Swamy Kotagiri: Yes. Good morning. I think it’s a good question with what’s happening in the industry. For us, it’s, I would say, normal course of business, right? Some of the reductions or optimization as you look at. We are not really focused on just overall headcount reduction. I think the way I look at it is, what is the cost structure of the business to be able to hit the margins that we’re talking about. Part of that obviously means flashing direct labor in various locations, and we have been doing that over the last six months. So it’s not a one-step change discussion for us. More specifically, if you are looking at a program like Fisker that we talked about, that type of restructuring is a little bit different.
We have talked about certain divisions being restructured over the last year and so, and that is a normal course, and we are continuing to look at that. This is all part of the operational excellence activities that we generally look at, right, which is headcount reduction of overheads, SG&A. Looking at more focus on continuous improvements, looking at recoveries, commercial discipline. All of this is how we are able to say we are offsetting the inflation headwinds by the 10 basis points that we talked about. We are talking about the capital discipline that’s how we are able to reduce the capital. We are looking at every engineering program and its relevance now and going forward, that’s a reduction on the engineering spend. So, I think it’s all encompassing.
I wouldn’t say it’s just focused on headcount. So again, this is all efforts towards margin expansion, and that’s one of the reasons why we are able to keep the margin outlook for 2024, and we feel comfortable looking forward into 2025 and 2026.
Joseph Spak: Thank you. And maybe just as a second question. Last quarter, you talked about an EV win in the Southern U.S. I was wondering if you could sort of provide an updated view from your perspective, given that there’s obviously been a lot of noise in the market around that potential program?
Swamy Kotagiri: Yes. Difficult to comment without the customers talking, right? We don’t comment specifically on the programs, but as we get to a little bit more clarity, we’ll start seeing what it means to CapEx and revenue going forward, we’ll keep you posted.
Joseph Spak: Have you changed any of your internal plans yet?
Swamy Kotagiri: Not at this point to comment.
Pat McCann: I think certainly, Joe, just for perspective, we do an annual planning once per year on a three-year forward basis, and we’re updating 2024. So I think it’s a little premature to say we’ve updated whether out to 2025, 2026. We’ll kick that off through the summer.
Joseph Spak: Thanks again.
Operator: Your next question comes from the line of Dan Levy from Barclays. Please go ahead.
Dan Levy: Hi, good morning. Thank you for taking the questions. Wanted to start first with a question on Complete Vehicles. Can you just give us a sense on the go-forward strategy at cross [ph] that assuming the Fisker Ocean is no longer going to be in production and you now have spare capacity, what is the process to get that capacity allocated to other automakers? What’s the cost? What’s the confidence that other automakers will take up that capacity and the timing around that? Thanks.
Swamy Kotagiri: Good morning. I think as we look at the current status, we are still looking at in 2024 producing roughly about 70,000 units or so. One of the key things that we have always talked about is the flexibility in the process to be able to handle multiple volumes in the same line, whether it’s ICE or EV or different types of vehicle segments. So that gives the call it the speed to be able to changeover and address as we get opportunities. But I think as you rightly said, one, we got to first be clear from an obligations perspective of what capacity needs to be kept versus when it’s released and how we can use it. All of that comes into the equation. There is multiple conversations on different customers, I would say, mature customers or new ideas and we continue to look at that.
So we’ve clearly indicated there is a call it a lull [ph] in the 2026 timeframe. And this business is typically lumpy. So it’s not very unnatural to have a low point and then get back to what we need to get to. That’s what we are going through. But there’s a lot of conversations on that topic to see how we can address the existing capacity. And like the total capacity is in the range of 150, 160, roughly, right. And we are 70 there with a lot of conversations ongoing.
Dan Levy: Is drop being looked at by other automakers as an opportunity to fill some of the EV volume where maybe they have a bit more of an uncertain outlook. So it’s a bit more of a stop gap for them rather than dedicating their own capacity to it?
Swamy Kotagiri: Yes. Like I said, a lot of conversations with different customers not just in terms of EV, but that it’s EV or ICE, sometimes it’s volume leveling, sometimes it’s very in discussion. So it’s a combination of the two. It’s not specific to EV. It’s more open, again, going back to the ability that we have the flexibility to do different models of the same line and be able to do that quickly. There is a whole bunch of conversations on that topic, yes.
Dan Levy: Okay, great. Thanks. And then as a follow-up, wondering if you could just talk to within the revenue base, the ICE versus EV split. I believe in the past, you made a comment that something like 20% of your revenue is on EV programs of some sort. What is the trajectory of that? Are you seeing any softening in that [indiscernible]? Are there offsets from better ICE? And then maybe you could just provide a quick comment on your DCT, which presumably is benefiting from a better hybrid outlook. Thank you.
Swamy Kotagiri: Yes. I think there is two parts of the question. Generally, I would say in the short term, if we look at 2024, obviously different regions have different EV penetrations. And overall as Magna, if you look at it in, we would be aligned with the overall EV market to the global market in 2024. And as we go out into the future years, we are more indexed in North America, as you know, 50% of our sales is in North America roughly. So we might have a higher index of EV in North America. But if you look globally, I think further out is difficult to say as volumes are changing. And we – as Pat said, as we go through the planning process, we will come back and be able to give you a little bit more clarity on that. Yes, that’s one part of it.
So pretty aligned in the short term as we look out in the mid and long term. A little bit more indexed in North America, under indexed in China and Europe. But if you look at the DCT, I think the question you asked there are certain programs where we have both sides of the equation. That means we are on the same platform supplying the ICE version, DCT or the hybrid DCT or the eDrive. So if there is ups and downs on this, it will be neutral to us. It’s is a good thing. But it doesn’t apply to all programs, obviously. So we do see, if the ICE continues to have the volumes and have an uptick, we will see that in our DCT programs that we have.
Dan Levy: Great, thank you.
Operator: Your next question is from the line of Krista Friesen from CIBC. Please go ahead.
Krista Friesen: Hi, thanks for taking my question. I was wondering if you could just give us a little bit more detail on what the conversations are like with some of your customers who are maybe adjusting their EV strategies? And if you’re able to get any recoveries at all or if that’s kind of out of the question and if that impacts how you structure kind of your contracts going forward?
Swamy Kotagiri: Yes. For sure, the discussions are on. And in cases – in some cases, we actually had the commercial recoveries already. Like I said at the beginning of my comments, in some cases, the OEMs are actually coming in with the capital upfront, which reduces the risk. In some cases, where we had a certain set of assumptions on volumes, and we had the capital invested, we had recoveries and those discussions continue going forward. We are also looking, as I said before, how we look at these programs, whether it’s volume banding, whether it’s in our front payments or at least have the framework to have a discussion giving. All this said, more importantly, also, we have our own view of looking at what we think the volumes could be on the project, although we have to meet the customer requirements in the run rates and be ready to give that volumes that’s where how we think in terms of flexibility and modularity and all of that stuff.
So it’s managing that. So that’s where a lot of this, call it, process knowledge and continuous improvement as well as the operational excellence planning comes into play.
Krista Friesen: Thank you.
Pat McCann: I think, sorry, I’ll just add to that, Swamy. I think Krista, if you think about – when we think about EVs, we have strategy depending on product group. So if you start thinking about higher capital type programs, whether it’s a battery tray or a frame, we’re making decisions now for the next three years. We’re making decisions on Gen 2, Gen 3, and that’s the history we’ve had on these capital-intensive products or highly engineered products. So I think it’s – there’s a lot of noise in the media right now about EVs, particularly in North America, but we’re looking much longer than the next three-year time horizon, and we’re making decisions based on our view of where the industry is going to be long-term. And as Swamy said, EVs are coming and it’s a matter of picking the right platforms and the right customers.
Krista Friesen: Okay. Great. Thank you. I’ll jump back in the queue.
Operator: Your next question comes from the line of Colin Langan from Wells Fargo. Please go ahead.
Colin Langan: Great. Thanks for taking my question. I just wanted to follow up, make sure I fully capture all the changes in guidance. So on the sales side, at the midpoint, guidance has cut $1.2 billion. So that split $400 million for Fisker, $350 million is the G-Wagen which is just pass-through with no margin and then there’s 450-ish from launch delays. And then the EBIT cut at the midpoint was like $135 million so about 100-ish from the Fisker impact. Maybe if you have contributions on that $450 million of lost sales that’s maybe 20% contribution, maybe $190 million – $90 million-ish maybe? And then the offsets to that are going to be about $50 million in lower engineering and then the input cost, which I guess is 10 basis points or maybe $40 million-ish. Are those the main puts and takes that we should be thinking about?
Pat McCann: Let’s just deal with the sales first, call it, if that’s okay. So Fisker 400-ish is correct, the G-Wagen just pure flow-through is the $350 million you mentioned. The one that number that I didn’t hear was foreign exchange headwind of about $200 million, which should have a corporate average type margin, most likely. And so that adds those number – those numbers add up to the $950 million of the $1.2 million. So your balance is $350 million-ish of delta.
Louis Tonelli: $250 million.
Pat McCann: $250 million, sorry, thanks Louis. And that’s a combination of volumes launches, offset in part by some of the delays we’re seeing in the ADAS space, but net-net. And then on the EBIT walk side, I think we talked so the G-Wagen, Fisker, we talked about the 25 basis point headwind. We have the pickup then on G-Wagen is about 5 basis points. We then talk about the benefit of about 10 basis points on the inflationary pieces. Engineering spend is the 50 Swamy had mentioned. And then we have some commercial pricing pickups in the back half that are going to flow through, which is in the range of about 20 basis points. So those are the big drivers. And then obviously, the offset is just the lower sales of the $250 million net.
Colin Langan: Got it. That’s very helpful to put it all together. Okay. And then just going back to the prior question about the EV programs because there was a very large paragraph in the release on those programs. Do you don’t have minimum contract commitments in your – in some of these programs where if you don’t hit certain volumes, you actually would be qualified to get some recovery; I don’t know how common that is or if it’s just hard to actually enforce those kinds of…
