Magna International 2026 Q2 Earnings Call

Hello, everyone, and welcome to our conference call covering our Q2 2026 results. Joining me today are Swamy Kotagiri and Phil Fracassa. Yesterday, our board of directors met and approved our financial results for the second quarter of 2026 and our updated outlook. We issued a press release this morning outlining both of these. You will find today's press release, conference call webcast, the slide presentations 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, and thank you for joining us today. We appreciate your time and interest as always. Let's get started. Overall, I was very pleased with our strong Q2 2026 results with continued margin expansion momentum driven by disciplined execution. In the quarter, sales increased 3% with weighted organic growth over market of 3%. Adjusted EBIT was up 16%, while adjusted EBIT margin expanded 70 basis points to 6.2%. Adjusted EPS rose 29% to $1.86, a record for the second quarter. These results demonstrate continued traction on our operational excellence activities and ability to deliver improved performance in a dynamic environment. Our strong free cash flow is further evidence of the continued improvement in our operating performance. During the quarter, we generated $954 million in operating cash flow and $617 million in free cash flow.

We were also pleased that S&P recently reaffirmed Magna's A-minus credit rating and improved the outlook to stable. This comes on the heels of a similar action by Moody's earlier this year. We ended the quarter with a 1.4 times rating agency leverage ratio ahead of our expectations and $1.4 billion in cash on hand, which further enhances our financial flexibility. Supported by our strong first-half performance, we raised our full year 2026 outlook, reflecting confidence in our margin, earnings, and cash flow trajectory. For the year, we expected weighted sales growth over market of about 1% at the midpoint. We narrowed and raised our outlook ranges for adjusted EBIT margin, adjusted EPS, and free cash flow, again, reflecting our first-half momentum and expectations for solid execution over the remainder of the year. Our business pipeline continues to grow with over 90% of our 2028 business already booked.

While macroeconomic and geopolitical conditions remain somewhat uncertain, including recent developments in the Middle East and with respect to trade policy, our outlook reflects our best estimates and confidence in our ability to mitigate headwinds and execute on what is within our control. We remain steadfast in executing our proven capital allocation framework. We continue to invest in our business to support further profitable organic growth while returning significant capital to shareholders. During the quarter, we returned $598 million to shareholders, including $465 million through share repurchases. At the end of June, we had about 9 million shares remaining under our NCIB, and we plan to repurchase those shares in the second half. Expect to complete the remaining lighting and rooftop divestitures sooner than originally anticipated.

As a result of our team's strong execution and focus on innovation, we continue to have success winning new business to drive organic growth into the future. We were recently awarded a driver and occupant monitoring system program with a European OEM, positioning Magna's technology as a foundational platform-level solution across the customer's vehicle architecture. Our mirror-integrated hardware and software supports scalable software-defined vehicle architectures and reinforces our leadership in driver awareness and interior sensing integration. We see additional opportunities to expand this technology across other customers and vehicle programs. Our recently awarded 800-volt two-speed e-drive program with Chery Automobile further demonstrates Magna's advanced electrification capabilities. This award builds on our existing momentum with Chery following the launch of our dedicated hybrid drive system, which is now in series production for the Jetour T2. This recent award further strengthens Magna's market position in high voltage e-drives.

Our commitment to innovation, quality, and execution continues to be recognized by our customers. Most recently, Magna earned 5 General Motors Supplier of the Year awards, spanning 5 different product categories. These awards bring our total GM Supplier of the Year recognitions over the past decade to more than 40, underscoring the strength of our partnership with GM and our consistent ability to deliver for our customers. Lastly, I want to address a topic that has come up in several recent discussions with investors and analysts, whether Magna is looking at opportunities beyond automotive, including areas such as robotics, automation, data centers, and other adjacent markets. We are actively evaluating these opportunities, and we have already some initial project wins where we can leverage Magna's existing capabilities, manufacturing footprint, technical expertise, and automotive-grade standards for quality and reliability.

The key point is that we are not pursuing diversification for its own sake. Any opportunity must meet clear returns-based criteria, fit with our capabilities, and give Magna a credible right to win. Where those conditions are met, we believe these adjacent markets can provide attractive opportunities for incremental growth and high return value creation over time. We will provide more detail on how we are thinking about these opportunities, including the criteria, project awards, and potential path forward at our investor day in November. With that, I'll turn the call over to Phil.

Thanks, Swamy, and good morning, everyone. I'm gonna begin on slide 16 with a summary of our strong second quarter results. Sales were $11 billion in the quarter, up about 3% from last year. Adjusted EBIT margin improved 70 basis points to 6.2%. Adjusted earnings were $1.86 per share, up 29% from last year, and a second quarter record. Free cash flow was strong at $617 million, more than double last year's level. 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 17. As I mentioned, second quarter sales were up about 3% overall compared to last year. Excluding foreign currency translation, sales were up about 2% organically. By comparison, global light vehicle production declined 2% in the quarter. On a Magna-weighted basis, we estimate light vehicle production was down about 1%.

This translates to 3% growth over market for Magna consolidated and 4% growth over market excluding Complete Vehicles. Looking at the sales walk, volumes, launches, and other added $273 million to the top line, or about 2%. The increase was driven by new program launches, including the Jeep Cherokee Recon, Zeekr 9X, and Ram 1500, as well as net favorable sales mix. This was partially offset by the end of production of certain programs, including the Ford Escape, lower light vehicle production, and normal course customer price concessions. Sales in Complete Vehicles declined $96 million organically, despite higher unit volumes. The higher unit volumes were driven mainly by new assembly programs and grants, 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 in aggregate.

This resulted in net lower assembly sales dollars. Engineering revenue was also lower, in line with our expectations. Lastly, foreign currency translation was positive $172 million, driven by a net weaker U.S. dollar compared to last year. Now let's move to EBIT on slide 18. Second quarter adjusted EBIT was $677 million, an increase of $94 million or 16% from last year. Adjusted EBIT margin was 6.2%, up 70 basis points. Looking at the margin pluses and minuses, the largest benefit came from operational performance, volume, and other, about 75 basis points. This reflects continued momentum from operational excellence and other cost reduction initiatives. We also benefited from prior restructuring actions, favorable net foreign exchange transaction gains, and incremental margin on the higher organic sales. These positives more than offset unfavorable mix and higher commodity costs, among other items.

Lower net tariff costs year-over-year added around 25 basis points in the quarter, as costs were slightly lower, and we're getting recoveries quicker than we did last year. While the tariff situation continues to evolve, we currently expect that our net tariff headwind for full year 2026 will be similar to 2025. Higher equity income year-over-year contributed around 10 basis points to margin in the quarter. This mainly reflects productivity and efficiency improvements, as well as some favorable commercial items at our unconsolidated JVs. Finally, discrete items reduced margins by about 40 basis points. This was driven mainly by the net unfavorable impact of commercial items year-over-year in the consolidated business.

Looking below the EBIT line on Slide 19, interest expense was $15 million lower than last year, due mainly to lower debt levels and our strong first half free cash flow, which resulted in reduced seasonal short-term borrowings. Our second quarter adjusted tax rate was 19.1%, an improvement of 140 basis points versus last year and better than our expectations. For the full year, however, we continue to expect an adjusted tax rate of 23%, which implies that our second half rate will be north of 23% for modeling purposes. Second quarter adjusted EPS was $1.86, up 29% from last year, reflecting higher net income as well as a 3% lower share count from our share repurchases over the past 12 months. Now let's take a brief look at our business segment performance, which is summarized on Slide 20.