Ladies and gentlemen, thank you for standing by. My name is Krista and I'll be your conference operator today. At this time, I would like to welcome everyone to Magna International First Quarter 2026 Results Webcast and Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star then the number 1 on your telephone keypad. If you'd like to withdraw your question, again, press star 1. Thank you. I will now like to turn the conference over to Louis Tonelli, Vice President of Investor Relations. Louis, please go ahead.
Thanks, operator. Hello, everyone, and welcome to our conference call covering our Q1 2026 results. Joining me today are Swamy Kotagiri and Philip Fracassa. Yesterday, our board of directors met and approved our financial results for the first quarter of 2026 and an updated outlook. We issued a press release this morning outlining both of these. You'll find today's press release, the conference call webcast, the slide presentation to go along with the call, and our updated quarterly financial review, all in the investor relations section of our website at magna.com. Before we get started, just as a reminder, the discussion today may contain forward-looking information or forward-looking statements within the meaning of applicable securities legislation. Such statements involve certain risks, assumptions, and uncertainties which may cause the company's actual or future results and performance to be materially different from those expressed or implied in these statements.
Please refer to today's press release for a complete description of our safe harbor disclaimer. Please also refer to the reminder slide included in our presentation that relates to our commentary today. With that, I'll pass it over to Swamy.
Thank you, Louis. Good morning, everyone, thank you for joining us today. We appreciate your time and interest. Let's get started. Overall, I was very pleased with our strong Q1 2026 results, where we drove margin expansion with disciplined execution. In the quarter, sales were up 3% with weighted growth over market of 3%. Adjusted EBIT was up 58%, with adjusted EBIT margin expanding 190 basis points to 5.4%. Adjusted EPS rose 77% to $1.38. We continue to demonstrate traction from our operational excellence initiatives across the company. Our robust cash flow reflects improved operating performance. We generated $677 million in operating cash flow and $372 million in free cash flow.
In addition to strong earnings growth, our team did a great job securing additional commercial recoveries related to previous EV investments. Moody's recently reaffirmed its A3 credit rating for Magna and improved the outlook to stable. We ended the quarter with a 1.5 times rating agency leverage ratio ahead of our expectations with $1.6 billion in cash on hand. Our 2026 outlook reinforces our confidence in our margin, EPS, and cash flow trajectory. We continue to expect weighted sales growth over market of about 1.5% at the midpoint. We are reaffirming our prior outlook ranges for adjusted EBIT margin, adjusted EPS, and free cash flow. While the situation in the Middle East introduces some uncertainty, we have a track record of navigating external disruptions, and we are confident in our ability to execute on what's within our control.
Importantly, we expect to mitigate most cost headwinds over time. We remain focused on executing our proven capital allocation framework. We continue to invest in our business to support further profitable organic growth while returning $575 million in capital, including $440 million in stock repurchases to shareholders in the quarter. At the end of March, we had about 17 million shares remaining and available for repurchase under our NCIB. We plan to repurchase the remaining shares during 2026. We recently announced the margin accretive dispositions of our lighting and rooftop systems businesses. The transactions are consistent with our long-standing principles around portfolio management. We have highlighted in the past that we manage our portfolio using an objective set of criteria and regularly assess our product lines based on their addressable markets, market positions, and returns.
Specifically, we wanna participate in meaningful or growing markets with stable or growing profit pools, strong or a clear path to strong market positions, profitable growth, and sustainable competitive advantage. This has long been a key principle that ensures that we manage Magna for long-term success. The dispositions allow us to streamline the portfolio and focus on businesses that advance our long-term growth margin and return objectives. The transactions are expected to close in the second half of the year. In our outlook, we have removed about $350 million of sales with minimal earnings and free cash flow impact. One example of our team's execution and innovation is the recent expansion of our hybrid driveline portfolio with the introduction of a dedicated hybrid drive for range-extended electric vehicles.
The new system offers several advantages, including reduced size, weight, and system cost, multiple operating modes, and applicability across a broad range of vehicle segments. It underscores our commitment to providing OEMs with adaptable driveline solutions that support a wide range of vehicle performance and market expectations. Our team continues to partner closely with our OEM customers to deliver solutions that support Magna's growth. With that in mind, I would like to highlight a couple of recent Complete Vehicle EV program launches in Austria for China-based OEMs. This past quarter, we launched a second Complete Vehicle program for GAC. We also recently launched a third model, the XPeng P7+, for Xiaopeng. Since September of 2025, they have now launched five vehicle models for these two China-based OEMs. More recently, we were awarded a fourth program with Xiaopeng, which will launch later this year.
This reinforces Magna's strong position in vehicle manufacturing and highlights the value of our flexible state-of-the-art production process, enabling fast-to-market, high quality vehicles for any customer in the European market. Recently, Magna was once again recognized by Ethisphere as one of the world's most ethical companies, marking our fifth consecutive year of recognition. This reflects our ongoing commitment to integrity, ethical decision-making, and doing what's right, something we are very proud of. With that, I'll turn the call over to Phil.
Thank you, Swamy, good morning, everyone. I will begin on slide 19 with a summary of our strong first quarter results. Sales were $10.4 billion in the first quarter, up 3% from last year. Adjusted EBIT margin improved 190 basis points to 5.4%. Adjusted earnings were $1.38 per share, up 77%. Free cash flow was very strong at $372 million, up $685 million from last year. Each of these metrics came in ahead of our expectations. Now, I'll take you through some of the details. Let's start with sales on slide 20. First quarter sales were up 3% overall compared to last year. Excluding foreign currency translation, sales were down about 2%. Global light vehicle production declined 7% in the quarter.
On a Magna-weighted basis, we estimate light vehicle production was down about 5%. This translates to 3% growth over market for Magna consolidated and 5% growth over market excluding Complete Vehicles. Looking at the sales walk, foreign currency translation was positive $520 million or about 5%, driven by a weaker U.S. dollar compared to last year. Volumes, launches, and other was relatively flat as lower light vehicle production, the end of production on certain programs, including the Ford Escape, and normal course customer price concessions were largely offset by the launch of new programs, including the Ford Expedition Navigator, Mercedes-Benz CLA, and Jeep Cherokee Recon, and net favorable program sales mix. Sales in Complete Vehicles, excluding foreign currency, declined $172 million despite higher unit volumes.
The higher unit volumes reflected new assembly programs in Graz, including with XPeng and GAC, where sales are recognized on a value-added basis. Volumes with other customers, where sales are generally recognized on a full cost basis, declined year-over-year collectively. This resulted in net lower assembly sales dollars. Engineering revenue was also lower, in line with our expectations. Let's move to EBIT on slide 21. First quarter adjusted EBIT was $558 million, an increase of $204 million, or 58% from last year. Adjusted EBIT margin was 5.4%, up 190 basis points. Looking at the pluses and minuses, the largest benefit came from operational performance, volume, and other items, about 80 basis points. This reflects continued momentum from operational excellence and other cost reduction initiatives.
We also benefited from prior restructuring actions and favorable net foreign exchange gains. These positives more than offset the impact of lower organic sales and unfavorable mix. Equity income contributed around 70 basis points in the quarter, reflecting a favorable commercial settlement at one of our Power & Vision joint ventures that was originally planned for the second quarter. Margins were also supported by higher sales, favorable mix, as well as productivity and efficiency improvements. Discrete items added around 55 basis points, driven mainly by lower warranty costs, as we had a large expense accrual last year in seating. We also benefited from net favorable commercial items year-over-year in the quarter. Finally, tariff costs net of recoveries reduced margins by about 15 basis points.
While recovery mechanisms are in place with some customers, discussions with most OEMs for 2026 are ongoing, and we are following the frameworks we established last year. We remain confident that our net tariff impact for 2026 will be similar to 2025. In other words, a roughly neutral impact to EBIT margin for the full year. Looking below the EBIT line on Slide 22, interest expense was $13 million lower than last year, due mainly to our strong first quarter free cash flow. This led to lower short-term borrowings and higher cash balances, resulting in lower net interest expense for the quarter. Our first quarter adjusted tax rate was 23.8%, an improvement of 190 basis points versus last year. For the full year, we continue to forecast an adjusted tax rate of approximately 23%.
Adjusted net income was $386 million, up $167 million or 76% from last year, driven mostly by the higher EBIT. First quarter adjusted EPS was $1.38, up 77% from last year, mainly reflecting the higher net income as well as a slightly lower share count. Next, let's take a brief look at our business segment performance, which is summarized on Slide 23. Three of our four segments posted higher sales year-over-year and growth above market in the quarter, with a notable 6% year-over-year increase in Power & Vision. The exception on the sales line was Complete Vehicles, where sales declined 4% as net lower volumes on full cost programs and lower engineering revenue were only partially offset by favorable foreign currency translation and the benefit of recent value-added program launches with China-based OEMs.
Turning to EBIT, Body Exteriors & Structures, Power & Vision, and Seating all posted notable year-over-year improvements in adjusted EBIT dollars and margins, reflecting strong operational execution. Power & Vision also benefited from a favorable commercial settlement in equity income, while Seating benefited from lower warranty costs. Complete Vehicles margin was lower than last year, but in line with our expectations, reflecting the impact of lower engineering revenue offset partially by productivity and efficiency improvements. Now let's look at cash flow on Slide 24. In the first quarter, we generated $677 million in cash from operations, an increase of $600 million from last year. Operating cash flow in the current period includes over $450 million in balance sheet-related customer recoveries for certain EV programs in North America. We had originally expected to receive most of these recoveries later in 2026.
Investment activities in the quarter included $219 million in CapEx, representing 2.1% of sales, and $168 million for investments, other assets, and intangibles, offset partially by proceeds from normal course asset dispositions. Netting everything out, we generated free cash flow of $372 million in the quarter, above our expectations and the most cash we have ever generated in the first three months of the year. We continued to return capital to shareholders in the first quarter with $135 million in dividends, along with $440 million in share buybacks. We repurchased 7.6 million shares during the quarter under our NCIB authorization, which left us with close to 17 million shares remaining at the end of March. We're planning to repurchase those shares before the NCIB expires in early November.
Turning to Slide 25, our balance sheet and capital structure remain strong. At the end of March, we had almost CAD 5 billion in total liquidity, including CAD 1.6 billion of cash on hand. Our rating agency leverage ratio was 1.5 times on March 31st, better than we anticipated 3 months ago. This puts Magna in great position to continue our share repurchase strategy in 2026 and beyond. We're pleased to note that Moody's recently affirmed Magna's A3 investment grade credit rating with an improved outlook of stable. Next, let me cover our current outlook on Slide 26. Compared to our February outlook, we've reduced our North American production forecast by around 100,000 units to 14.9 million, and we reduced Europe by 200,000 units to 16.6 million, both reflecting current market conditions.
Our China production assumptions remain unchanged. We've also updated our currency assumptions to reflect recent exchange rates. We're now expecting a slightly stronger euro, Canadian dollar, and Chinese yuan in 2026 as compared to our February outlook. We continue to actively manage input costs and other volatility through commercial recoveries and cost actions. Our outlook reflects our current visibility into the balance of the year and does not assume a prolonged geopolitical conflict in the Middle East. Moving to slide 27. We are reaffirming our prior outlook ranges across key metrics, including adjusted EBIT margin, adjusted EPS, and free cash flows.
We have slightly lowered our sales outlook range for the updated light vehicle production estimate revisions we covered earlier, along with the expected second half closings of the lighting and rooftop systems divestitures within Power & Vision, offset partially by the benefit of foreign currency translation from a weaker U.S. dollar. We're also forecasting lower interest expense, reflecting the favorable timing of commercial recoveries, which should result in less borrowings throughout the year. All other outlook metrics from February are unchanged. Note that we continue to expect strong margin expansion with adjusted EBIT margin between 6%-6.6% despite slightly lower sales. Adjusted EPS between $6.25-$7.25 per share, and free cash flow between $1.6 billion-$1.8 billion.
While we don't provide a quarterly outlook, I would like to offer a framework for how we're thinking about EBIT and margin cadence for the rest of 2026. We expect 2026 adjusted EBIT to be back half weighted, with first half EBIT just under 45% of full year EBIT. We're taking a measured approach to the second quarter, given the ongoing geopolitical dynamics and the potential for near-term volatility, with adjusted EBIT margins expected to be relatively flat with the second quarter of last year. That's it for the financial review. Now I'll turn it back to Swamy to wrap things up. Swamy?
Thank you, Phil. Before we take your questions, let me recap a couple of key points. We had a strong start to 2026 with adjusted EBIT margin expansion, cash generation, and solid weighted sales growth over market. We are positioned for continued margin expansion and shareholder returns, supported by a solid 2026 outlook that is largely unchanged from February, reflecting our confidence in our operating performance. We are executing a disciplined capital allocation strategy, including significant return of capital and portfolio actions aligned with long-term value creation. Most importantly, we remain highly confident in Magna's future. We hope to see many of you in November at our investor event in New York City, where we will go into detail on our strategy, key initiatives, and long-term financial outlook. Thank you for your attention. Now, operator, let's open it up for questions.
Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you'd like to withdraw that question, again, press star one. We do ask that you limit yourself to one question and one follow-up. For any additional questions, please re-queue. Your first question comes from Alexander Perry with Bank of America. Please go ahead.
Hey, guys. Thanks for taking my questions here and congrats on all the progress. I guess just first I wanted to ask, can you give us an update on your raw material exposure, I guess particularly on the resin side. What is the impact expected to have on the margins? Were there any other offsets that allowed you to keep your EBIT margin guide? How should we think about sort of the flow through there? Thanks.
Sure, Alex, this is Phil Fracassa. I'll start and then Swamy Kotagiri can chime in. You know, relative to, you know, raws, if we take a step back, if we look at, you know, exposures like steel and aluminum as an example, we're largely protected through OEM resale programs and other pass-through mechanisms. You know, the vast majority of our exposure there is covered. You know, on resins it would be a little bit less. A meaningful portion would be covered by pass-throughs as well or not resale, but more pass-throughs. You know, think of it as sub 50%, so a little bit exposed there in the. As resins move, you know, we would do what we normally do, which is kind of work with customers to recover the higher input costs.
You know, looking at the first quarter, I'd say we saw minimal impact on all of that. You know, we saw a little bit of higher freight costs in the quarter, but minimal impact across other input costs. As we talked about kind of many times, as we see input costs move, you know, we typically recover on a lag basis. To the extent, you know, oil stays high, resins stay high, we would work with our customers to recover that over time, and frankly, would expect to recover the bulk of any swings, you know, over the course of the rest of the year.
Last comment I would make on, you know, we get a lot of questions on energy, particularly in Europe, but we, you know, we're in a much better position now than we were, say, in 2022. We're hedged about 2/3 of our both electricity and natural gas spend in Europe for this year and about 50% hedged for next year. Swings in costs, near term, we're pretty well protected there as well. Swamy, anything to add?
No, I think you covered it well, Phil. You know, the one thing that you might look at is the logistics and the freight costs. That's the reason why we talk in terms of ranges. We feel pretty confident based on everything that you said we would be able to contain it.
Really helpful. I guess just my follow-up question. The production outlook came down a bit, but you kept all the segments the same other than Power & Vision, which came down a bit. Maybe walk us through why that is, and how you're thinking about production and the various segments. Thanks.
Sure, Alex. What happened there was we had 3 things that happened in the outlook. First, we took the production estimates down as you referenced, which was a slight downward revision in the revenue, if you will. We took foreign currency up as we're modeling a slightly weaker U.S. dollar than before. That sort of offset one another as compared to February across most of the segments. The one exception was P&V, where we also layered in the anticipated closing of lighting and rooftop systems and in, you know, kind of in the 2nd half, call it near the end of the 3rd quarter, sort of what we modeled. That kind of had the effect of bringing P&V revenue down about, you know, $400 million or so if you look at the outlook.
It was really kind of FX and vehicle production offsetting one another in the other segments. You know, honestly, the fact that we held the margins despite that, 'cause oftentimes when, you know, when foreign currency improves, you won't get the same incremental that we do when volume goes up or down. We were able to kind of offset that, hold the margin range where it was, hold the EPS range where it was, you know, just given the given how well the business was performing, particularly in the first quarter of the year.
That's incredibly helpful. Best of luck going forward.
Thanks, Alex.
Your next question comes from the line of James Picariello with BNP Paribas. Please go ahead. James, you're on mute.
Hey. Yep. Can you hear me?
Yeah. Hey, James.
All right. Yeah. Can you just speak to the favorable commercial item? Can you just provide more color on, you know, what actually took place? Was it unexpected for the full year, or was it more of a timing shift within the year in terms of, you know, the ability to get that recovery, which showed up in equity income, right?
Right. Yeah, exactly, James. Two things there. It was a recovery in the 1st quarter. In equity income, it hit P&V. We had initially planned for it in the 2nd quarter. It wasn't a variance to the full year. It was a timing shift between Q2 and Q1. It really related to recoveries for past investments in EV programs. Just to kind of give you an order of magnitude, it was the bulk of the equity income improvement in margins year-over-year was probably 60 basis points of that improvement was that item. Again, hitting in P&V, you'll note that P&V had really strong performance in the quarter, revenue up, strong incremental margin on the revenue.
Even excluding that item, you know, the incrementals in P&V would've been quite strong on the order of 30% even without that item. P&V performed really well, good growth across several different launches, good growth in some of our camera businesses, et cetera. But to answer the question, it was a one-time item, but it was timing between Q2 and Q1.
Okay. That's crystal clear. Appreciate that. My apologies if I missed this in the prepared remarks, for the lighting and rooftop divestiture, should we expect any proceeds from that, or is it more of a, you know, partnership handoff type of an arrangement because it's a 0, you know, has neutral EBIT?
Hi, James. Good morning. As I said in the remarks, the transactions will be closing later this year, obviously subject to approvals. They are margin accretive, you know, because they were below the Magna average, I would say. Going back to the guiding principles, if you look at it from a strategic perspective in terms of market position, in terms of returns, we did not feel it was the right home and not the right path with us. That was the reason why the divestiture was done. You know, we'll continue to look at the portfolio just like we've always said with an objective lens.
Yeah. Maybe just to round that out, James, you know, I would want to point out that on our GAAP results, we did book the loss related to those divestitures in the first quarter, just given where they were in terms of negotiations at the end of the quarter. That was, you know, over a $400 million impairment that we took in the first quarter, which would be in the GAAP results excluded from adjusted.
There are some modest proceeds that will be used in the normal course, James, right? You know, in terms of the cash flow, looking at the balance sheet and, you know, how it will be used for share repurchases.
Is this the beginning of a like ongoing pruning of the portfolio of, you know, smaller businesses, or is this mainly a one-off? I'm just curious if there's anything strategic, you know, and sustained behind this type of sale for you guys.
Yeah. I don't think it is a one-time or it's, if you go back into the last 10 years, you would have seen, you know, fuel pressure controls. You would have seen in years. Honestly, James, this is an ongoing process. We continue to look at it every year. Can't speculate or won't comment on future actions, but I can tell you this is really a very rigorous ongoing process.
Thank you very much.
Your next question comes from the line of Dan Levy with Barclays. Please go ahead.
Hi. Good morning. Thanks for taking the question. Your guide assumes 35 to 40 basis points of operational excellence. You just did in the first quarter, I think it's 80 basis points. I know there's other stuff in that category in your earnings bridge. Maybe you can just give us a sense within the quarter, you know, why you were out punching on that 35 to 40 basis points and, you know, what changes in subsequent quarters, or is there potential upside on that 35 to 40 basis points?
Good morning, Dan. The 35-40 basis points that we talked about obviously encompasses a lot of things that go on. The specific larger operational excellence initiatives that I've mentioned in the past are really specific. For example, enterprise-wide digital architecture, data backbone, real-time performance management through data streaming dashboards and scalable automation of material handling and so on and so forth. Beyond that, there are thousands of initiatives that every division looks at in terms of material savings, in terms of OEE improvements. You can't really put an exact cadence. Definitely with some of the programs in place and feel comfortable, the proliferation is a little bit accelerated.
It also depends on the cadence of how many ideas or VA/VE initiatives are in place in the fourth quarter and how they can, you know, materialize in Q1, right? All in all, I would say we feel pretty good about the 35, 40 basis points. If the macros hold good, yeah, we feel pretty good that we'll hit that and, you know, continue the path.
Yeah. Dan, just two things I might add there. You know, we did accelerate really well last year with the operational excellence initiative, so probably a bit of a easier comp in the first quarter than maybe the comps we'll have as we move through the year. That'd be one. I would say, stepping back, a stronger than we expected performance on the operational excellence front in Q1. To your point about if we can keep that going, I would agree with you that that would present some upside for us.
That's why I keep saying, you know, as we look at the proliferation, we are still in the early innings of the factory of the future.
Great. Okay. Thank you. Then I just wanted to follow up on James' question on the divestitures here. I get it, you know, there's constantly a portfolio review process to make sure that the products that you're in, that you have a strong market position, that's a relevant market these businesses didn't clear that threshold. I guess I would just ask more broadly, you know, the broader Magna portfolio, what percent of that would you deem to be in a market position that is not where it should be and where it's, you know, it's a tougher path to sort of getting to an appropriate market position? How would you characterize Seating as it relates to your market position and path to improving the market position?
Yeah. It, it's a long question, Dan, and you know it's a complex one. As you look at most of the products, right, we're not really saying we have to be number one, but you need to have meaningful market position, but along with it also good returns and good profitability. It's not at any one point in time. You have to look at it, you know, you invest, you go through cycles, and if you see a good path and if you see good progress, you know, we continue to, you know, stay on it. Specifically to seating position, you know, Again, it's not just looking at it broadly at the global market. In North America, we have a good position. We have good position in Europe. We have really a good position now in China.
More importantly, we have some really good innovation in terms of not just the product, but how we assemble the seat and how we take it forward. As part of this operational excellence or factory of the future initiatives, you'll start seeing that. Hopefully, we can talk to you a little bit more when we see you in November for the Investor Day. We feel pretty good, and you'll continue to see the traction on the profitability and the returns in that segment.
Great. Thank you.
Your next question comes from the line of Chris McNally with Evercore ISI. Please go ahead.
Thanks so much, team. Swamy, a little bit of a broader question around, you know, some of the risks in the second half of the year. I know this is a high-arching question that, you know, I think everyone's getting asked. I'm curious your perspective if you're more worried about sort of the known unknowns in the second half or the unknown unknowns. You know, when I think about known unknowns, raw materials, transport, second half volumes, sort of the typical that you're curious duration of the issue of the conflict.
The unknown unknowns is the one that we're having the hardest time grappling with, you know, as investors in the self. You know, things like memory availability or just other disruptions. It's just if, you know, maybe you could opine on those two buckets, for what you're seeing, you know, sitting here in April.
Yeah. Chris, I'm gonna use your terminology, known unknowns and unknown unknowns. Honestly, I think if it's a known entity or variable, right? For example, things that you just mentioned, we at least have a scenario analysis and a playbook to say how we are gonna address it. That's the reason why we talk about outlook and ranges and not specific numbers. The bigger question is the unknown unknowns, right? Because you haven't thought about it. You might have some scenario planning, but it's not as granular. Those are the bigger questions. If you look at the DRAM, we are focused on it. We are tracking it. We are monitoring it. We are working with our customers. Continuity is the most important in terms of supply. We are doing that.
We are managing costs through sourcing actions and customer alignment. You know, that we believe if the world doesn't flip upside down, we can manage it within our outlook ranges. That's an example of something that is a scenario planning and we can address. Things that we don't know in terms of complete volatility, big macro issues. You know, lack of certainty and volatility are the two things that you have to constantly worry about.
Yeah. That's great. If we could just double-click, Swamy, on the one on memory because we obviously get this question a lot. We see obviously everything going on with AI and the hyperscalers. Is it fair to summarize the industry's view? I think that many companies have been asked this, that right now on memory there's more of an issue around price, meaning you may have had some contracts and basically memory providers are coming back and asking for closer to spot as opposed to contract, and that's some of the risk, as opposed to literally pulling the volume, which would not allow for cars to be made. Is that a fair summary of where the industry kind of view is right now, that there's a little bit more of this price discussion, "I wanna be paid for spot," as opposed to pulling volumes?
The short answer, Chris, I would say your summary is correct in the short term, right? It's more in pricing and how do we manage that in terms of demand and keeping capacity and so on and so forth. In the long term, you know, you gotta look at design options and so on. In short, your summary is correct.
Perfect. Thanks so much. Great quarter.
Thanks, Chris.
Your next question comes from the line of Joseph Spak with UBS. Please go ahead.
Thanks. Good morning, everyone. Phil, just, I'm sorry to go back to this. I just wanna make sure I understand some of your comments on recoveries, 'cause it sounded like maybe it was, I don't know, $60 million, $70 million in EBIT. I'm trying to just sort of figure out how that relates to, you know, in the report it said the recovery sort of investments in the quarter was like $475 in cash flow. I just wanna make sure those numbers are correct, that part of that recovery in the cash flow was not in the operating income. On that recovery in the cash flow, just wanna make sure that is what you sort of expected, and is that mostly done or do you still expect more cash recovery to come down the pike?
Yeah. Thanks, Joe. Great question. I think you've got it right. First of all, the 60 basis points, or call it CAD 60-ish million, the equity income item was did run through the P&L. The CAD 475 that we called out in our MD&A was really balance sheet only. The vast majority of that recovery was a balance sheet recovery, so getting sort of reimbursed for prior investments that we made that were sort of sitting on the balance sheet. You know, very little P&L impact from that. We did largely expect that in 2026, just later in the year.
There's maybe a little bit, a little bit overall for the full year, maybe a little bit higher than we previously anticipated. Is there any more to come? There's a little bit more we would expect between now and the end of the year, not of that same order of magnitude. It's reflected in the full year outlook as we continue to work with customers on other negotiations that are ongoing. The, you know, beyond that $60 million that ran through equity income, we had, you know, we had very little running through the P&L for the other recoveries. It was really just cash only.
Yeah, really appreciate that clarification because I was having trouble connecting those two. Second question, Swamy, and I apologize in advance because I don't wanna put you in the middle of a, you know, geopolitical storm. There have been, you know, reports of Chinese OEMs looking to maybe build vehicles in Canada. I was wondering, you know, if you were able to comment on any conversations you might have, or even more broadly, you know, how you would view that potential opportunity. 'Cause obviously, you know, you mentioned some of the wins with the domestic Chinese, whether it's, you know, Complete Vehicles or others. You have that good relationship there, and I was wondering how that could sort of spill over to this region.
Joe, for the exact reason that you mentioned, I would like to remain a businessman and a capital allocator and not a policy commentator. I won't comment on speculation. I can say that Magna's Model is to be neutral global partner to all OEMs. We are not, you know, as you've heard me talk about it, we continue to win business in Europe with our complete vehicle assembly. With all OEMs. Today it happens to be the Chinese OEMs. We continue to win business in China with Chinese OEMs. You know, any OEM that continues to grow in the ecosystem, we have an opportunity to supply Magna systems and components and also do vehicle assembly where possible.
Okay. Thank you for that.
Your next question comes from the line of Tom Narayan with RBC Capital Markets. Please go ahead.
Hi, this is Thomas Ito on for Tom. It looks like your guidance implies some pretty substantial margin uplift in BES and Seating for the remainder of 2026. Just wondering, is this sort of just the timing of the customer recoveries, or are there other factors going on in these segments?
No, I mean, I would say it's really continued progress on the operational excellence initiatives and then obviously getting really strong pull-through on revenue. You know, the P&V was, we're expecting strong growth in P&V for the full year. We did have the item in the first quarter. You know, for the full year, the margins will be on the implied guide would be pretty close to the first quarter performance, but still really solid growth year over year. BES and Seating over the course of the rest of the year would expect the, you know, the operational excellence really being the biggest item that's kinda sticking out relative to the improvement from Q1 through to Q4. I don't know, Louis, anything else to that?
Okay. Got it. I guess as a quick follow-up, we saw another supplier announce some revenue impacts related to the IEEPA tariff adjustments. Could you just comment on whether any such adjustments are incorporated in that 26 guidance?
I mean, it's a great question. I figured we would get it. On tariffs, let's just take a step back. We came into the year based on last year's rates, if you will. We had about a $160 million gross impact last year. A run rate would have put us at around $200 million this year. Again, looking to recover that from our customers. We had a lot of developments. IEEPA came out. 122 came in. We had some changes in Section 232. Net, net, our gross exposure's come down. From, you know, $200 million, now we're thinking it's closer to last year's number actually, right around $160 million. Our net exposure, you know, relatively unchanged, we still expect maybe a little bit better, but relatively unchanged.
We still expect, you know, a margin headwind of less than 10 basis points, year-over-year would be neutral in that scenario. Relative to the last element would be the refunds. I would say we are working to file those refund claims sort of as we speak. We're in the midst of filing them as we speak. You know, that's a good size number. We talked about, you know, it was probably over half of our tariff exposure, roughly half of our tariff exposure was IEEPA. As those refunds are filed, as those refunds come in, we didn't book any of those refunds in the first quarter.
As those refunds come in, we'll obviously work with our customers on that, given that, you know, they funded, you know, they covered about 80% of our tariff costs last year. We'll work with them as those refunds come in to make sure that they're allocated appropriately.
Okay, great. Thank you.
Your next question comes from the line of Emmanuel Rosner with Wolfe Research. Please go ahead.
Great. Thank you so much. I was hoping to follow up on a comment you made in the prepared remarks about the expected cadence of earnings this year. In particular, I think you said Q2 margins would be broadly stable year-over-year. Can you just give us a few of the puts and takes in there? Is there some timing of things that, you know, shifted from Q2 into Q1, or I guess, how should we think about the stable margin year-over-year this quarter?
Yeah, I think it's, well, you know, relative to expectations, we had that, we had that equity income item that kind of moved from Q2 to Q1. As we sort of set up the cadence for the rest of the year, we did, I would say, deliberately take a little bit more measured view on the second quarter, a little bit more cautious view, if you will. As you look at, you know, year-over-year at sort of the midpoint of the guide, we'd probably see a little bit of increase in revenue year-over-year. You know, with, kind of a proportionate incremental margin, kind of keeping margins relatively flat.
We've got foreign currency as a positive in there, which kind of comes through as with a little bit lower margin. The volumes kind of coming down a little bit with a little bit bigger impact. You know, really nothing more than that. The operational excellence continues, but it was really more just trying to be a little bit more measured in how we were thinking about the second quarter as it, you know, as kind of we're sitting here in time and space. As we look out to the rest of the year, still very confident in, you know, the full year guide and very confident in the margins and earnings, et cetera. If you remember in February, we talked about first half EBIT being, you know, kind of slightly above 40%.
You know, this time around, we're probably seeing a little bit more front half weighting on the EBIT, maybe, sub 45. Think 43, you know, 43-ish kind of % first half, second half, and that should kind of get you in the ballpark.
Okay, that's helpful. Thank you. I was hoping to ask about your growth over markets. You know, you measured it as like 3 points for this quarter of, I guess, for Q1 or 5x Complete Vehicles. You know, still good conviction at, in the, I think 0%-3% for the, you know, for the full year. Can you talk about some of the, you know, upcoming big launches that you have that will drive this growth of a market and potentially sort of like any sort of, you know, cadence within that?
Yeah. Good morning, Emmanuel. I think, like you said, it's really a reflection of the launch activity. It's a bit of good program mix and also content growth across all our core segments. Net-net, if you look at the end of production programs and compare it to the new production launches that we have, which is many, across the different geographic regions, different customers, different programs. If you take the content, that's positive net-net, right? That's the reason why we are seeing that. The Complete Vehicles, you heard me talk about the specific program launches, with the GAC, with Changan, and the discussions continue.
Understood. Thank you.
Your next question comes from the line of Colin Langan with Wells Fargo. Please go ahead.
Oh, great. Thanks for taking my question. I just want to follow up again on the recovery impact. You mentioned the 60 basis points from JV. If I look at the slides in discrete items, it looks like half of the discrete items are also recoveries. Is there another $25 million-$30 million outside of the JV recoveries? I thought last quarter you had said that recoveries for the year were neutral, and yet we have a big help in Q1. Does that mean as we go into the second half that there's headwinds as those recoveries are down year-over-year?
Yeah, thanks, Colin. On the first part of the question, yeah, in the discrete items, we did see, you know, the favorable warranty cost, which was a big item. We also had the net impact of, you know, we did have favorable commercial items as well, which sort of spans the gamut of, you know, not just EV related recoveries, but recoveries for, you know, other commercial matters as well. As you know, that can sort of vary quarter to quarter. I think we did talk about coming into the year thinking we'd be largely neutral for the full year on the P&L with respect to recoveries.
On the cash, you know, we did, we did get a fair amount of cash for EV related recoveries last year. If you remember in the fourth quarter, we had a big cash inflow in the fourth quarter. We did expect recoveries as it related to the EVs to be a fair bit comparable. We do expect to be that way for the full year. We had it was more front-loaded this year. It was a little bit more backloaded last year. Our guide of free cash flow of CAD 1.7 billion at the midpoint implies about CAD 1.3 billion for the rest of the year, and that will be, as always, back halfway.
On, on the, on the recoveries, the recovery related to equity income was kind of in the equity income in the roll between 2025 and 2026. It's, I guess, it's just bucketing. We had that in equity income is in part of the reason why we had higher margins this year, not in this kind of recoveries. Recoveries we're talking about here are more on a consolidated basis.
You still expect recoveries to be neutral for the year. The initial guide did incorporate the JV help.
It did. Yeah.
...from recovery.
It did.
Okay. Just broadly, if I go into the second, I mean, Q2 is supposed to be flat. Organic sales or I think the guide implies are fairly slightly down actually. You have $100 million sort of implied EBIT improvement. I kinda feel like we're out of some of the puts and takes outside of warranty. JV incomes are any kinda most of that good news in the initial guide is done. Is it all just operational efficiencies or other items that are kinda gonna add some help to kinda offset the, at least at the midpoint, weaker sales?
Yeah. I would say some of it is as you talked about operational excellence. As new programs come in, they have different economic terms. There is a mix of, as I said, launches, right, that are happening towards the second half of the year. I would say it's a combination of the two columns.
Got it. All right. Thanks for taking my question.
Your next question comes from the line of Andrew Percoco with Morgan Stanley. Please go ahead.
Great. Thanks so much for taking my question. I wanted to start out on, you know, your disposing of your lighting and rooftop systems business. I kinda wanna get a sense for, as, you know, as we think about the evolving landscape, particularly around ADAS and AVs, are there any areas where you might wanna grow your portfolio or add to the offerings that you currently have around that ecosystem?
Yeah. Good morning, Andrew. I think I said that the last couple of quarters, we feel pretty good where we stand with our portfolio right now. I think the focus is really on organic growth trying to get efficiencies up, get the traction that we have in operational excellence continue, focus on the cash flow, continue the journey right now. If there is some really good opportunity in terms of small tuck-ins that add value here and there. Obviously, we'd be open to it, but our focus really is on, you know, continuing to keep the roadmap that we have in front of us for cash flow and, you know, good value.
Okay, that makes sense. Maybe just around, you know, these recoveries. I'm curious, like if you or the industry in general are planning to adjust how you maybe strike these contracts with your OEM partners going forward. I know there's been a big kind of right-sizing exercise in the industry around EV manufacturing capacity, but the OEMs are still very much committed to exploring new, you know, vehicle platforms. I'm just curious, as you kind of think about that next cycle, how you might evolve that contracting structure to maybe avoid some of the overinvestment that we've seen in prior cycles. Thank you.
I don't know if we can change the decision of the OEMs, but we definitely can bring our opinion to the table. And there are cases where we have looked at different terms, right? Whether it is sharing of capital deployment, let's say, looking at, you know, volumes and, you know, how we band them, and how we look at the step function of cadence as you go into the program, rather than putting all the capacity up front. There are several of those discussions, you know. We are fortunate to have those strategic discussions with the customers.
As an industry, I think the big elephant in the room is, like, how do you become good stewards of the capital, right? How do you extrapolate what's there, what's capacity that's existing? How to use it more efficiently, rather than just adding more. Like you said, it's a two-way traffic, and we have many of those discussions.
Great. Thank you so much.
Your next question comes from the line of Jonathan Goldman with Scotiabank. Please go ahead.
Hey, good morning, team, and thanks for taking my questions. Most of them have been asked already. I guess just one on the guidance. I think you talked about the rooftop and lighting business being, you know, below the Magna consolidated margin levels, but you maintained the margin guidance for the year. I would have thought the divestiture may have been margin accretive. I just wanna know, what are the offsets there?
I think, Jonathan, good question, but we're looking at the broad picture of Magna, given the uncertainty in the market that we have and, you know, what we're looking at. That's the range we're talking about, right?
Yeah, that's exactly right. The only thing I would add, Jonathan, is, you know, it was really, you know, really we're talking about, call it, you know, call it 3-4 months of the year, so not a big number in the current year. The other point to keep in mind too is we took revenue up for currency, which comes through at an EBIT margin, if you will. We took revenue down a little bit for volume, which sort of comes out at an incremental or a decremental, as the case may be.
There's a little bit of that going on there, too, but there's no question to both P&V and to Magna as a whole, that the divestitures, you know, would be modestly accretive to margins, just given where they were operating.
Okay, that's good color. Maybe just circling back on that one, Phil. The revenue guidance may be switching the mix, you know, maybe more currency in the sales this year. Is the offset the lower production volumes that you've updated the guide for?
I would say when you think about... We're kinda holding the EBIT. We're holding the EPS guide. We did see a little bit of a benefit on the interest line below EBIT, as, you know, the free cash flow in the first quarter was much sooner than we anticipated that cash coming in, it will result in lower borrowing throughout the year, a little bit of interest benefit. While revenue's down a little bit, with holding margins would bring EBIT down a little bit, got a little bit of offset in interest expense, which kinda enables us to hold the range where it was before. Again, kinda, you know, kinda holding the ranges, despite the strong Q1 was really as much just being a little bit prudent on the rest of the year at this point.
Okay, that makes sense. Thanks. I'll get back in queue.
Thank you.
Your next question comes from the line of Mark Delaney with Goldman Sachs. Please go ahead.
Yes, good morning. Thanks very much for taking the questions. One on margins. When considering the efficiency efforts that the company has underway for this year, an expectation of 35-40 basis points, as well as the portfolio optimization you announced, relative to lighting and the rooftop part of the business, will you put that into the context of where Magna thinks its EBIT margins can go over the medium to longer term? In the past, the company has spoken about the potential to get to a 7%+ type range. You know, I'm curious where you think you are on that journey, especially in light of some of the decisions and progress you reported today.
Good morning, Mark. I think I can tell you we are in a good path to the roadmap that we laid out. Right now, we are focused on executing, like we did in Q1 or the last 2 or 3 quarters, and we see a good path into 2026. That's why we were able to reaffirm the outlook of 2026. Now regarding the midterm and long term, I would say, you know, the best time to get through that without confusing anything is the November Investor Day. We will be able to lay out the next 3-5 years.
Looking forward to that. My last question was around the production environment. You already described your view on overall production volumes by region, but I hope you can share a bit more around mix. Curious if you're seeing any changes in the kinds of vehicles your OEM customers are looking to manufacture. Perhaps is there some increase in the number of EVs and hybrids that they're planning to make in light of the recent increase in gasoline prices?
It's not really a significant shift in what's been talked about. Obviously, there's, you know, a increased interest in hybrids, you know. It's very regional. In China, we continue to see the EV proliferation. In Europe, you know, it's a little bit more hybrids, and EVs continue there at a slower pace maybe. In North America, we're, you know, see renewed interest in hybrids. In terms of vehicle segments, no, not really. We're not seeing a material shift in anything else.
Understood. Thank you.
Your next question comes from the line of Michael Glen with Raymond James. Please go ahead.
Hey, good morning. Swami, with the winds happening in Europe with the Chinese OEMs, are you at all supplying any parts to those vehicles yet, or is it strictly assembly? Is there an opportunity to expand and supply parts?
Yeah. I think, Michael, right now it is just assembly. Obviously the conversation says this expands into volume. There is a localization discussion, That's where we see the opportunity for other system and component supply.
Okay. Just following on that, maybe just broadly with Europe, I know you don't break Europe out separately as a segment. How do we sort of think about gains with new entrant OEMs into Europe and then what appears to be the lagging legacy OEMs as a whole? Is this a net negative to Magna or are the gains being made with the new entrants offsetting the difficult legacy business?
Yeah. Difficult to break down at that granularity, for sure, Michael Glen. I think I would say with the presence of Magna in China and as we continue to build that relationships, we believe as they come to different parts of the world, we'll have a seat at the table. At this point of time it's very difficult to, you know, talk at that level to say how much and how it's offsetting and so on. Overall, we still continue to grow our business in Europe.
Okay. Thanks for taking the questions.
That concludes our question and answer session. I will now turn it back to Louis Tonelli for closing comments.
All right. Thanks everyone for listening in today. If you have any follow-up questions, please don't hesitate to reach out to me. Thanks, and have a great day.
Ladies and gentlemen, this does conclude today's conference call. Thank you all for joining. You may now disconnect.