My pleasure to introduce Magna in the afternoon session here. One of the leading auto parts manufacturers in the world, a company that really doesn't need any introduction. I'm joined on stage by CFO, Phil Fracassa, and VP of Investor Relations, Louis Tonelli. Thanks for being here. I've got a bunch of questions here. If there's any questions in the audience, please raise your hand and I'll get to you. Louis, Phil, thank you for joining us again in Montreal. We always appreciate the support.
Yep.
Maybe to start, you updated your full year outlook this summer with your Q2 results. As we sit here late in Q3, how have things progressed compared to your expectations? How are you thinking about the rest of the year?
Yeah, great. Well, thanks, Kevin, and it's great to be with all of you. Before I hit the question, maybe I just want to maybe frame up sort of the overarching messages we have today, and it's really probably three themes, if you will. First would be Magna continues, and I think we saw it in Q2 and seeing it in the full year, expanding margins and growing earnings despite a flattish industry production environment. I think that would be point one. It's more of an execution story, more of a self-help story for Magna, with operational excellence and some of the things we can control. The second point I would make is we've seen a step up in our free cash flow both in 2025 and 2026.
We believe that's durable and that provides the powder, if you will, to do things like share buybacks, which we've stepped up as well. The last point is around the capital return. I think the buybacks have been a really good story this year, and we believe capital return will remain a key differentiator for Magna well beyond 2026. So getting to the question around the outlook and kind of what's changed since then. We typically don't comment too much on how the quarter's progressing so late in, but I would say two things on it. One, industry production. So far, we've not seen any major surprises relative to industry production as compared to expectations. Then back to the things we can control around operational excellence and execution, I would say continuing to trend well.
Overall, I think we'll provide another update at the end of the quarter, and I look forward to providing a more fulsome update at that time.
You mentioned operational excellence a couple of times here. Clearly an important component of your margin story so far. What do these initiatives look like within Magna, and how would you frame the upside or maybe the inning you're in as you execute against the strategy?
Yeah. We started the year saying we expected about 35 - 40 basis points from operational excellence in 2026, and that's on top of about call it 150 basis points that we had through the 2023 to 2025 timeframe. And it's really a combination of the thousands of continuous improvement activities that we have going on across the company, all over the world, as well as our Factory of the Future initiatives that we have going on as well, that we're starting to scale. It's really all of that that's driving, if you will. We're going to talk a little bit about the specifics when we get to our investor day, which is in November, and hopefully many of you will be there for that.
Okay.
But we certainly feel as though we're in the early to mid-innings, and that there's room for us to continue to grow in operational excellence.
Okay.
And maybe just to add if I could. It's really been impactful. So when Louis talks about 150 basis points over the past three years through 2025 and then more this year, so we'll be at sort of 200 basis points cumulative over the last four years, by the end of this year. That's after contractual price concessions that we give to our customer in normal course, if you will. That's after direct labor inflation. So it's net margin expansion and over and above those two items. And I think if we can continue to do that, even if we find ourselves in a relatively muted production environment like we are today, I think the combination of the operational excellence driving margin expansion, good incrementals on growth over market, will provide nice margin tailwind for the company.
Take the free cash flow, enabling us to reduce the share count a little bit. It puts together a really nice pretty compelling value creation story
for Magna, we think.
And when I think of operational excellence, how does AI play a role? Is that folded into that strategy, or is AI an incremental addition to some of the drive for cost efficiencies here?
Yeah, I would say really the theme for us around AI, obviously it's still pretty early days in the whole AI race. But for us, we see it as a real accelerator. What we're doing with Factory of the Future is we've created a lot of data connectivity in our plants, and that's continuing as we speak. We really see AI coming in with it, working with it to really accelerate the impact, and that would be faster results, more impactful outcomes, and maybe the ability to scale it a little bit more quickly. Still early days, but based on what we see so far, we think AI can be a real enabler for us across multiple areas of the business, not just Factory of the Future.
The key, I would say, guiding principles for Magna are, number one, we have really good governance around AI across the enterprise. Secondly, everything gets tied to use cases, business outcomes, and everything has to be supported by a very strong business case to make the investment. Where we do, whether it's Factory of the Future or technology like AI, very short paybacks, very high returns, and that's contributing to this net margin expansion that we've seen and we should continue to see.
Okay. That's exciting. Maybe just turn to the macro side of things. How have you and maybe the broader auto industry been impacted by the tariff war, related commodities, commodity price dislocations, and maybe how would you compare your exposure to the macro shocks you're facing today versus maybe other shocks you've seen in recent history, such as the Russian-Ukraine war when it broke out in 2022?
Yeah, I'd say the more recent inflation that we've seen have been around resin prices, aluminum, freight, logistics, and we'll put DRAM aside for a moment. That's kind of where we've seen it. Some of those we have recoveries through with a lag through kind of automatic mechanisms. Some of them have to be recovered through negotiation. We'll see where that lands. I think in terms of 2022, 2023, that was very significant inflation that we faced at that time. We had to kind of revisit how we dealt with some of those inflation items. I think we have a higher degree of indexing today than we had back then, a higher degree of hedging that we have in place. For instance, we're two-thirds hedged in our energy in Europe now.
We wouldn't have been hedged if you go back a number of years.
Right.
In some cases, we've had to look at our contracts and build in some mechanism to protect ourselves against inflation. So in some contracts, we have basically a reset at economics at SOP, which is good for both ourselves and the OEM just to deal with inflation volatility that we have. So things have changed. I think we've adapted to the inflation that we've seen over the last few years.
Okay. Just more broadly, the health of the supply chain overall as you deal with some of the items you mentioned, inflation, whether it's energy or some of the commodities that you're exposed to, just the overall health of the supply chain.
Yeah, I would say overall the supply chain I think has remained fairly resilient, even in this kind of relatively challenging macro environment. Obviously, the conflict in the Middle East has created some pressures, I would say in some spots. But overall, I'd say fairly resilient. As Louis mentioned, we've increased our indexing of commodities to get quicker recoveries and more fulsome recoveries for commodity inflation. We've also, as Louis said, stepped up our hedging activities. Where we don't get coverage, particularly on commodities, then it becomes a discussion with our customers to get recovery, either build an index in or negotiate commercial recoveries for inflation that maybe runs beyond our expectations. Now, memory chips have sort of been kind of in a category of their own, I would say. Earlier in the year, we talked about the DRAM shortage.
It was really a combination of, started out it was just a pricing issue, then it became sort of an availability issue. I think our teams have worked really hard to put contractual pricing in place so we can have clear line of sight to pricing, ensure supply so we don't put any of our customers at risk. Then obviously kick off discussions with our customers for recoveries for the inflation. I would say as we sit here today, those discussions are ongoing, but they've been constructive. I would say progressing kind of as we've expected. We've been able to work with suppliers and customers to ensure that we're covered in the near term on DRAM in particular. As it relates to the outlook, we did build in some expectation for unrecovered inflation for both DRAM and some commodities.
We continue to work on it, continue to watch it, and continue to work constructively with our customers to make sure we're covered.
Great update there. Maybe I'll just turn to the audience to see if there's any questions. I'll keep on going here. How are you thinking about, or how should we think about Magna's view on overall consumer demand in the auto industry, in an environment of rising consumer costs, macro uncertainty, higher vehicle prices?
Yeah, I'd say, demand's been pretty resilient to this point. Those are all the case for sure. But the vehicle park is relatively old and inventories are relatively lean. I think that's got something going forward, if you will. It's hard to predict the future, but if you look at what we have built into our plans, not overly ambitious. We don't have a significant amount of growth, and that's from fairly low levels of vehicle production. We still think we can continue to expand margins even in a low production environment. I think we feel pretty comfortable where we're at.
Yeah. Maybe if I could just add. I think Louis is right. We've spent a lot of time and energy to right-size the footprint for the current level of production. We feel like we've done the work, the heavy lifting around restructuring. There's still more, we do some every year. But if we're surprised to the upside, I think we can flex up pretty easily, and I think that would be another contributor to incremental margin, if you will. But overall, we feel like even in a flat environment, as we said with the self-help initiatives, still feel like we can expand margins, grow over market and create a lot of value.
Yeah, really capacitize for a lower level of vehicle production and we'll flex up if we have to flex up ultimately.
In terms of flexing up, is there a material increase in labor that's required, capital? Or it sounds like you can do it on the-
We believe it's manageable.
Yeah. Okay.
Yeah. Typically overtime and manning and that kind of thing.
Right. That makes sense. You've highlighted a very strong new business pipeline having visibility out to 2028. Your production slots are about, I guess, over 90% booked here. Where has Magna been winning business, and what needs to happen for Magna to continue to deliver above-market growth?
We're growing really in all product areas. We see opportunities for growth across our portfolio, and what we have to do is what we've done for decades now, and that's just continue to gain through innovation and technology, continue to gain content on the next generation of vehicles, to continue to grow in new markets and grow with new customers, expanding with customers, diversifying our customer base. Then to the extent that there are opportunities in new markets, look cautiously at those and act accordingly. I think that's the formula for us to continue to do what we've been doing for many years.
Okay. When you are having these conversations with customers, anything around onshoring your supply chain and how meaningful could that be for your North American business?
Yeah, there has not been a lot of movement. There has been some, but I would not say a lot of movement with some of our bigger customers. I think they are all kind of taking a bit of a wait and see attitude as to how things unfold on the trade side. But yeah, it is out there, but it is not something that we are. We are a big supplier. We are the biggest supplier in North America with footprint in Canada, U.S., and Mexico, and we have a seat at the table. So to the extent that the customers do some shifting, it is an opportunity for us, especially in our U.S. footprint, which is the largest of our North American footprints.
Right.
Yeah, we are obviously a Canadian company, but the footprint is very balanced.
across regions, not just within North America, but across regions as well.
Right. Definitely gives you flexibility.
Yeah.
Yeah. Maybe turning to Europe, what are you seeing in the European market, with Chinese vehicles taking share, as some of your large European customers go through significant restructuring?
Sure. The Chinese OEMs are definitely taking share in Europe. That's happening. From a Magna standpoint, I would say we haven't seen too much negative impact to this point, and it's probably due in part to the fact that we're skewed a little bit more to the luxury part of the market, whereas I think many of the share shifts in Europe have been more in the mainstream vehicles, if you will. But on the flip side, I think creates an opportunity for us as well. So our complete vehicles business, which has broad capabilities around vehicle assembly and engineering, is really giving some Chinese OEMs an opportunity to come to the European market quickly without investing a lot of capital. We can help them get the vehicles ready for the European market.
It's been a logical first step for them to come in, test the market before they make more significant investments, and it provides really attractive business to us like we've done with XPeng and GAC, and we've got more than a half a dozen models in assembly as we speak in our facility in Graz, Austria. It's what we call SKD, so it's modules that we're assembling for the customer for the market, and I think the logical next step would be to get a little bit deeper into the market, go to maybe full CKD assembly, and then ultimately as they localize in Europe, we feel we're well positioned to win more than our fair share of business based on the relationships we have in China as well as our capabilities in Europe.
Frankly, as the Chinese are exporting vehicles to Europe, certainly we are serving them in China. We do serve some of the bigger exporters. As vehicles are getting exported, full vehicles getting exported to Europe, we are participating there as well. With respect to your second point on restructuring, I would say we want a healthy industry, so if our customers need to do some restructuring, we think over time, that will make them better customers, healthier customers. I think it is good for the industry. It will not have too much of an impact on us unless there is a significant movement in production, maybe across regions or something like that could impact us. By and large, we do not see too significant of an impact from some of the restructuring that we have seen.
Okay. It does sound like you could help a Chinese OEM establish a manufacturing presence in Europe as they continue to potentially gain share there.
Yeah, it starts with the I like to refer to the Graz facility
Yeah
in Austria as sort of a bridge.
Right.
They can be a bridge for some Chinese OEMs into Europe. Then, as we said, the next logical step would be to localize there, and we feel our capabilities. We have a very competitive footprint in Europe. We have broad capabilities, a lot of facilities in and around that Graz, Austria area. I would say the Chinese are capacitizing in Europe a little more slowly than maybe initially anticipated. It is happening, but it is happening maybe a little bit more slowly. We are continuing to work with them, and it has been a really good development for the Graz facility. We have seen some European programs roll off as some of our European OEM customers have insourced some of those models as opposed to outsourcing them to us. The Chinese business we have picked up has been a real nice replacement for that. It is good margin business.
It is value add, so the revenue line just contains the value add portion, so it is not as much revenue, but the margins are quite attractive for us.
Right. Maybe just turning to China, you have touched on it a bit here. How has your presence, or how has Magna's presence evolved over the past few years, and what are the opportunities for Magna to continue to take share in that market?
Yeah, sure. If you look at our business today or you look at, let us say 2025, consolidated revenue was about $5 billion. If we look at what we call managed revenue, which would include JVs, it is closer to $7 billion, and that was basically all grown over the last, call it 25 years. In early days, we were probably 20%, maybe sub 20% Chinese OEM. Today, that business is almost two thirds Chinese OEM. We have grown with our Western customers in China, but we have grown significantly with Chinese OEMs over that time, and it has been a double-digit CAGR over that timeframe, and that has allowed us to establish really deep relationships with some of the key OEMs. We are pretty selective about the customers we serve, the programs that we are on, but we have developed strong relationships.
We've earned their trust, we believe, and I think that should help us as they move around the world. The growth isn't always linear. It's not the same amount every year, but over time, we feel like we can continue to grow with Chinese OEMs. As Louis said, when we think about growth over market more broadly, so our ability to grow over market is gaining content with our core customers, which would be the Detroit Three, the German Three, recognizing they're losing share in certain parts of the world, but continue to gain content with them, grow with new customers like the Chinese OEMs, electric vehicle manufacturers, other manufacturers around the world, and then that third newer piece, third leg, if you will, around non-automotive revenue, which is kind of in the early days but could be additive as well.
Are there noteworthy differences between how the industry operates in China versus what you see in North America or Europe?
Yeah, I would say a couple differences, but the biggest one would be speed. Things just move so much faster in China. So a program in the U.S. may be a three-year from quote to start of production, in China, it'd be half that. 18 months, let's say, or even less. So you've got to be able to move quickly to serve that market. I tell you, the customers will work with you. As Swamy would say, some of our legacy customers, a spec sheet might be 200, 300 pages where with a Chinese OEM, it might be a quarter of that, might be 50 pages. So things just move a lot quicker. You got to be able to match the speed. We've done that. Our China business is run by our team in China, so we have the ability to respond quickly.
Frankly, we're actually taking some learnings now from them, our associates over there, and trying to find ways to even get faster in North America and Europe.
Right. And then just from a margin standpoint, how does your China business compare to the rest of Magna? Are there structural reasons why the region may have a different margin profile in the long run?
Yeah. So overall, we've said it before, our China business is accretive to margins. It's higher than the Magna average. Part of that is, as I said before, being very deliberate about where we play, focusing on more challenging applications, focusing on higher technology products and solutions where we can differentiate and earn the returns that we need to participate in the business. Then the other reality is, I think material and labor is a little bit cheaper there. Steel's less expensive in China than it is in the U.S., as an example. So that's probably part of it as well. But it really boils down to focusing on the right customers, the right programs, the right product lines where we can generate those returns.
Okay. Any questions in the audience? I'll keep plugging away here. We've seen a pretty significant reset in demand for electric vehicles in recent years, particularly in North America here. How has Magna adjusted to an environment of lower EV demand, and what are your expectations around your EV-related business moving forward?
Yeah, I'd say one of the important attributes of Magna's portfolio is that it is largely agnostic as to the powertrain configuration of the vehicle. So every vehicle needs a body and needs seats and latches and mirrors and fascias and active safety components. So all those things are unaffected by the shift to electrification. A couple of areas that have been impacted, if you look at battery enclosures, we've made pretty significant investments. We've got a lot of recovery from our customers for investments that we made. We're repurposing some of that equipment, and we're talking to customers about reusing some of that equipment. So we feel like we're in good shape there.
Okay.
Another area that is affected is the powertrain area, the driveline area in particular. We have a nice pipeline of business that's coming up, whether it be in hybrid or electric vehicles. We're launching a bunch of programs in the next couple of years. We're starting to ramp the curve on some of those electrified products.
Okay.
The good thing about those products is they are higher content than what they're replacing. A front-wheel drive, all-wheel drive to a secondary e-drive is an uptick in content, for instance. I think that's a good place for us to be.
Okay.
I was going to say, maybe the other thing I'd add, Kevin, is around we did make significant investments in EVs in 2023 and 2024, but we've invested into the core engineering. When we think about as EV adoption rates, while they've slowed down in North America, certainly the trend continues, and I think that investment's been made. From here, it's really just application engineering. A lot of the capital's already in place, as Louis talked about. We feel like from here, as adoption rates differ across the world and as they might vary year to year in North America, we feel like we're very well positioned to respond, react and capture more than our fair share.
It is a really good point. The fact that electrification and EVs are continuing to grow.
Right.
They are obviously slower in North America. That trend has slowed down, but Europe continues to see it. China for sure is seeing it. Those things are still benefiting us
Okay
in terms of content opportunity.
It feels like you feel good about your footprint. You do not need to rightsize or rationalize things. It feels like you feel good where you sit there.
Footprint and the core technologies that we've invested in.
Okay.
I think by and large, like on the footprint, I've been with the company just over a year now, and one of the things that's impressed me about Magna is that the company really does get after restructuring quickly. We do restructuring every year. We're constantly looking to consolidate facilities where it makes sense, close facilities where we need to. I think we're a company that's, as we sit here today, we've got restructuring in the budget for 2026, a relatively modest amount. We like the footprint. We think the footprint's in pretty good shape, but it's something that we, I would say, systematically get after.
Okay. You recently divested of your rooftop and Lighting business. Are there other businesses that are underperforming or are non-core that you could potentially divest?
Well, as you know, Magna's got, probably has the broadest portfolio of any major automotive supplier, and I think it's something we're proud of. There's a lot of advantages to having the portfolio that we do. We do look at the portfolio always through a lens of are we serving what we believe are growing markets with attractive profit pools? Do we have a leadership position in that product line, or are we growing to a point where we believe we can achieve a leadership position over a foreseeable amount of time? Then do we have sustainable competitive advantages? We look at the portfolio through that lens regularly, and certainly Lighting and rooftop were two businesses that were-
smaller parts of the portfolio that made more sense for us to divest and really focus our energy on the rest of the portfolio. We will continue to look at the portfolio through that lens. I would say, generally speaking, as we sit here today, we like the portfolio that we have. We feel we can compete and win anywhere in the world across our product lines and, as I said, I think there is a lot of advantages to having that broad of a portfolio.
For sure. Can you remind us Magna's tariff exposure at this point and how you interpret the threat from the U.S. to impose 50% tariffs on Canadian autos and auto parts starting January 1st, 2027?
Sure. Well, it changes day by day as everybody knows. I would say the main messages around tariffs for us would be first, it has thus far been very manageable and we have talked about coming into the year, we thought we would have a gross exposure at the Magna level of around a couple of hundred million dollars, with a net impact of call it $30-ish million, so getting recoveries for most of it, but a little bit of an impact. Comparable net impact to last year. Now we have mitigated the gross impact a little bit during the year, but the net impact is still relatively the same. I would say the current state of affairs, very manageable, but the range of outcomes has widened considerably with the imposition of 338, the retaliation by Canada, the retaliation by the U.S., the potential for 50%, 232 of the tariffs in January.
Now obviously the January action, if you will not kick in until then, so there is obviously time for-
further negotiation. I would say right now, manageable range of outcomes has widened, so we're doing a lot of scenario planning, as you might expect, staying very close to our customers, keeping our ear to the ground with the governments, particularly Canada and the U.S. I would say, I think the industry's still hopeful and I would count Magna among them, that we ultimately get to a resolution that preserves the benefits of USMCA or CUSMA.
Right. As you mentioned, it's a very fluid situation, so we'll see how this plays out.
Right.
We have seen a number of companies in the auto supply chain pursue opportunities outside of traditional auto such as defense. You mentioned the November Investor Day, maybe this is something you'll touch on then, but maybe at a high level, how is Magna thinking of non-auto opportunities and maybe how to engage with them?
Yeah. I would say, like many of our competitors, we do see opportunities outside the automotive space. I would say we're approaching it in a very disciplined way where we're looking at areas where we can leverage existing capabilities, leverage existing capacity, minimal incremental investment. If we can do that and serve a non-automotive market at very attractive returns, it's something we're looking at doing. The world is changing. We've seen there are industries that are growing very rapidly that need manufacturing and engineering expertise that we have. So we do see opportunities. We've got some revenue in the portfolio today, and I would put them in probably two broad categories of, there's adjacent, call it mobility markets, and then there's adjacent, probably industrial markets when you think of industries like whether it's data centers or energy storage or warehousing, robotics, automation, different markets like that.
We'll certainly have more to say on it at Investor Day. But I think the key point would be we definitely see opportunities to maybe help enhance our growth rate, mix us up a little bit on margins because most of the opportunities we see are quite attractive from a margin standpoint, enhance our returns on invested capital since we're looking at areas that require very little incremental capital. And as we step our way through it, if we see areas that we really like, then we'll look at potentially investing further down the road.
Phil Louis, we're running out of time here. Great conversation. I have a bunch of other questions here, but we'll end it right now. Thank you very much, guys.
Thanks, Kevin. Appreciate it.