumption of a weaker-than-expected euro, leading to a slight reduction in the sales range. Interest expense has been reduced to approximately $80 million from approximately $90 million previously, primarily reflecting higher interest rates.
Our expectations for the adjusted EBIT margin, equity income, tax rate, net income attributable to Magna and capital spending are all unchanged from our last outlook. We have maintained our free cash flow projections in the range of $700 million-$900 million. In summary, our second quarter was in line with our expectations, and we anticipate stronger results in the second half of the year relative to the first half. Our sales outgrew weighted production for the quarter, and this is expected to continue. This is driving the increase in our outlook. We continue to focus on operational excellence, managing our costs, and obtaining customer recoveries to help address the current challenges and our future. We are making progress in our go-forward strategy. Thanks for your attention this morning. We would be happy to answer your questions.
Thank you. If you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. One moment, please, for the first question. Our first question comes from John Murphy with Bank of America Securities. Please proceed with your question.
Good morning, guys. Can you hear me okay?
Yes, John.
We can hear you, John.
I guess the first question is, you know, the second quarter came in a fair amount weaker than we were expecting, but you maintained the full year. I'm just curious if you look at this as a reasonably meaningful acceleration in the second half versus the first half if you go on EBIT. What are kind of the key drivers there? Is it a function of, you know, volumes coming through or there being more stability in schedules and launches easing? What are the key drivers there?
Hi, John. Morning. I think you've covered most of the key drivers. It really is driven by volumes. We are seeing, when you neutralize for the amount of FX, given the euro's decline, we are seeing improved. I would say actual production activity that's being offset by the foreign exchange. We have positive volumes. We also have positive mix. To your point earlier as well, we are seeing improvements in the cadence of our recoveries. Finally, we are seeing some stability coming into the production schedules. I think all those factors are driving that cadence. I think as well, John, I know your expectations for Q2 are at one level.
I have to reiterate that our expectations were in line, so we executed against our expectations in Q2.
Okay. All right. That's helpful. And then just a second question. I mean, traditionally, when times get tough, you guys win a decent amount of takeover business, and it's, you know, depending on where you sit in the value chain, it's, you know, kind of a tough time, particularly for some smaller suppliers. I'm just curious if any takeover business that you see either now that may be coming available for you or especially as volumes rebound and some of these other suppliers can't handle the ramp back up. I mean, are you seeing any of that now or expect to see that sometime in the coming quarters?
Good morning, John. I would say we are keeping our eyes wide open right now, and there is discussions to an extent, I would say, looking at, you know, takeover business and so on. I think as the current economic conditions continue or, you know, hopefully they end soon, but as they continue for the next short period of time, I think there could be such opportunities. Whether it's customer interaction and learning from them and looking to help out there or just, you know, opportunities that come to us, we are, you know, being very attentive, let's say.
Swamy, maybe just the last one. I mean, when you look at what Ford is doing in a reordering and resegmentation of its not just its accounting, but its internal ops around EVs and ICE, I mean, what does that mean for you? I mean, they're obviously a large customer. Do you see other large customers doing anything like that that may either be good or bad for your business?
John, I think it's a fluid condition, but we are having a lot of conversations, whether it's with Ford or other customers who are looking at reprioritizing or looking at optimizing the best way to, I guess, address both segments, right? Which is ICE as well as the you know, fast accelerating EV market.
If you just look overall from an organizational perspective, you know, how the purchasing functions work, how the development work is done, I think we'll have an impact on our conversations with them. As you know, as with most of our customers, we have holistic strategy roadmap discussions, so we are at the table, given the various products that we are in. I think overall it's gonna be helpful for us, and we have said that in the Investor Day and in many other occasions. As we talk about system integration and bringing things together, and providing overall optimized cost at a system level rather than each of the products, I think Magna has a benefit.
You know, as you talk about electrification, what happens to the underbody, and therefore its impact on the seat are a good example. We talked about DMS, where how inside mirrors can work with camera and ADAS, and we are talking about connected powertrains in the future. If you look across Magna, I think bringing things together, I believe will give us an advantage, as we have these conversations.
Okay. Thank you very much, guys. Appreciate it.
Thanks, John.
Our next question comes from Itay Michaeli with Citigroup. Please proceed with your question.
Great. Thanks. Good morning, everyone. Just first wanted to hone in on two items in the quarter. First, I was hoping you could quantify the operating inefficiencies at the facility in Europe. Second, maybe talk a bit more about the Seating margin, obviously respecting that to get back to maybe mid-4% in the second half. Just hoping you can kinda talk about the quarter and the bridge there for second half of the year.
I think, Pat, you can talk a little bit about the Seating margins, but the Vecsés facility, I think, from a program change perspective, a complex product led to inefficiencies in terms of scrap, and therefore started to impact, I would say, the capacity allocation and meeting all the customer expectations in terms of production. There's team in place. There's a very clear understanding of the issue, very good plan. As you can imagine, if you look at any situation like this, it takes a little bit of time to get to full stability of the production. That's really the impact.
We are not getting into the specifics, but, Itay, as you heard Pat talk about, I think it was about a 25 basis points impact on the Q2, and I would say about a 20 basis points, for the second half of 2022.
Good morning, Itay. As far as the seating, when you look at the margins going forward, I think I would frame them more as that margins are stabilizing and returning to expectations. Our seating business was disproportionately hit, I would say, in H1, and in particular in Q2, with the nature of the business. With the stop-start nature of what we've been seeing in the first half of the year and some of the negative mix where we have some higher vertical integration. I think what we're seeing is we were disproportionately hit in Q2 and in H1, and as we move into H2, we're seeing that stabilize and returning to previous levels.
We have some normal launch costs in the first half that subside in the back half as well.
That's very helpful. Just two other quick follow-ups. First, to what extent is sort of the second half margin rate a good baseline to think about for 2023? I know there's a lot of noise with customer recoveries, but hoping you can maybe give us some help there. Then maybe for Swamy, hoping you can maybe update us on just overall booking and quoting activity, kind of what you're seeing in new business in the second quarter.
Yeah. We're not gonna get specifically into our 2023 margins. It's the cadence we go through, and it's not a new situation, but we're gonna start our business planning process. If you start doing the cadence of our earnings from H1 into H2, you do see an improvement in our earnings. Our exit margins should be more reflective going forward. I think we were disproportionately hit in H1 on some of the commodities, and we're seeing improvements as we go forward.
Yeah. I think the second part of the question that you asked in terms of bookings. You know, we kind of look at the overall year plan, and there is, I would call it, lumpiness sometimes on the decision-making process, Itay. But if you sit and look at today where we are, I would say we are pretty much in line with the plan and doing well and feel comfortable that, you know, we'll track to the plan, if not better. I would say sitting where we are right now.
Great. That's all very helpful. Thank you.
Our next question comes from Peter Sklar with BMO Capital Markets. Please proceed.
Good morning. Pat, question for you. In the last two quarters, you've given us an update on the magnitude of the, you know, unrecoverable incremental costs. I believe your last update was $565 million on an annual basis. Now there seems to be some puts and takes listening to the discussion this morning. It sounds like you have had some successful, you know, commercial settlements with your customers. It sounds like commodity costs are easing somewhat. I'm just wondering if you can give us an update on that number.
Yeah. The number hasn't really moved, Peter. I think to your point, there has been some puts and takes between the gross, the net, but we're holding firm at the $565 million. If you remember, we started the year at $275 million. We saw some acceleration in April, primarily driven by Russia's invasion of Ukraine driving a lot of energy costs throughout the European continent. When you put it all together where we stand today, as you said, there's some puts and takes, but we're holding at the $565 million. I think some of that stability is coming in.
Okay. My next question is, I believe it was just over $400 million of impairment charges you took during the quarter. Is the lion's share of that the impairment of the Russian assets?
Exactly, Peter. When you break down the other expense, there's, like you said, just over $425 million roughly. Of that $425 million, $50 million of it relates to mark-to-market on warrants and other, you know, private and public entity securities. The bulk of it does relate to the Russian impairment, which was $376 million. Effectively what we've done, Peter, is given the accounting rules and our ability to generate cash flows out of that market, we've impaired it. We fully impaired the assets other than the cash balances, which we're not able to do under accounting standards.
Okay. Pat, when you say fully impaired, you mean it's impaired to zero, so we won't see that in future quarters?
Exactly.
Okay.
Other than the cash.
Then my last question. Yeah, thanks. Then my last question for the management team. I'm just wondering if you could give some flavor around the performance of the, you know, of the Power & Vision. There was no revenue growth. You know, your margins deteriorated year- over- year, I think from about, you know, down to 3%-ish. You know, I thought you might have had some growth there and improvement as, you know, your ADAS programs come on. I wonder if you could just talk a little bit about what's unfolding in that segment.
I can start, and I think Swamy can jump in as well. You know, when you break the numbers down, Peter, and you think about what's happening in the industry, we talk a lot about a higher input costs, whether it's inflation and whatnot. This group is disproportionately hit in that space because they are exposed much more to the chip space. They have also the other issue or fact is that they have more of a European footprint. When you think about what's driving our $565 million, it relative to the size of this group, there's a higher amount of those costs in this area. When you look year-over-year, we're down 380 basis points. Substantially all of that decrease is inflation type items.
Okay. There's no revenue growth. I thought some of your ADAS programs would be ramping by this time.
Yeah. I think the ADAS programs ramp is, you know, a slow ramp as we start going into the launch, of the programs you might be talking, Peter. Generally, overall from the perspective of ADAS or powertrain, operationally as well as we call it, the general health and the booking traction, we feel good in terms of the plan that we talked about, in the investor day or in the previous quarters.
We're gonna see some of that growth is gonna come through unconsolidated sales.
Yeah.
You won't see in our consolidated results, but it's still coming through.
Meaning it's in the equity line.
Exactly.
Correct.
Yeah. Okay, thank you for your comments.
Perfect. Thanks, Peter.
Thanks, Peter.
Our next question comes from Chris McNally with Evercore. Please proceed.
Thanks so much, team. I was wondering if we could follow up on the $565 million headwind inflation for the year. Is it possible to broadly bucket, you know, in broad percentage terms, you know, how much are hard to recover, you know, hard to quantify, probably it's gonna take, you know, more like 12 months-18 months versus things that are more direct raw material related, just not covered by pass-throughs. Because I just imagine things like utility and transport, it's gonna take longer because we're in sort of new territory. Any sort of way to bucket so we can just have an idea how those recoveries would work would be super helpful.
Good morning, Chris. I wish I could give you the granularity, but you're kinda looking at our assumptions, and if you look at the estimate last quarter year-over-year, I would say that net input costs for 2022 was the number you mentioned, $465 million, obviously, right? Some amounts have changed, and as I mentioned, our discussions with the customers are ongoing. We've had some success, and we are not even looking at just 2022, right? We gotta look at some of the costs incurred in the past. We're gonna look at how to carry forward these discussions into possible continuing effects in 2023 and beyond. It's kind of a complex equation trying to figure how best to address this.
Obviously the big topics I would say are the commodities, the semiconductors and other materials. There is energy. Given the production conditions, you know, not being very stable, I would say, right? Our primary goal is now how to keep supporting our customers. There is premium wages and freight and other and so on. It's kinda really difficult to put a pin on each one of them and categorize this, Chris, but we very much focused on not just looking at the $465 million and, you know, it's a continuing conversation going forward. $565 million, sorry, not $465 million, with various customers.
No, that's very helpful, Swamy. Again, you know, it's more of a question of the high level for the, you know, how Magna is thinking about, you know, going back to the OEMs for these conversations. Kind of I guess the other way we could think about it is in February, you know, you gave a guide for 2024, obviously volume dependent, 8.1%-8.6% margin. Over the next couple of months, you incur, you know, another $200 million in sort of extraordinary costs due to the war.
The question is, do you think if we got back to that volume level we have over the next two years the ability to make up that $200 million so that broadly speaking, and obviously you're gonna give an updated guide, that you remain on target for 2024 volume dependent?
Pat, you can jump in, but I think we talked about, Chris, that's exactly what we kicked off as a normal annual business planning process right now, and we go kind of bottom up, right? If you look at the last three years, three months, the volumes have changed a few times, right? There's a certain uncertainty still. We look at the volumes, but broadly speaking, right, you gotta consider the current economic conditions, and the recovery discussions that we're having, some of it in. You know, it comes in various forms, right? Whether it's give backs or productivity improvements in businesses and so on and so forth. I think the intent would be to take all of that as a best guess.
I shouldn't say best guess, the best effort to put things together, and that's what will help us come to the guidance when we come to February of 2023. We have to take all of this, inflation and, you know, what do we end up at the end of the year with our conversations or discussions with customers. All of this will play a role. I don't know, Pat, if you wanna add something.
Yeah. The only thing I would add, Chris, it's not a linear calculation, right? It's not you just carry these numbers forward. Part of the discussions we have with our customers is not just looking at 2022 and asking for a check to recover. What we're looking at is multiple factors. You're looking at PO changes, which will continue. The other factor we look at is do we have an ability to pass that cost through to the customer via customer programs, so we're de-risking our BOMs. Some of that de-risking strategy, you're pushing it through, and you're effectively pushing your cost up to the customer and it allows us to focus on what we're good at, which is manufacturing. We look at de-risking strategies, whether it's on energy, materials.
Just to clarify on your first. When we started this conversation, when you think about the pass-through cost, we have significant costs or commodity costs that are on pass-through programs that are already where the costs flow directly to the customer. When you look at changes on the price of steel, if we're on a customer resale, we're not exposed in that area. Apologize for the long answer, but that's it. It's a very complicated in flux situation.
No, appreciate it, and know it's a tough question. Thanks, Pat. Thanks, Swamy.
Thank you.
Thank you.
Our next question comes from Mark Delaney with Goldman Sachs. Please proceed.
Yes, good morning, and thank you very much for taking the questions. First one is to better understand the full year top line outlook. You've left your global production assumptions unchanged, but you did tick up the full year revenue guidance, even though I think there's some FX headwinds there. So maybe if you talk a little bit more on what's leading to the slightly higher revenue view despite the unchanged production outlook.
Morning, Mark. I think when we break down our volume mix, part of the win actually is happening in Q2. We outperformed in Q2. I think when you get a chance to go see the MD&A. We're seeing a couple things that's driving that. We have, you know. You think about we have positive mix. When you look at some of the mix on the volume side of it, we're seeing positive mix in Q2, but also continuing out to the balance of the year, and that's really just program volumes. The second area where we have some positivity relates to content on the programs and mix within the various programs. Finally, what we're also seeing is we're talking about a lot of these recoveries.
Some of them do come in the form of a PO adjustment, whether it's a pass-through, like, a resale program or some of the recoveries we're receiving from our customers. That's all those factors are driving an increase in net content per vehicle, I would say. To your other point, you're right. We do have an impact the other way on foreign exchange, and that's primarily driven by the euro's decline significantly in the last three months.
I think the mix is more impacting us in the back half of the year than we saw in Q2. Little bit positive in Q2, but more in the back half.
Got it. That's helpful. My second question is on Europe and, you know, hoping you can share more details about what Magna is seeing in Europe related to potential gas and energy shortages. Maybe you can speak to what Magna and perhaps the industry more broadly are doing to potentially mitigate impacts. You know, to the extent natural gas flows do sustain at very low levels, do you have any early assessments about how much production could be impacted in Europe? Thanks.
Yeah. Good morning, Mark. I think it will be very difficult in these conditions to have an assumption of what the production impact could be, given the fluidity of the situation there. You know, whether it was COVID or whether it was, you know, chip shutdowns, we are reacting to a very volatile situation, right? Whether it was the sustainability efforts that we had taken up and looking at optimizing energy, how do we plan. All of these things come into play, and hopefully help us in thinking through the energy part of it. To the extent possible, we have the contracts in place, but, you know, given the current state, you know, we have to see what it might be.
I think the energy crisis that we're talking about in Europe has a much larger impact beyond even automotive in Europe. I think the secondary effects could be far-reaching. Other than looking at the DNA of resilience and being agile and working with the customers, I don't know if there's a whole lot that could be done from an energy perspective.
Understood. Thank you.
Our next question comes from Joseph Spak with RBC. Please proceed.
Hi. Thanks. Good morning, everyone. Sorry, just to sort of go back to some of the change in guidance, I understand you think, you know, mix in CV and some of the recoveries are better on the top line. But then you sort of still kept this $565 million of headwinds, which I think was a net number, right? I guess the implication would be that, you know, maybe you also raised your gross commodities and, you know, we are starting to see some falling there. Can you just help me understand exactly? I understand there's a little bit of a, maybe a give and take between sort of how you assumed some of those, some of the netting of the gross headwind was going to occur.
I'm still having a little bit of trouble or difficulty sort of squaring some of your comments.
Yeah, I think you're right, Joe. I mean, you know, we talked about puts and takes in the net number. There's some things went up, some of those input costs went up, whether it be commodity or otherwise, but some of our recovery expectations went up as well. The net number did not change. I wouldn't say that's a huge number, but there's a little bit of incremental recoveries that's built into our plan. The bigger element, I think, is the program mix.
Okay. Do you think you can get to a better, you know, and probably not all the way neutral, but to a better price cost equation by the end of the year?
Yeah. Joe, good morning. I think we continue, like I said, our discussions with the customers, right? You know, when we talk about the $565 million, say, it's a planned number, obviously. It's not the end all, right? We continue to push in all directions. As Louis said, if you look at some of the recoveries that were already built in, you know, before we talked about the net $565 million number, and as they come to start to flow through the, you know, the sales line, the cost of sales line, they remain kind of margin neutral. Like I said, again, we are not just looking at 2022. We are looking at, you know, recoveries in general and holistically, what could it mean to us as a business in the long term.
As we are looking at new quotes, you know, we look at new economics. As part of these conversations, it's a multivariable equation, I should say, that we are having conversations right now. You know, all I can say is we'll be focused not tied to the $465 million number, but, you know, overall, how much more can we optimize and how do we optimize, right?
Okay. Thanks for that. Maybe just to go back to Europe and energy, and I understand, like, quantifying sort of potential impact to your customers is pretty much impossible at this point. Like, specifically with your Steyr business there, you know, how does it work contractually with your customers that you're making cars for if you have some higher, you know, energy costs there? Where does that get absorbed?
Good morning, Joe. To be honest with you, it really varies depending on the contract that we have. When you think about our Steyr business, it has some significant productions under a couple of contracts, and it really varies depending on which customer and which contract we're working on. I think the vast majority of our contracts in Europe, outside of Steyr would be primarily it's the economics are our responsibility, and that's fully reflected in the $565 million and the recoveries that we're targeting and the recoveries that we have achieved already.
Thank you.
Thanks, Joe.
Our next question comes from Colin Langan with Wells Fargo. Please proceed.
Oh, great. Thanks for taking my questions. Just wanted to follow up on the $565 million and input cost. Can you just remind us of the cadence through the years? How much was it again in Q1, and how much was it actually this quarter?
Morning, Colin. It's Pat here. I can jump in as far as the cadence and if you have a follow-on. When we look at the breakdown of the $565 million, what we had experienced in the first quarter was about in the range of about $200 million, just broad brush, and we experienced the same in the second quarter. When you think about the cadence going forward, we're not gonna provide a split by quarter, but you know, that's gonna leave you know, just under $200 million for the back half of the year on a year-over-year basis. H2 of 2022 versus H2 of 2021.
Got it. Okay. I think that sort of helps explain my second question. If I look at the midpoint of guidance, it looks like sales are up just 2% first half to second half, but about a 30% EBIT. It has a pretty large contribution on that. The biggest delta is gonna be much lower input cost headwinds. Is that really driving that high contribution on sales?
Recoveries. Recoveries against those costs.
Recoveries on those input costs. Okay, got it. Okay. Why the 2%? Well, you know, I guess year-over-year and first half, second half gets a little wonky, but you know, why just 2% growth considering I think IHS is up 9% for first half, second half? Is that just really FX starting to dip into sales?
Yeah, I think that's the biggest driver of it. You know, the euro did decline significantly from our previous estimate. What you're seeing is, as I said earlier, you have an increase in production activity in local currencies, and it's being deteriorated or reduced that benefit because of foreign exchange translation.
Yeah, I don't think when we looked at it, we were that far off, IHS and in the region. It's, you know, we're pretty much in line. It's more just currency impact.
Got it. All right, thanks for taking my questions.
Perfect. Thanks, Colin.
Our next question comes from James Picariello with BNP Paribas. Please proceed with your question.
Hey, good morning, guys. Just on electrification and the LG powertrain and HASCO JVs, can you just talk about Magna's, you know, progress in general, the major programs you have in the pipeline and just how things are, you know, progressing relative to the multiyear sales ramp you have targeted over the next few years? I believe the LG JV broke ground on a facility in Mexico back in April. Just, you know, just wondering what the update is there on timing.
Hi, good morning. I guess the short answer would be it's progressing well, but I'll give some color. I think if you go back and look at it, we looked at the 2019 as a basis for our LG Magna joint venture and kind of talked about a 50% CAGR over the three-year period at that time. I would say we are progressing well. You know, as we continue to gain traction and put plans into implementation, the result was breaking ground in Mexico for the facility there. If you refer to our investment investor deck slides and so on in our past commentary, we kind of talked roughly about $4 billion in electrification sales looking forward.
We came back in our Investor Day and said we upped it to $4.5 billion now, because we continue to execute on our plans and see further traction, right? You talked a little bit about our HASCO JV and, you know, our wholly owned business. I think, I would say we continue to launch the programs that we have talked about in the past, and we also continue to gain traction in looking at new business from our customers. All in all, I would say according to the plan that we communicated, we are in line or, you know, beating the discussions we have had a year ago.
Got it. That's great. I know you touched on this aspect, but can you share your thoughts on just, you know, what the contingency plans might be for the energy rationing possibilities in Europe? Just, yeah, how Magna's positioned from that standpoint.
I wish we could have a say in the policy implementation of energy rationing, but I would say it is a lot of discussions with our customers because, you know, not having one part is not gonna get the car made. I think there is a cohesive effort, I would say, from the customer and the entire supply base to see how we can keep the pipeline full, and no pun intended when I say pipeline. Other than that, I mean, honestly, there is no clear answer to this, right? We're all looking to see how we can stay resilient and function through, you know, all of it. It's just not a company solution. I think it's got to be an industry-wide solution for this one.
Yeah. Thank you.
Our next question is from Rod Lache with Wolfe Research. Please proceed.
Good morning, everybody. Just, first of all, just one clarification. On the quarter, the $200 million year-over-year decline in EBIT, I see material up by 300 basis points as a percentage of sales, and you commented on the $200 million impact of non-recovered costs as basically the reason for the decline. I'm not sure I'm seeing any contribution on the $800 million or so of organic sales growth. Just to clarify, is that largely because that growth was actually reimbursement for the gross impact of the costs that you're incurring?
Good morning, Rod. It's Pat. I think there's quite a few puts and takes, but to quickly answer your question, we do see pull-through on our sales. There is about, like as you mentioned, you gotta back out the FX. If we start at the top, we have
Yeah.
Some headwind on FX, right? That's $600 million plus on sales. When you back that out, and you know how translation works, there's not much pull through on that number. You basically pull in throughout the average FX margin rate by the regions. You back off the FX, and we do have positive sales activity again, I would say. It's higher than the $800 million, and it does have positive pull through, more in the range where we've experienced in the past. The other thing to consider is our operations in Russia on a year-over-year basis. We guided previously that we have about in the range of $400 million of sales in the Russian market. If you just take that by quarter, you're talking roughly another $100 million.
The pull through on that would not be at our standard pull-through because we've effectively idled all those operations, so your decrementals there are pretty significant. We talked about the 25 basis point impact on our operations in Germany. That's continuing. As I said, Swamy mentioned earlier, we expect that to continue to go forward in range about 20 basis points. Then you have some other puts and takes when you put it all together, very long answer, Rod, and I apologize, but we are seeing pull through on our incremental sales to answer your very specific question.
You know, to your point.
Okay
Since we're doing those index contracts and we're getting a price adjustment, it's really, it's margin neutral, right? We're adding up higher cost of sales, higher sales, it's margin neutral, and that drags the margin down a little bit. That's certainly impacted-
Okay.
us last quarter and this quarter.
What's the gross impact or when you're talking about $200 million of non-reimbursed expense, there was a reimbursement component. Can you just maybe give us a sense of how large that is? Like how much-
Sure.
of your growth over market is coming from the reimbursement of higher costs?
The growth over market year to date, the majority of that is just pure content growth, but there is a portion that's related to recovery, whether it be index contracts or other recoveries. In the quarter, we had, let's say, a higher proportion of it was related to recoveries, but we had just pure organic growth related to, you know, mix and content growth, et cetera, also in the numbers. We're not disclosing the gross numbers. We've only been talking about the net numbers on the net input costs.
Okay. Just two other things. Ford, on their earnings call, mentioned that they have 550 suppliers at risk in Europe, in the event of rationing, and that they're building a 30-day buffer stock. Are you hearing anything along those lines with regard to building up additional inventory from your customers? Lastly, Swamy, on your prepared remarks, you talked a little bit about going beyond the supplier and manufacturer of vehicles. Could you just elaborate what you were referring to?
Yeah, absolutely, Rod. I think. Good morning. When we talk about the energy rationing, you know, I talked about it, we are seeing various initiatives, I should say, across OEMs and to see how we can, as much as possible, as you can, right, given the condition there to figure how to protect production, whether it's inventories or buildups and so on. I wouldn't say there is one thing that we are seeing across the board. There is a mix of everything, but definitely that is very much in focus.
The second point, when I talked about beyond, if you heard me talk about mobility ecosystem, how can we leverage Magna overall from a system perspective, you know, beyond, you know, our core business of parts and systems supply and contract vehicle manufacturing. You know, whether it is delivery logistics, looking at what Magna can bring in as platforms, whether it's last mile, whether it's micromobility, possibly, you know, from an automotive infrastructure related topics, whether it's charging stations and so on. It's in a preliminary evaluation, and we continue to have several discussions on that topic. But I would say it's pretty preliminary. That's what I meant by the comment in my prepared statement.
Okay. All right. Thank you.
Thanks, Rod.
Thanks, Rod.
Now our final question comes from Michael Glen with Raymond James. Please proceed with your question.
Hey, thanks for getting me in. Maybe just to start on M&A environment, in terms of what you're seeing, are you seeing an uptick in opportunities present themselves? Like is anything looking interesting to you at this point in time?
Good morning. I would say we continue to scan the M&A landscape more, I would say, in a very deliberate fashion, looking to see how, you know, from a strategy perspective, addressing whether it's a technology customer geographic footprint. That continues. You know, I think in the initial comments to your question, I said, you know, given the economic conditions, you know, there might be opportunities that might come along, and we are very attentive, I should say, and stay focused to see it. You know, we are in the industry, we are well-known, and they all come to the table. I don't think our approach to M&A changes because of it, but, you know, we'll have our ear to the ground a little bit more.
Just maybe one on Europe. Going across the segments with the Q1 results, I believe there was a comment indicating that body and exteriors, there was an impact to think about from rising energy prices. I think earlier in the call, you indicated Power & Vision as well. Are those the two primary segments where you would see pressure on the rising energy, or in which segment sees more pressure in that situation?
I don't know whether it's a segment question. I think it would be more the process-related question, right? Whether it's where you have energy-intensive processes, right? Whether it's stamping or, you know, machining or, molding and so on and so forth. I think it would cut across. Given the nature of the product and the mix of the processes, I would say the BS segment and, you know, powertrain would be high energy utilizing processes in place. Given that logic, I would say your assumption is correct.
Okay. Thanks for taking the questions.
Thanks, Michael.
Mr. Kotagiri, I'll turn the call back to you for closing remarks.
Thank you. Thanks, everyone, for listening in. As I said, the industry environment remains difficult, but we continue to demonstrate resilience while staying focused on our go-forward strategies, not just about today, but about the future. Hopefully you heard that in our message. Enjoy the rest of your day, and have a great weekend. Thank you.
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.