Magna International - Earnings Call - Q2 2020
August 7, 2020
Transcript
Operator (participant)
Greetings and welcome to the second quarter 2020 results. During the presentation, our participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, just press one, followed by the four, on your telephone. If any time the conference needs to reach an operator, just press the star, followed by the zero. As a reminder, today's call is being recorded Friday, August 7th, 2020. Now, I would like to turn the conference over to Louis Tonelli, Vice President, Investor Relations. Please go right ahead.
Louis Tonelli (VP of Investor Relations)
Thanks, Tommy. Hello, everyone, and welcome to our second quarter 2020 conference call. We will have formal comments today from Don Walker, Swamy Kotagiri, and Vince Galifi. Yesterday, our Board of Directors met and approved our financial results for the second quarter ended June 30th, 2020. We issued a press release this morning for the quarter. You'll find the press release, today's conference call webcast, the slide presentations 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. As we review financial information today, please note that all figures discussed are in U.S. dollars unless otherwise noted. We have included in the appendix reconciliations of certain key financial statement lines for Q2 2020 and Q2 2019 between reported results and results excluding unusual items. Our quarterly earnings discussion today will exclude the impact of unusual items in these periods. Don will comment on the restructuring actions we recorded in the second quarter. Please note that when we use the term organic in the context of sales movements, we mean excluding the impact of foreign exchange, acquisitions, and divestitures. Now, I will pass the call over to Don.
Don Walker (Canadian Executive)
Thanks, Louis. Good morning. I hope everyone is staying safe and healthy wherever you are. Before I start, I want to reiterate that the health and safety of our employees remains our top priority at Magna. We have been reintegrating employees back into our plants and offices using our protocols, assessment tools, and guidance documents. It was a monumental exercise to plan, coordinate, and implement the restarts. As a company and as an industry, I believe we have responded extremely well to the challenge caused by the pandemic, including being a leader for other industries to follow in terms of safe and successful operational restarts.
During the second quarter of 2020, our most significant markets of North America and Europe experienced year-over-year declines, both in percentage and absolute volume terms, that far exceeded the worst quarters that we saw during the great financial crisis more than 10 years ago and the worst decline that I've experienced in my 40 years in the auto industry. The industry environment has been improving off these lows. Vehicle sales and production levels in our key regions were better sequentially in May and June as governments around the world started to ease lockdowns and as auto sales began to recover. The vehicle sales trend continued upward in July, and we expect a significant improvement in our sales from the first half to the second half of the year.
Nevertheless, the general view of the industry is that the production trend line over the next few years will be lower than previously anticipated. This prompted us to initiate and, in some cases, accelerate the timing of restructuring plans to right-size the business to align with our updated expectations for the midterm. Across the company, we have been taking difficult but necessary actions to strengthen our business for the future. We recorded a $168 million charge in the second quarter, substantially related to this restructuring. As expected for the second quarter, our sales reflected the severe production decline falling 58% compared to Q2 2019. As a consequence, we posted our first operating loss on a normalized basis since 2009. However, underlying the discouraging results were a few encouraging elements. Our decremental margin associated with COVID-19 was about 22%, reflecting our efforts to reduce and defer discretionary costs.
We conserved additional cash by reducing capital spending, and we expect the actions we undertook in the quarter to lead to an improved cost structure and decrementals going forward. At the same time, we continue to invest to secure a future and to ensure that we can successfully execute on all upcoming launches. While we remain in relatively uncertain times, we're confident that we have the balance sheet, the leadership, and the right operating structure to allow us to remain nimble and responsive to whatever the future holds in the short and long term. Lastly, I want to comment on an important recognition from our largest customer. In late June, General Motors recognized Magna with six 2019 Supplier of the Year awards, the most ever for a supplier in a single year.
The Supplier of the Year awards recognize GM's best suppliers that consistently exceed expectations, creating outstanding value or introducing innovations to the company. Magna won Supplier of the Year awards across our system segments for our mirrors, driveline systems, truck frames, fascias, and seating systems, as well as an innovation award for our Freeform seat trim technology. I'm very proud of these accolades as they recognize our ability to provide solutions to the many challenges faced by our customers. With that, I'll pass the call over to Swamy.
Swamy Kotagiri (CEO)
Thanks, Don. Good morning, everyone. I am happy to report that we were able to achieve safe and orderly restarts in all of our operations around the world. Plant closures varied in length, with most plants shut down for several weeks. Overall, the mood and morale at our plants upon return to work has been positive. With respect to our restarts, capacity utilization in both China and North America is getting close to where we thought we would be at the beginning of the year in this time frame. Europe is a little behind these two regions, largely reflecting a softer vehicle demand environment compared to China and North America.
While we have seen a number of delays and a few program cancellations from our customers at this point, we don't expect these to have a significant impact on our business growth relative to the market over the next couple of years. One of the concerns we had a few months ago was the status of our supply base. We noted on our Q1 call that we were working closely with our suppliers to ensure a safe and timely restart. While we continue to track a number of suppliers, we have mitigation plans in place and, to this point, have experienced no major supply base issues impacting our operations. Our operations have been able to manage the transition to a new normal. Our Smart Start Playbook has been an excellent foundation and has become standard operating procedure.
The protocols put in place have been well received and adapted by our plant employees. We have been able to manage the production ramp-up without significant disruption to our production efficiency. However, we are not stopping there. A team of varying backgrounds from across Magna looked ahead to develop recommendations on how operations could be adjusted to stay prepared, especially if a second wave hits or this becomes a seasonal illness. The team closely examined what may need to be done in our global operations over and above our current playbook and incorporated these into our regular operating mode and policies. We are staying prepared to keep our employees safe and protect our business. While our leadership team was addressing the short-term needs of the business, we were also looking and planning much further ahead at what our company, industry, and society may need in the future.
We continue to monitor ongoing trends and potential new trends, and I believe Magna has the structure, people, technology-building blocks, and investment strategy to remain a leader in mobility. Lastly, I want to announce that Sherif Marakby has joined Magna as Executive Vice President of Research and Development. Sherif will manage all aspects of Magna's innovation and new product development strategy and related activities. Sherif has been in the automotive and technology industry for 30 years and comes to Magna from Ford Motor Company, where he held a variety of product development and engineering leadership positions. He has extensive experience in electrification, having led the Ford team in developing a battery electric vehicle and hybrid electric vehicles. Sherif also served as President and CEO of Ford Autonomous Vehicles LLC and was on the board of directors for Argo AI, Ford's self-driving technology partner.
Additionally, he spent time with Uber as Vice President of Global Vehicle Programs, leading the integration of their autonomous software into production OEM vehicles. We are very happy to have Sherif as part of our management team. I will now pass the call over to Vince.
Vince Galifi (EVP and CFO)
Thank you, Swamy, and good morning, everyone. I will provide a fairly high-level summary of our quarterly results today. Rather than go through a lot of detail, including on our segment results, which you can find in our MD&A and are not particularly meaningful given the severe sales declines, I will spend some time addressing what our outlook implies about the second half of this year. As Don mentioned, we experienced the worst year-over-year decline in vehicle production that we can recall during the second quarter of 2020. Global vehicle production declined 42% year-over-year, but more significantly, it declined 70% and 59% in North America and Europe, respectively, our most important production markets. We estimate that COVID-19-related shutdowns negatively impacted our second quarter results and sales in particular by approximately $5.5 billion and our adjusted EBIT by approximately $1.2 billion.
This represents a decremental margin of approximately 22%, reflecting strong cost control across Magna's operations. We have included in our appendix a breakdown of estimated COVID-19-related sales and decremental margins by segment. In addition, equity income was negatively impacted by the COVID-19-related shutdowns. Our second quarter total sales were $4.3 billion, a decline of $5.8 billion, or 58%, from the second quarter of 2019. In addition to the COVID impact, our sales in the second quarter of 2020 were negatively impacted by the end of production of certain programs, currency translation, which was a $76 million headwind, and net customer price concessions. On an organic basis in Q2, our regional sales in North America, Europe, and Asia each outperformed vehicle production in their respective markets. However, as a result of regional production mix, our organic sales underperformed the change in global vehicle production in the quarter.
Recall that we far outperformed global production in Q1, in part due to significantly lower production in China, where Magna is relatively less represented. On a weighted basis, our organic sales slightly outperformed global production. Adjusted EBIT decreased $1.3 billion to a loss of $600 million, substantially reflecting the decline in global vehicle production due to the COVID-19-related shutdowns. Also contributing to the decline in EBIT was lower tooling contribution in the quarter compared to the second quarter of 2019, higher engineering costs in our ADAS business, including retroactive social tax costs, net provisions for customer claims in the quarter, and higher net warranty costs. These were partially offset by lower spending for electrification and autonomy, as well as favorable assembly program mix and the benefit of cost-cutting initiatives in our complete vehicles segment.
Our tax recovery was booked at 16.9% income tax rate compared to 23.5% on our pre-tax income in the second quarter of 2019. The tax recovery was lower than our typical tax rate, primarily as a result of an increase in losses not benefited in Europe. Net loss attributable to Magna was $511 million compared to income of $509 million in Q2 of 2019, reflecting the lower EBIT, higher interest expense, and the impact of the lower effective tax recovery rate. Diluted loss per share was $1.71 for the quarter compared to EPS of $1.59 last year. The decline reflects the lower net income and the negative impact of 7% fewer shares outstanding. We estimate that the lower tax recovery rate cost us about $0.15, assuming a tax rate of approximately 24.5% that we expected when we last provided an outlook in February.
I'm now going to review our cash flows and investment activities. During the second quarter of 2020, we used $1.2 billion in cash for operations, representing a $2.2 billion swing from the second quarter of 2019. $1.2 billion of the change is a result of reduced earnings due to the lower sales. $934 million is a result of an increase in non-cash working capital. You may remember from the first quarter that, given the COVID-related shutdowns and our corresponding sales decline, we generated cash from working capital in the quarter when we normally invest working capital through the first half of the year. We said on our Q1 call that we expected this to reverse as we restarted production at various facilities around the world.
Customer payment delays, the payout of our 2019 employee profit sharing plan, recoverable wage subsidies, and a shift from a tax payable to a tax receivable balance, which all aggregated to about $500 million, together with a ramp-up of production, represented most of the change in non-cash working capital in the quarter. However, we expect to recover much of our working capital investment by the end of this year. The delayed customer amounts were collected shortly after the second quarter. Investment activities amounted to $243 million, including $169 million in fixed assets and $72 million in investments, other assets, and intangible assets. Free cash flow was -$1.5 billion in the second quarter. In addition, we returned $116 million to shareholders in the quarter through the payment of dividends. Despite the significant use of cash in the quarter, our balance sheet remains very strong.
At the end of the second quarter, our liquidity stood at $4.1 billion, including over $600 million in cash. In June, we completed an offering of $750 million of 10-year senior unsecured notes bearing interest at 2.45%. This debt raise provides additional financial flexibility at a very low rate at a time when the debt markets were highly receptive. Our adjusted debt to adjusted EBITDA at the end of the second quarter stands at 2.35x. As anticipated, this is above our target range given the severe decline in EBITDA, particularly in the second quarter. We will likely stay above the target range in the short term but expect the ratio to normalize back in the range in the second half of 2021. Yesterday, our board approved our second quarter dividend of $0.40, reflecting our collective confidence in our liquidity and our future.
Now, let me turn to our outlook, which we reestablished this quarter. As always, our outlook is based on a set of vehicle production assumptions. Compared to other years, there is a higher degree of uncertainty surrounding future production given risks associated with consumer demand, increasing COVID-19 infection rates, supply chain, or other production challenges, and other factors. If actual production varies significantly from our assumptions, our results may also vary significantly. Rather than repeat the outlook already in our press release, I will make a few observations regarding our implied second half outlook in comparison to the second half of 2019. Vehicle production is expected to be down approximately 5% and 10% in our key markets of North America and Europe, respectively. Overall, we're also expecting global vehicle production down approximately 11%. We believe our expected second half stacks up well, particularly given these production declines.
Our total sales range implies sales at worst down 9% and at best up 2%. Our EBIT percentage range implies an EBITDA dollar range of about $1.05 billion-$1.25 billion compared to $1.15 billion in the second half of 2019. Our free cash flow range for 2020 is between $200 million and $400 million, implying a range of $1.3 billion-$1.5 billion for the second half of 2020 compared to last year's very strong second half of $1.45 billion. Lastly, comparing this outlook to our February outlook, we now expect second half decremental margins to be under 20%. This solid outlook reflects the combined actions we are taking across our business to mitigate the impacts of the current environment we are facing. Thanks for your attention this morning. We would all be pleased to answer your questions at this time.
Operator (participant)
Thank you. If you'd like, once again, to register your question, just press the one followed by the four on your telephone. Give it a three-tone prompt that can answer your request. If the question has been answered, I'd like to draw your registration as the one followed by the three. One moment, please, for our first question. We'll get to our first question on the line from John Murphy of Bank of America Merrill Lynch. Go right ahead.
John Murphy (Managing Director)
Good morning, guys. And thanks for the outlook. It's very helpful. That's my first question. Vince, as we look at this, the performance in the quarter, decrementals of down 22% was impressive. Getting to just down 20% in the second half of the year is obviously even better. I'm just curious, as you're looking at this, first, are there any actions that you think might be sticky as the world normalizes, which means maybe earnings might be a little bit better than expected as the world normalizes? Second, sort of in the same vein, if we think about incrementals on the upside over time, are they going to mirror these new decrementals, or could they potentially be higher? How would we think about incrementals as sales and production actually start rising, presumably in 2021?
Vince Galifi (EVP and CFO)
Yeah, John, that's a really good question. It's kind of difficult to answer that in isolation. I think you got to consider a whole bunch of things. I think when you look at the restructuring actions that we took in Q2 or commenced in Q2, and they're going to wrap up by the time we get to the end of the year, most of them, I think what you're seeing in the second half of the year is the benefit of some of those actions already impacting positively our decremental margin. We don't get to the true benefit of all those activities until we get into 2021. We will continue to see that fixed cost structure reduction helping us in 2021.
I think if you look longer term and you start thinking about what happens to overall volumes and how fast do they grow and in what regions and what happens to incremental margins going forward, at some point, you're going to be approaching average margins as the business grows at a significant rate. That's why I think you can't just answer that question in isolation. You've got to look at all the factors, sort of what regions are you growing, how fast are you growing, what's your absolute level of growth in sales.
I think when you look around the organization and you think about our culture, which we do not talk a lot as much as we should, our decentralized operating system with our general managers focused on what they need to do to run their plant efficiently, what costs are required, and what costs can they take out, and you kind of put that all together, it makes a pretty significant difference in our overall results.
John Murphy (Managing Director)
Okay. That's helpful. Just a second question. Don, as you look at the environment for new contracts or the bidding environment from your customers, I'm just curious what the pace of activity is as maybe it is normalizing as everybody's kind of working through the crisis and hopefully getting back up and running. Also thinking just about launches in the near term for stuff that's in your backlog. Just curious if there's anything more disruptive than sort of two- to three-month delays from COVID as things were down. On the launch side, are there any sort of near-term issues or maybe even opportunities?
Don Walker (Canadian Executive)
For the most part, people worked pretty effectively through the down period. There were some delays where you could not get people in for physical testing. We are seeing a few program delays from the customers. Most of them are relatively short. There have been a couple of cancellations. Most of them are, we are not talking about them. The customers can. Most of them, none of the big programs we have. The discussion is ongoing on winning new contracts. We had a little bit of a delay, not particularly. I was pleasantly surprised that we were able to keep on top of our launches. We just went through our quarterly reviews globally. I do not see any unusual spike in sort of running up against concerns on new launches. We are in pretty good shape. Swamy, you are probably closer to it than I am, and certainly in your areas. Have got any other comments there?
No, Don. I think you covered it. Pretty much small delays here and there, but nothing that I would say is material that would affect the business going forward or the launches that are ongoing right now.
I think the area we've talked about in general, the move towards electrification is pretty consistent with what we saw before. I think the autonomous level two, level two and a half continues. That's a big pull from the market. Spending on the level three, four, and five are certainly slowed down a little bit. Everybody's trying to conserve cash. I think the customers still have to be awarding contracts so they can hit their launches. No big huge delays there.
Vince Galifi (EVP and CFO)
Keep in mind, to the extent that we have content on the old program that gets extended, that really mitigates the potential loss business from launches that are delayed.
John Murphy (Managing Director)
Got it. Lastly, real quick on acquisition opportunities. I know the balance sheet might, the leverage might be a little bit higher than your target range. Just curious what's out there. Have there been any new opportunities that have availed themselves because of the stress? What does the landscape look for you guys, and what are you looking at most specifically as you kind of go through the funnel of opportunities?
Don Walker (Canadian Executive)
I do not want to comment on anything specifically, obviously, but generally, unless there is a huge second wave that we do not anticipate, we went through our cash position. I think it would have been difficult to try and execute anything big unless it was a distressed situation during the downtime or the downturn. We are continuing to look at things more in technology areas where we want to add some capability. We have the ability to. We continue to pay the dividend. We stopped the buyback, but we should be back to a pretty healthy cash flow standpoint going forward. We have the ability to move on something if we think it is correctly priced. I do not want to comment specifically. We are continuing to look at pretty carefully what technologies we want to grow in and where we want to be located around the world.
John Murphy (Managing Director)
Got it. Thank you very much.
Operator (participant)
Thank you. We will get to our next question on the line from the line of Peter Scolaro at BMO Capital Markets. Go right ahead.
Peter Scolaro (Managing Director and Group Head of Asset Based Lending)
Good morning. Question on the decremental margin of 22% in the quarter. As you know, there were various government subsidy programs in regions where they subsidized wages and other programs as well. Was that a meaningful amount, and would that have had a positive impact on the decremental margin, or were those subsidies that Magna would have received relatively minor?
Vince Galifi (EVP and CFO)
Peter, good morning, it's Vince. In terms of the amount of subsidy that we book, particularly in Canada, probably higher than what we were anticipating. As you know, there were some programs in Canada where we were encouraged to keep people on our payroll even though they were not working. We were incurring a cost that we otherwise would not and had a reimbursement from the government. That is kind of a net zero to us. I think if you back all that out and you look at the benefit of the government programs on our decremental margin, it is really not significant at all. Obviously, the sheer amount of recovery is larger because of, as I said, inactive employees that we brought back on payroll but did not really have a significant impact on overall decrementals.
Recall that when you start looking at the bucket of I looked at decremental margins from an operations standpoint. Then I looked at the cost of inactive labor, government support. The other part we have in all of that is the cost of PPE in the quarter. It is kind of hard to get an exact number. We are probably about $35 million of additional PPE costs in the quarter. Some are going to be obviously recurring with masks and sanitation fluid. Part of it is one time. If you look at that other bucket of costs, it pretty well nets to zero, Peter. The big change when I look at decremental margin is just reduced sales and reduced costs of producing those sales, including SG&A and other related costs.
Peter Scolaro (Managing Director and Group Head of Asset Based Lending)
Okay. Vince, you touched on this a little bit in a previous question, but your decremental margin was 22% in the quarter, but in your guidance, you're guiding for a decremental margin of under 20%. I'm just wondering why it's not the same on the way up as on the way down, or I'm just being too precise. It's really this 22% and 20% are really the same thing.
Vince Galifi (EVP and CFO)
No, I think about it, Peter, as it's an improvement. You remember last quarter, we talked about kind of for the last nine months of the year, we thought about low 20%. I think when you look at even Q1 and Q2 on reduced sales and reduced EBIT, we're running about 22% decremental. It was a little higher in Q1, but I think in total it's about 22%. How we came up with that number is we looked at our outlook we gave in January, which is where we think we were going to be. We looked at the reduced sales as a result of COVID in Q1 and Q2 and the lost operating income, and that's at 22%. When you go to the second half of the year, again, we're looking at the reduced sales compared to where our outlook was in January.
Sales are down because volumes are down and EBITs down, and the decremental on that is going to be less than 20%. If there was no change in our cost structure, that decremental would be around 22%. Because we've taken some actions to right-size the business, we're seeing the benefit of that by way of a reduced decremental margin.
Peter Scolaro (Managing Director and Group Head of Asset Based Lending)
Okay. Lastly, Vince, can you just, based on your guidance, Magna's going to be back to profitability in the second half, generating good free cash flow. Can you comment on the NCIB and what your thinking is in terms of resuming the share buyback?
Vince Galifi (EVP and CFO)
Yeah. Yes, Peter. It is a topic of discussion at every board meeting in terms of capital structure and leverage and kind of what we want to do with the balance sheet and opportunities we have and so on. From my perspective, and the board's and the rest of the management team's support, I still think there is some uncertainty with respect to where volumes end up for the balance of the year. We are generating, expect to generate, some pretty significant amount of cash flow. I prefer at this point in time to kind of step back from the buyback. Let us get through this year. Let us look at our business plan where volumes sort of shake out next year, and then we can think about starting to resume the buyback in 2021. Now, again, we might get through a quarter and things look a lot different. We might have a more positive view on things, and our actions could change. That is our thinking at this point in time.
Peter Scolaro (Managing Director and Group Head of Asset Based Lending)
Okay. Thanks for all your comments.
Operator (participant)
Thank you very much. We'll get to our next question on the line from James Picariello from KeyBanc. Go right ahead.
James Picariello (Senior Automotive Analyst)
Hey, good morning, guys. Just to clarify on the second-half guide, which is, of course, appreciated. The implied back half, you're looking at $650 million lower sales. I think the comment was just made that that drops through at a 20%-22% decremental. Right? That's $150 million in loss to EBIT for the back half. Then we get back to flat year-over-year driven by the structural savings. Is that a fair assessment?
Vince Galifi (EVP and CFO)
Yeah. I think if you look at the slide deck that we posted, you're looking at EBIT. The mid-range of our implied outlook is the same as 2019 because our range is $1.05-$1.25 on overall sales, depending on where you could be about flat. If you look into 2021, and we still need to do our business plan, what we're going to get incrementally in 2021 is the benefit of the restructuring we're doing in 2020. That should be accretive. There's going to be a whole bunch of other things taking place in 2021. Remember some of the things we talked about at the beginning of the year. We're focusing on underperforming operations. We're expecting some contribution from that. We're expecting some contribution from reduced engineering costs on the three advanced ADAS programs that we're working on and so on. There are a lot of moving pieces into 2021, but certainly the restructuring activities we are taking in 2020 will continue to benefit us in a bigger way in 2021.
James Picariello (Senior Automotive Analyst)
Got it. No, that's helpful. Question on complete vehicles. The margins continue to improve on down sales as there's a recovery in the back half. Should we expect margins similar to maybe the second half of 2019, or do they continue to at the first half run right here?
Vince Galifi (EVP and CFO)
Yeah. We haven't given specific guidance on segments, just given the level of more uncertainty on overall production volumes given other years. What I can talk about on the complete vehicle business, if I think about the very first half of the year, there's a couple of things that have benefited us. One is we've had some favorable mix within just even assembly programs, depending on what vehicles are being sold and trim levels. If that continues, that should be a positive year-over-year. Our Magna Steyr Group undertook a huge review of their overall processes and cost structure. As a result, we're seeing the benefits of those cost-saving initiatives impacting us positively in Q1, but more so in Q2, and that's going to continue in Q3 and Q4. That is different from where we were last year.
The other unusual thing with our business here at Magna Steyr, in a lot of our programs there, we get a fixed cost recovery regardless of the level of production. When you start thinking about incrementals and decrementals, we do not have the same level of operating leverage that we do in our production division. That could impact ultimately where margins end up at Magna Steyr. Again, a lot of different sort of ingredients in there impacting margin. I guess the final point on Magna Steyr, if I think about the business this year and last year on the engineering side, we have been getting a lot more work, and we have been generating some decent margins on that. Given that engineering is a bigger proportion of overall Magna Steyr because of reduced volumes, that is having a positive impact on average margins in this segment.
James Picariello (Senior Automotive Analyst)
Got it. Just to clarify on the restructuring effort, $168 million charge in the quarter, is that something that possibly continues through the second half, or is that a charge that reflects the entire effort possibly, potentially?
Vince Galifi (EVP and CFO)
I think it's substantially all there. There's going to be some costs that are going to trickle into Q3 and Q4, depending on when we're going to be able to recognize them from an accounting perspective. I'd say the bulk of it, substantially all of it's already been reflected in our accounts in Q2. Remember, some of that spending is not going to take place until later, but we've been able to recognize that cost in our financials for the second quarter.
James Picariello (Senior Automotive Analyst)
Is there a typical return you get on your restructuring efforts in terms of savings versus costs? Is there a typical?
Vince Galifi (EVP and CFO)
It depends what region. If you're letting some people go in certain regions, the cost of severance could be pretty significant. In other regions, it's a little less. There really isn't a typical, probably by region, but not typical across your organization. When we look at the restructuring, there was about $150 million of it that was restructuring. The balance of it was asset impairments across a number of our operations. That $150 million, as we get into 2021, should translate into about a $200 million annualized savings in costs on a run rate basis. We'll pay back the restructuring costs in less than 12 months.
James Picariello (Senior Automotive Analyst)
That's very helpful. Thank you.
Operator (participant)
Thank you very much. We'll get to our next question on the line. It's from the line of Dan Levy with Credit Suisse. Go right ahead.
Dan Levy (Senior Equity Research Analyst)
Hi. Good morning, everyone. Thank you. First, we know that the GM large truck program, T1XX, that's your largest platform. If you look at the schedules, obviously, EZCOM from the fourth quarter from the strike, and they're producing everything they can. I think their volume is going to be up in excess of 30%. To the extent that that volume materializes, could you give us a sense of what type of incremental margin you'd see on that? Is it fair to say that that's contributing nicely to the comments that you've given on second-half decremental sub-20?
Louis Tonelli (VP of Investor Relations)
Dan, we're not going to comment on incremental margins or margins in general on any program, so we can't help you there. You're right. In terms of sales, it's definitely strong, and it's certainly contributing to what we see as the opportunity for good organic growth in the back half of the year. It's a big program, as you said. We got about $20 million of content on the new K2XX versus or the new GM platform versus the old one.
Dan Levy (Senior Equity Research Analyst)
As they're going all out, is it fair to say that your, I guess, directionally, your contribution margin on that now is comparable to what you would have done in the past, or are there any inefficiencies as they're trying to squeeze as much out of that?
Don Walker (Canadian Executive)
Yeah. We never talk about where we are, but we've done this program. A lot of content we've had in that program for several generations. It'd be typical going forward. I wouldn't want to comment on a particular program.
James Picariello (Senior Automotive Analyst)
Okay. Great. Just as a second question, thank you. A question on the broader EV landscape that we're seeing and the role of complete vehicles. We know we're seeing some, obviously, a lot of headlines with EV startups, and there's a lot of questions of those who want to go asset light. Are you having incremental discussions across the automotive landscape, being it with established automakers or with startups, about complete vehicles? How does that vary regionally? What's the role of complete vehicles as this landscape is clearly shifting?
Swamy Kotagiri (CEO)
Don, if you want me to answer this, good morning. I think as a part of a normal process, we go through discussions with our various OEMs from a product landscape perspective. As part of that, obviously, the EV discussions are there from the customers that are traditional, as you said. Because of our Magna Steyr, we do have a lot of touchpoints with the so-called newcomers, as you talked about, which gives us also a pretty good visibility on what the other newcomers or the future is being thought about in terms of EV. From our product strategy perspective, we talked about the different building blocks and the platform strategy that we have from various subsystems of the powertrain. We are able to address that. As you know, the design cycles are long enough that we have good visibility and are able to pivot as we need going forward.
Don Walker (Canadian Executive)
Yeah. Just a couple of additional comments. If you think about a new entrant or a new mobility player, typically it's electric, but depending on what they're doing, they would be looking to Steyr for engineering and program management, which is a huge undertaking for anybody new in the business. On top of that, and that can be anywhere globally. On top of that, if it's going to be leading to contract vehicle manufacturing, we've got a big facility in Europe. We've also had a good startup in our joint venture we have for electric vehicles in China, and that is working well. Geographically, we'd be more likely to be able to do something from a manufacturing standpoint in China or Europe, but engineering, we can do it anywhere.
Dan Levy (Senior Equity Research Analyst)
Okay. As we're thinking about going forward, would you expect the discussions to accelerate more with legacy OEMs that do not want to put in place the added capacity, or is more of the incremental discussion on your end going to be with startups that just want to go asset light?
Don Walker (Canadian Executive)
I think it's both, and it's hard to predict what's going to happen. Part of it will be dependent on what happens in vehicle volumes and what the specific car companies want to do from restructuring their capacity utilization. I think going forward, to the extent that people know what the market's going to do, they want to try and have it so they're running their facilities pretty close to 100% and then utilize people like Magna Steyr for excess capacity. It's difficult to answer that unless we had a real crystal ball that says what the volumes are. We're also pretty careful who we take business on. There's a lot of different startups talking about what they're going to do and how much money they raise, and a lot of people fail. We're pretty particular in who we take business on for.
I do think mobility is something that Swamy and his team are looking at pretty carefully, and I think there's going to be different opportunities coming up with some new entrants.
Dan Levy (Senior Equity Research Analyst)
Great. Thank you.
Operator (participant)
Thank you very much. We'll get to our next question on the line. It's from Itai Michaeli from Citigroup. Go right ahead.
Itai Michaeli (Director)
Great. Thanks. Good morning, everyone. Just want to go back to a longer-term margin question. I mean, it looks like the second-half guidance implies that you kind of get back to 2019 margins on still a fairly lower revenue base. I think you mentioned additional restructuring benefits and other potential tailwinds next year. As we think about the big picture, do you think the earnings power of the company has increased through this downturn? That when and if we do get back to your prior 2022 revenue objectives, whenever that might be, that the margins could end up being higher than what you originally thought?
Don Walker (Canadian Executive)
Yeah. I do not know if Vince wants to comment on it. One of the things we have been working on when we are looking at world-class manufacturing is I do not think we are going to be getting a lot higher margins on our traditional business. They are pretty well where they are. As we are bringing new technologies to market, we can usually get higher margins, and we have been spending a lot of money in the electronics area and the powertrain area, as well as a lot of other new products. That is why I was particularly pleased to see the number of awards we won from General Motors because it is fairly representative of what we are offering to a lot of customers. It is just that they are recognizing innovation and execution.
Margins can be affected by our cost of non-quality and getting a lot of non-value-added cost out of our company, and we've been working really hard on that. There are a lot of moving pieces, but I think we are making good headway on our world-class manufacturing initiatives.
Vince Galifi (EVP and CFO)
Yeah. Itai, it's Vince. I think assuming you get back up to when we get, not assume, but when we get back to same volumes and same sort of revenue, and that'll be out a couple of years out, given what IHS is thinking about overall global production volumes, our mix of business, I got to believe, will be different than what we thought just in January. I sit back and think about your question, and what I saw happen in the organization is certainly right-sizing the company for what we see in the next short and midterm from a cost perspective. The relentless focus on world-class manufacturing and the time that the plants were down, I think, gave us an opportunity to reflect on things a little harder and a little differently.
I think there are processes and costs that we took out that probably would have come out at some point down the road, but those have been all sort of accelerated and taken out. I think that is incremental. How that kind of maps up to when revenues sort of come back, again, what our mix of business is, what programs we got awarded, what new programs we are working on, I mean, those all come into play, and I just do not have the visibility right now to venture out a couple of years out.
Itai Michaeli (Director)
No, that's all very helpful. Just a quick follow-up, Vince. I think you mentioned that you expect to recover most of the working capital this year. Any high-level view on what you may be able to recover in 2021, kind of unrecoverable working capital or other timing differences affecting cash flow?
Vince Galifi (EVP and CFO)
Sorry, was that 2021 or 2020 I asked? Let me answer with respect to 2020. When I looked at the investment in working capital in the second quarter, about $930 million, it was more than I expected. You start peeling back the skin on the onion, look at it and say, "Well, we got some delayed customer payments. We got that back in July." When you think about these government grants, net basis on a P&L perspective was pretty neutral. It is a pretty significant receivable that we have that we should be getting in Q3, Q4. Income taxes flip from being a payable to a receivable. That will flip back. Remember that we also generated cash in Q1 from working capital. It is really unusual. That has all come back into as a use of cash in the second quarter.
Remember, Itai, we also had it was about a $200 million collection of receivables in Q4 of last year that we should have gotten in Q1. Kind of think about where we end up at the end of the year. I think if we were not thinking about that $200 million of cash that we collected in Q4 versus Q1, I would have thought we probably recover all of it. Are we short $100 million or $200 million of that because of the pull forward of cash into Q4? Could be. We could also get some other payments that we get in early in Q4 of 2020. Net, we are going to get substantially, I think, all of that back by the time we get to Q4 of 2020.
Itai Michaeli (Director)
Great. That's all very helpful. Thank you.
Operator (participant)
Thank you very much. We'll go to the next question on the line from the line of Rod Lache with Wolfe Research. Go right ahead.
Rod Lache (Managing Director)
Good morning, everybody. I wanted to follow up on just this significant amount of capital being raised by EV startups. It's something that clearly the investment community believes that has implications for the competitive landscape in auto. I am wondering if that is actually influencing you in terms of the risk that you're willing to take with regard to some of these startups. Should we look at that, should we be thinking that there's greater potential for expansion in complete vehicle assembly in North America, at least relative to what you've done so far?
Don Walker (Canadian Executive)
We really haven't done much in North America so far. We have an investment, which we've talked about, in Waymo, and we're doing some work with them. We've had a good relationship with them, but it's relatively low volume. It's a bit like the chicken and the egg as far as vehicle assembly work in North America. We continue to have requests or questions from potential existing customers who want to outsource some low-volume programs as well as some new startups. You need a certain volume to justify the capital, even if it's a brownfield. I think if we had a sheet of paper with all the potential new entrants into the market, how many will succeed? What would the volumes be? I do think there will be some people who will be successful. Will they be then joint ventured or bought by somebody else? Hard to say.
I don't see a huge volume in the new entrants relative to the size of the market. I know, Swamy, do you have any other thoughts?
Swamy Kotagiri (CEO)
No, I think that kind of addressed it, Don. I think, Rod, the EV market is kind of still evolving, just not only from the startup, but also the architecture perspective for different OEMs. We kind of look at the landscape and be able to evaluate. I am sure there are opportunities, like Don said, as we engage with Magna Steyr, and also help the product roadmap from the component subsystem perspective.
Rod Lache (Managing Director)
Okay. Thanks for that. I was hoping, just Vince, if you can clarify, you put out longer-term margins, I think, for 2022. Let's forget about the time frame, but the margin was 7.6%-8%. Just based on the $200 million of additional savings, if you just divided that by the 20% decremental margin, is it reasonable to conclude that you could achieve that same level of profitability with $1 billion of lower revenue, or were you basically implying that a lot of what we're seeing right now is essentially pulled forward from your future plans?
Vince Galifi (EVP and CFO)
Rod, I think when you look at some of the things that we talked about in Q2, part of that is a pull forward. It would have been factored into our outlook that we gave for 2022 back in January this year. Part of it is actually incremental activities that we undertook. Remember my comments about this gave us the time to kind of reflect on what we're doing, and we're doing things a little differently that wasn't in our plan. That is incremental to whatever we would have talked about in the past.
Rod Lache (Managing Director)
Okay. Just to kind of summarize on that point, when you provide a margin target like that, it sounds like that's kind of a floating target a bit. It's really contingent on the mix and the size of the business. It's not like you're not doing the reverse exercise and saying, "Look, based on the capital we committed, we have to reach this kind of profit and find some other way to get there." Is that fair?
Vince Galifi (EVP and CFO)
You're talking about 2022? Sorry, I'm just going to clarify.
Rod Lache (Managing Director)
Yeah. Yeah. How do we read that, that kind of a target?
Vince Galifi (EVP and CFO)
Sorry. Let's go back. When we talked about January, and we pulled our guidance, obviously, but when we talked about January, it was not a target, Rod. It is based on a bottoms-up business plan based on business that has been awarded, substantially been awarded to us, or a high potential that we are going to get awarded. It is based on production volume assumptions. It is based on mix. It is based on exchange rates. Even if you get to 2022 and exchange rates are different or production is higher or lower in a particular region or mix is a little different, that could impact our ultimate numbers. It is not a target. We talked about in January, by segment, what was going to happen to margin and why it was going to happen to margin.
There was a whole bunch of reasons, Rod, depending on the business unit, why margins were going to move. Part of it was underperforming operations. Part of it is startup of new business. When you think about some of the investments we're making, electrification and autonomy, as that business starts to come on, we're going to have revenue, which in some cases we don't have today, but we have costs. That is all going to add to margin improvement.
Rod Lache (Managing Director)
Okay. Thank you. Thanks for clearing it up.
Operator (participant)
Thank you. We'll get to our next question online. I'm Chris McNally with Evercore. Go right ahead.
Chris McNally (Senior Managing Director)
Great. Thanks so much and great results, guys. Maybe the first question, some of the questions have already been answered. If we think about some of the "problem child" of 2019, some of the issues you had around seating, the Innoviz contract,GETRAG in China, could you talk about maybe just a little update about how many of those have we actually cycled through the benefit? It looks like probably on PV that you've gotten some of the issues back from the Innoviz contract. Just maybe an update if there's more savings or improvements to come, particularly maybe in GETRAG in China where that's a multi-year sort of recovery.
Vince Galifi (EVP and CFO)
I think if you look at let's break that up. You look at some of the underperforming operations that we talked about last year, and we were on track to see some improvements. Obviously, reduced volumes from COVID-19 is a challenge for all of our plants. What we've seen from an operational standpoint is that in both of the operations in North America, we have continued to see improvements. I think in one in particular, even with lower sales, we're a little bit better than where we thought on an absolute basis. That's a good story. I think when you look at our you talked about, I think it was ADAS and electrification. Our electrification spend, it's an investment because we've got programs coming in the future and platform technology and continued discussions with our customers.
I mean, that's just continuing to be invested and incurred for the right reasons. On our ADAS business, and we talked about some overspending in 2019, and kind of look at where we are for 2020. I'd say we're probably a little bit behind where we thought we were going to be, a little bit additional cost overall. Again, as we get into 2021 and start to ramp up, that should go away. From China and a GETRAG standpoint, obviously, we've been impacted by COVID-19. There has been some restructuring in some of the joint ventures. It takes some costs out. I'd say in one particular joint venture, just probably a little bit less volumes than what we were anticipating, even with the restart of overall production volumes in North America.
That is probably going to be a negative shorter term going forward than what we had anticipated in the past. Overall, we are pretty well on track everywhere across the organization if you take COVID-19 into account.
Chris McNally (Senior Managing Director)
Great. Just a quick one on Steyr. You talked about, obviously, the benefit in Q2 as a result of some of the cost actions and that should maybe continue in, I think you said, Q3 and maybe second half. Should we start to think about this? Obviously, there's moving pieces, but as a 3%+ sort of margin business, you've been moving in that direction for several years. I guess that's the first part. The second part, on the back of that EV question, I think was asked earlier, if there were programs that had 40,000-50,000 of potential volumes, is that sort of the right hurdle for the kind of visibility that you need? Many of your programs are in that sort of area in year one. Just thinking about the potential to grow this business well beyond the $6 billion or $7 billion that it's been historically.
Don Walker (Canadian Executive)
We have an existing plant. We'll take programs that are 5,000-10,000 units because they'll fit in there. If we're looking at a justification of a new facility, you want to get up to 80,000-100,000. Ideally, that's probably three programs at 20,000, but it never comes that cleanly. I think there's some opportunities with some new startups, but it really comes down to what's the vehicle? Do you need a paint shop? Is it a greenfield? Is it a brownfield? From a margin perspective, we have complete vehicle manufacturing, and the margins are pretty low because we have all the bought-in components. We also have engineering, and I do think there's opportunities for good engineering contracts, especially with some of the new entrants because of the capability we've got there.
I want to comment on whether we can get 3% or not, but I've been very pleasantly—I wouldn't say surprised—but it's been nice to see the efforts and the results we've been getting out of our engineering and the manufacturing initiatives in Steyr. And that's typically in the existing facility over in Europe.
Vince Galifi (EVP and CFO)
Yeah. Chris, I think when you look—sorry, we're not going to give guidance on any one of our segments, including complete vehicles for this year or for the next couple of years. We'll do that again as we update our business plan in January. In my commentary about margins, there are things that are going to move it in any one quarter. It's going to be the mix of programs within our complete vehicle assembly business. It's going to be, as Don talked about, the level of engineering. What, in my mind, is incremental, and we've seen the team do a really good job, is focusing on some cost-saving initiatives, and we're seeing some handsome dividends on that, and that's going to continue. That's incremental to kind of where we were thinking even a year ago.
Chris McNally (Senior Managing Director)
Fantastic. Thanks.
Operator (participant)
Thank you very much. We'll get to our next question online from Richard Hilgert with Morningstar. Go right ahead.
Richard Hilgert (Senior Analyst)
Thank you. Good morning, everyone. Thanks for taking my question. I'd like to drill down a little bit more on the complete vehicle too. We went from a 2.4 adjusted EBIT last year to a 4.7 this year. Revenue from the segment was down almost 50%, but you went from 43 million to 44 million on the adjusted EBIT. Can you kind of characterize for me, please? You talked a little bit about the favorable mix. You talked about the fixed cost recovery. You talked about cost reduction in the group. That 44 million on that much of a drop in revenue, can you talk a little bit about where most of that came from? Is this something that was all cost reduction driven and then partially the fixed cost, or is it more the fixed cost recovery and the mix that drove that?
Vince Galifi (EVP and CFO)
Yeah. I'd say that the biggest impact is going to be—look through this—is you've got mix is probably the most significant impact on us, and that's trim levels and types of vehicles that are being produced and the amount of contribution that we have on that, I'd say, followed by some of the cost-saving initiatives. What's a little more challenging—and I've got a summary here to try to figure this all out—is the impact of some of the fixed cost arrangements that we have with our customers. You could have sales coming down, and you've got fixed cost recoveries. You'd think margin would come down or profit would come down more than it actually has, and that's because of the support we have under those fixed cost recovery contracts.
Richard, keep in mind, when the sales start to go up, you also see the fact that you have those fixed cost recovery that you do not have that operating leverage. Those are the factors that are impacting us. We keep on talking about it is that there has been some more engineering work that this group has been doing, and particularly over the first half of this year. Our engineers, by a big part, have been working from home, and we have seen some efficiencies as a result of that. That has all contributed to the growth in profitability and growth in margin percent at Magna Steyr in Q2 of 2020 versus Q2 of 2019.
Richard Hilgert (Senior Analyst)
Okay. Great. Thank you. That's helpful. Then on the other segments, on the decrementals, pretty much good performance there across the board. Everything's under 30%. The seating dropped from the 30s in the first quarter to 18 in the second quarter. Body exteriors and structures stayed fairly constant in the mid-20s. Power and vision just about doubled from 15 to about 28. I recognize that seating is more of a less capital-intensive business. On a high-level basis, just looking at the different segments and given the entrepreneurial spirit of the company, I mean, the seating performed better in the second quarter because of the individual plants doing more cost-cutting versus the other segments. Can you kind of just go through what's the difference there between the segments that drove the different kinds of performances there?
Vince Galifi (EVP and CFO)
I think the first thing you got to remember, Richard, is that the level of capital intensity by segment is different. You are going to have different decrementals and incrementals as sales move around. In our commentary, as well as if you kind of comb through our MD&A, there are some items that are impacting segments that are not COVID-related. If I think about our body exteriors and structures group, I would say there are probably a couple of things that kind of stand out. A couple of things just balance each other out. Last year was a heavy launch year for this group, and there was some more tooling contribution last year than there was this year. That is a negative if you look at it on a year-over-year basis. I am not looking at it sequentially, but I am looking year-over-year.
We did talk about some provisions for some customer claims, and they're plus and minus every quarter. They're more significant than what they would typically be, and they're sitting in our body exteriors and structures group. So that's a negative, which is going to impact overall decremental margins. In our power and vision group, when I think about kind of decrementals other than COVID, we talked about Social Security taxes, a difference in our view on consultants and whether they're employees or independent contractors. And we booked a provision for Social Security taxes, which amounted to about $15 million in the quarter, which is reflected in our power and vision group. It's our electronics group. So that's one thing that impacted us, and warranty was a little higher this quarter versus the prior year quarter. I think in seating.
Louis Tonelli (VP of Investor Relations)
And equity.
Vince Galifi (EVP and CFO)
And equity income. Thanks, Louis. I think in seating, what you're seeing is some continued progress on some of the underperforming operations. And when we were struggling last year, an action plan was put in place. Even with reduced volumes, we're seeing some improved performance, which is what we were expecting with the team as focused on that. And I think that covers some of the kind of unusual type items that are impacting decrementals. And that's just the focus everyone's having on their cost structures across the organization, which is having a positive impact on profitability.
Don Walker (Canadian Executive)
And seating also was launching the business, the BMW business in Europe. So you got normal pull-through on the launch that's offsetting the COVID impact.
Richard Hilgert (Senior Analyst)
Okay. Great. And then given the guidance for the second half, I'm assuming that where we're looking at where the different segments have opportunity to improve, it looks like then body exteriors, structures, and power vision would be the ones that probably improve in the second half versus the seating and complete vehicle.
Don Walker (Canadian Executive)
We're not providing details in terms of improvements in the back half by segment, Richard. Sorry. Okay. Great. Thanks.
Operator (participant)
Thank you very much. And we do have one more question in the queue from the line of Michael Glen with Raymond James. Go right ahead.
Michael Glen (Managing Director)
Oh, okay. Thanks for squeezing me in. Can you just give an update on GETRAG in terms of what you're seeing from the hybrid transmission product? And as we think about a lot more fully electric product coming to market, will that have some implications for customer demand on the hybrid side?
Vince Galifi (EVP and CFO)
Swami, do you want to take that?
Swamy Kotagiri (CEO)
Yes, Vince. I think as we're talking about the NEV credits and how China is looking at it in terms of including hybrids in the credit side, I think it will be a positive influence, we believe. In addition to the eDrives and looking at DCTs going to the hybrid dual-clutch transmissions and the product of the DHT in the future, we see that as a positive trend for the product line in China. When I say that for transmissions, whether it's the JVs or overall in general for the product line of transmission for us.
Michael Glen (Managing Director)
Okay. Are you able to give some commentary on Europe as well? What are you seeing there?
Swamy Kotagiri (CEO)
Yeah. In terms of the specifically to this, I'm assuming. And I think, Vince, as mentioned in the past, we've seen pretty good progress and traction in terms of the product line in terms of transmissions, not just DCTs, but also the HDT part of it, which is the hybrid transmissions. And there is some good activity with customers even on the next generation, which is the DHT I talked about. So definitely much higher traction and interest in several programs in Europe as we speak.
Don Walker (Canadian Executive)
Do you recall, Michael, that at our Investor Day, we talked about a couple of programs in Europe on the HDT side. So it's going well.
Michael Glen (Managing Director)
Okay. That's it for me. Thanks.
Operator (participant)
Thank you very much. Mr. Walker, we have no further questions on the line. I'll turn it back to you.
Don Walker (Canadian Executive)
Okay. Well, appreciate everybody dialing in this morning. It's been a very interesting year, to say the least, and Q2 is a complicated quarter from a reporting standpoint. But overall, I'm fairly optimistic. We've continued to have good activities and lead results in our innovation activities, both in the product and the process. We're making good headway in our world-class manufacturing, reducing number of losing divisions and launch concerns. We have continued with the big priorities within the company. Sustainability is a big push in the company. Our diversity and inclusion activities, the restart's gone extremely well, as we talked about. The launches seem to be going well. We have had to make some tough decisions, but that's business, and we'll be getting some payback on that.
So overall, I'm really happy with the efforts and the cooperation we saw throughout the company in a very difficult time trying to keep people safe and comfortable working, also in the execution of everything we're doing. So I'm really looking forward to seeing what the future brings in the area of new mobility, whether it's new customers or new products or new revenue models. So thanks, everybody, for tuning in, and hope you have a great day.
Operator (participant)
Thank you very much, and thank you, everyone. That does conclude the conference call for today. We thank you for your participation. Please disconnect your lines. Have a good day, everyone, and be safe.