Magna International 2026 Q3 Earnings Call

Hello, everyone, and welcome to our conference call covering our Q3 2026 results. Joining me today are Swamy Kotagiri and Phil Fracassa. Yesterday, our board of directors met and approved our financial results for the third 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 presentation that 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 slides included in our presentation that relates to our commentary today. With that, I will pass it over to Swamy.

Thank you, Louis. Good morning, everyone, and thank you for joining us today. We appreciate your time and interest. Let's get started. I am pleased with our performance this quarter. We delivered another strong quarter with continued margin expansion, reflecting disciplined execution and progress across a number of areas. In the quarter, sales were down 4%, reflecting lower light vehicle production and our previously announced dispositions. However, weighted organic growth over market was positive. Adjusted EBIT was up 11%, while adjusted EBIT margin expanded 90 basis points to 6.8%. Adjusted EPS rose 38% to $1.83. These results reflect continued progress in our operational excellence initiatives and success in resolving commercial items, including some pulled forward from Q4. Most notably, we continue to see improvement in the underlying operating performance of the business.

Our strong free cash flow is further evidence of the continued improvement in our operating performance and the cash-generating capability of the business. During the quarter, we generated $950 million in operating cash flow and $584 million in free cash flows. We ended the quarter with leverage well within our targeted range and $1.4 billion in cash on hand, which provides continued financial flexibility. Supported by our strong year-to-date performance, we updated our full year 2026 outlook. We lowered our sales expectations to reflect reduced vehicle production in China and unfavorable program mix, and narrowed our range for Adjusted EBIT margin. However, we maintained the midpoint of our outlook range for adjusted EPS. In addition, we raised our outlook range for free cash flow, again reflecting our year-to-date momentum and confidence in our cash flow trajectory.

Together, these updates demonstrate our ability to absorb lower production and still deliver improved profitability and cash generation. 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 $658 million to shareholders, including $529 million through share repurchases. We completed our existing buyback authorization in October, repurchasing the remaining 1.3 million shares, and our board approved a new NCIB for 25.8 million shares. Lastly, we closed on the sales of our Rooftop Systems and North American lighting businesses in Q3 and expect to complete the remaining divestitures in the fourth quarter. I would like to take a moment to highlight our Complete Vehicles segment, which is ramping up business globally and demonstrating the value of our flexible vehicle manufacturing model.

In Mesa, Arizona, we are launching and ramping up two new vehicle programs for Waymo in our existing AV upfitting facility. In Graz, Austria, we assembled six vehicles in total for XPENG and GAC. We are launching the G9L, our fourth model in Graz, supporting XPENG's European localization strategy. We also produced two GAC models, including the AION UT, launched earlier this year. In China, our joint venture is ramping up production of all-new Alpha T7, the fifth ARCFOX model produced by the joint venture. These programs demonstrate our ability to support new and established customers across regions through flexible, state-of-the-art manufacturing. They are also generating discussions with additional customers and creating opportunities to bring more Magna systems content to new vehicle programs. We also continue to win new business across our core product areas.

We were awarded a transfer case, rear drive module, and front drive unit for a North American-based global OEM. This new program, which launches in 2028, adds to our leading market position in four-wheel drive. We were also awarded incremental actuator content for a smart glass system we currently supply to a North American-based global OEM. The global program launches in 2027, spans our three key markets, and supports new global regulation requirements. The wins reinforce Magna's strong technology position in leading product areas. Lastly, our commitment to innovation continues to be recognized by the industry. Three of our technologies are finalists for Automotive News PACE Awards, and two are finalists for PACE Pilot Awards. Winners will be announced in November. These finalists span a number of our capabilities, demonstrating a strong position across our portfolio. With that, I'll turn the call over to Phil.

Thanks, Swamy, and good morning, everyone. I'm going to begin on slide 15 with a summary of our strong third quarter results. Sales were $10.1 billion in the quarter, down approximately 4% from last year. Adjusted EBIT margin improved 90 basis points to 6.8%. Adjusted earnings increased 38% to $1.83 per share, and free cash flow was strong at $584 million. Each of these metrics exceeded our expectations and continued the momentum we saw in the first six months of the year. Now, I'll take you through some of the details. Let's start with sales on slide 16. As I mentioned, third quarter sales were down about 4% overall compared to last year. Excluding divestitures and foreign currency translation, sales declined 2.1% organically. By comparison, global light vehicle production declined about 3% in the quarter. On a Magna-weighted basis, we estimate light vehicle production was down 2.6%.

This translates to positive growth over market for Magna of about 0.5% on a consolidated basis, and 1% excluding Complete Vehicles. Looking at the sales walk, volumes, launches, and other reduced sales by $150 million. The decrease mainly reflects lower light vehicle production, the end of production on certain programs, including the Ford Escape, and normal course customer price concessions. These factors were offset partially by new program launches, including the Jeep Cherokee and the Mercedes-Benz GLB and GLC. Complete Vehicle sales declined $74 million organically, despite higher unit volumes. The higher volumes were driven by new programs, XPENG and GAC in Graz, 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, including end of production for the BMW Z4 and Toyota Supra.

This mix shift resulted in net lower assembly sales dollars, but at higher margins. Engineering revenue was also lower, in line with our expectations. The Rooftop Systems and completed lighting divestitures reduced sales by $165 million in the quarter. Lastly, foreign currency translation reduced sales by $14 million, reflecting a net stronger US dollar. Now, let's move to EBIT on slide 17. Third quarter adjusted EBIT was $683 million, an increase of $70 million, or 11%, versus last year. Adjusted EBIT margin was 6.8%, an improvement of 90 basis points. Operational volumes and other contributed about 120 basis points to margin in the quarter. The improvement mainly reflects net favorable commercial items and the impact of operational excellence initiatives, net of normal course customer price concessions. We also benefited from prior restructuring actions, as well as the divestitures, which were running at margins below Magna average.

These factors were offset partially by lower earnings on reduced organic sales volumes, unfavorable net foreign exchange impacts, and higher profit sharing and incentive compensation. In addition, lower net tariff costs contributed approximately 30 basis points to margins. Costs were slightly lower, and we're getting recoveries faster than we did last year. While the tariff situation continues to evolve, we currently expect that our full-year net tariff headwind will be similar to what we experienced last year. Higher commodity costs reduced margins by about 50 basis points. As we have noted in prior quarters, we continue to experience inflation across several key commodities. While this was a headwind in the quarter, we do expect to substantially mitigate or recover these increased costs over time. Lower equity income reduced margins by around 10 basis points.

This mainly reflects the impact of lower sales, unfavorable product mix, and higher income tax expense at certain affiliates accounted for under the equity method. Looking below the EBIT line on slide 18, interest expense was $30 million lower than last year. The improvement was driven by some discrete interest expense last year that did not recur, as well as reduced seasonal short-term borrowings, supported by our strong cash flow. Our third-quarter adjusted tax rate was 22.4%, an improvement of 410 basis points versus last year, and better than our expectations. For the full year, we now expect an adjusted tax rate of approximately 22%. Third-quarter adjusted EPS increased 38% to $1.83, reflecting the higher net income and a 6% reduction in diluted shares outstanding from share repurchases completed over the past 12 months.

Next, let's take a brief look at our business segment performance, which is summarized on slide 19. We were impacted by lower global light vehicle production across the business. In Power & Vision, reported sales also reflect the rooftop and completed lighting divestitures. Excluding divestitures and foreign currency translation, P&V sales increased approximately 2% organically in the quarter. In Seating, sales were negatively impacted by a major changeover at Ford's Louisville plant, as well as retooling at BMW's Spartanburg plant for upcoming planned program launches. In Complete Vehicles, sales declined 8% as expected, despite higher unit volumes, as lower sales on full-cost programs and lower engineering revenue were only partially offset by new value-added programs and higher margins with Chinese OEMs in Graz.