Hugo Boss Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2024

There are 15 speakers on the call.

Operator

Thank you for standing by. My name is Kayla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Magna International Third Quarter 2024 Results Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the call over to Louis Tonelli, Vice President of Investor Relations. You may begin.

Speaker 1

Thanks very much. Hello, everyone, and welcome to our conference call covering our Q3 2024. Joining me today are Swamy Kotugiri and Pat McCann. Yesterday, our Board of Directors met and approved our financial results for the Q3 of 2024 and our updated outlook for 2024. We issued a press release this morning outlining our results.

Speaker 1

You'll find the press release, today's conference call webcast, the slide presentation 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.

Speaker 1

With that, I'll pass the call over to Swamy.

Speaker 2

Thank you, Louis. Good morning, everyone. I appreciate you joining our call today. As always, let's jump right in. Let me highlight a few key takeaways before we get into the details of the quarter.

Speaker 2

We are mitigating industry headwinds, including lower production volumes in each of our core regions and continue to execute with an adjusted EBIT margin of 5.8%, in line with Q3 2023, despite 4% lower global vehicle production. We expect our adjusted EBIT margin to be in the 5.4% and 5.5% range for 2024. Despite softer than anticipated vehicle production in North America and Europe, which has negatively impacted sales, we still expect our adjusted EBIT margin to be within our original 5.4% to 6% range from our February outlook, which highlights effective cost saving strategies we have executed on. We continue to expect margin expansion in 2024 compared to 2023. Operational excellence activities remain on track to collectively contribute about 75 basis points to margin expansion during 2024 and 2025.

Speaker 2

And we are benefiting from our ongoing restructuring activities and the $90,000,000 of reduced gross megatrend engineering spend for 2024. While we are reducing our spend, we maintain confidence in our long term positioning and ability to reap the rewards of recent investments. We have a continued focus on strong free cash flow generation and capital discipline. We have further lowered our expected CapEx range by another $100,000,000 for a reduction of up to $300,000,000 for 2024 compared to our February outlook, and we are maintaining our free cash flow outlook range at $600,000,000 to $800,000,000 And we are leveraging the elements within our control, further reinforcing our conviction in our growing free cash flow beyond this year. As a result of this, we are planning to restart meaningful share repurchases this quarter.

Speaker 2

We continue to focus on free cash flow generation and capital discipline to preserve our ability to return capital to shareholders while ensuring balance sheet health. Turning to a high level review of the numbers for the Q3 for 2024 compared to the Q3 of 2023. Consolidated sales were $10,300,000,000 down 4%, mainly reflecting lower production in our key markets and the divestiture of a controlling interest in our metal forming operations in India, partially offset by new program launches. Despite the challenging production environment, including Detroit 3 North American production being down 12% in the quarter, we posted 1% sales growth over market. Adjusted EBIT was $594,000,000 up $17,000,000 from Q2 2024, despite sequentially lower vehicle production in all key regions.

Speaker 2

Adjusted EPS came in at $1.28 inclusive of approximately $0.10 of net impact associated with the higher income tax rate, which Pat will cover later. And free cash flow generated in the quarter was $174,000,000 a strong $151,000,000 increase from last year, reflecting continued capital discipline. Our capital discipline and allocation principles remain unchanged. We continue to maintain a strong balance sheet, ample liquidity and high investment grade ratings to provide flexibility to invest for the future and manage through downturns. As we continue to invest for profitable growth, we also regularly review and refine our product portfolio to ensure all business lines are aligned with our strategy to be a leading player in relevant markets and to generate value for shareholders.

Speaker 2

And as we have for many years, we intend to continue returning capital to shareholders. Following a period of heightened investment, we are focused on returning to a more historical cadence in returning capital to shareholders. Overall, our disciplined, profitable approach to growth has served Magna and our shareholders well over the years and will remain a foundational principle going forward. At the end of Q3, we had about $3,700,000,000 in liquidity, including about $1,100,000,000 in cash. We have been reducing our adjusted debt to adjusted EBITDA ratio for a peak of about 2.2x in 2023.

Speaker 2

Currently, our ratio is at 1.93 and we are on a path to returning to our targeted range. When we talk about returning to a normal cadence, a look at the past dozen years provides some context to our capital allocation strategy. Overall, we believe our long term approach to investing for future value creation and capital return to shareholders is balanced. Over the 2013 to 2023 timeframe, we invested about $20,000,000,000 into our business, almost 90% of which has been capital spending, including for new product areas, programs and geographies to bolster or establish strong market positions. After a more recent period of investment in battery enclosure, assembly capacity to support the ongoing transition to EVs, our CapEx as a percent of sales is on a path to more normal levels of mid-four percent next year and around 4% by 2026.

Speaker 2

And over the same 2013 to 2023 period, we returned about $15,000,000,000 to shareholders in the form of dividends and share repurchases. As you can see, following a period of elevated investment in 2023, 2024, we expect our capital allocation profile to normalize starting in 2025. With our free cash flow generation this year and our confidence in further free cash flow growth beyond 2024, we are optimizing value creation by meaningfully increasing our return of capital to shareholders beyond our consistent dividend policy. Our Board approved a share repurchase plan for up to 10% of Magna's public float or over 28,000,000 shares. We expect to restart meaningful share repurchases this quarter.

Speaker 2

The repurchases are in addition to our ongoing quarterly dividend. We believe this capital allocation strategy provides the continued flexibility to both support future growth and further return capital to our shareholders. In summary, we are responding to the volatile operating environment and are focused on margin expansion, free cash flow generation and increasing return of capital. With that, I'll pass the call over to Pat.

Speaker 3

Thanks, Swamy, and good morning, everyone. As Swamy indicated, we continue to mitigate the impact of ongoing industry challenges. Comparing the Q3 of 2024 to the Q3 of 2023, Consolidated sales were $10,300,000,000 4% lower than Q3 2023 and in line with a 4% decrease in global light vehicle production. On an organic basis, we posted a 1% weighted growth over market for the quarter. Adjusted EBIT was $594,000,000 and adjusted EBIT margin was unchanged at 5.8%.

Speaker 3

Adjusted EPS came in at $1.28 down 12% year over year, mainly reflecting slightly lower EBIT and higher income taxes, which cost us about $0.10 The higher tax rate was largely related to non cash foreign exchange losses, including on certain deferred tax assets that are not deductible for income tax purposes. And free cash flow generated in the quarter was $174,000,000 a substantial increase compared to $23,000,000 in the Q3 of 2023. During the quarter, we paid dividends of $138,000,000 And with respect to our outlook, we are once again lowering our capital spending range and maintaining our expectations for 2024 free cash flow. Finally, we recognized $196,000,000 of other income from fiscal related deferred revenue as a result of the cancellation of the manufacturing agreements this past quarter. Let me take you through some of the details.

Speaker 3

North America and China light vehicle production were each down 6% and production in Europe declined 2%, netting to a 4% decline in global production. Breaking down North American production further, while overall production in the 3rd quarter, it decreased 6%, production by our Detroit based customers declined 12%. Our consolidated sales were $10,300,000,000 compared to $10,700,000,000 in the Q3 of 2023. On an organic basis, our sales decreased 4% year over year for a 1% growth over market in the Q3, despite negative production mix from lower D3 production in North America. The lower global vehicle production, end of production of certain programs, the divestiture of a controlling interest in our metal forming operations in India and normal course customer price givebacks were partially offset by the launch of new programs and increases to recover certain higher input costs.

Speaker 3

Adjusted EBIT was $594,000,000 and adjusted EBIT margin was 5.8 percent in line with Q3 2023. The EBIT percentage in the quarter reflects 75 basis points of net discrete items due to higher net favorable commercial items, including approximately 50 basis points of net unfavorable items in the Q3 of 2023, partially offset by higher net warranty costs and supply chain premiums, partially as a result of a supplier bankruptcy and 50 basis points of net operational improvements, including operational excellence activities, partially offset by higher net input, new facility and launch costs. These were offset by volume and other items, which collectively impacted us by about negative 90 basis points. These include reduced earnings on lower sales and lower vehicle assembly volumes, partially offset by the impact of the UAW strike in the Q3 of 2023 and negative 40 basis points related to lower equity income largely as a result of net favorable commercial items and lower unconsolidated sales in our LG Magnet joint venture partially offset by lower launch costs. Interest expense increased $5,000,000 mainly due to higher interest rates on the debt refinancing during 20232024.

Speaker 3

Our Our adjusted effective income tax rate came in at 27.2 percent, significantly higher than Q3 of last year due to unfavorable foreign exchange adjustments recognized for U. S. GAAP purposes and a change in the mix of earnings. Net income was $369,000,000 compared to $419,000,000 in Q3 of 2023, mainly reflecting lower adjusted EBIT and higher income tax expense. And adjusted diluted EPS was $1.28 including approximately $0.10 associated with the higher income tax rate compared to $1.46 last year.

Speaker 3

Turning to a review of our cash flows and investment activities. In the Q3 of 2024, we generated $785,000,000 in cash from operations before changes in working capital and invested $58,000,000 in working capital. Investment activities in the quarter included $476,000,000 for fixed assets and $115,000,000 increase in investment, other assets and intangibles. Overall, we generated free cash flow of $174,000,000 in Q3 compared to $23,000,000 in the Q3 of 2023, and we are maintaining our free cash flow expectations of $600,000,000 to $800,000,000 for 2024, despite the challenging industry environment. And we continue to return capital to shareholders, paying $138,000,000 in dividends in the 3rd quarter.

Speaker 3

In addition, as Swamy noted, we intend to begin repurchasing our shares this quarter, which demonstrates our confidence in our free cash flow profile and our focus on shareholder value. Next, I will cover our updated 2024 outlook, which incorporates reduced vehicle production in all key regions. We also assume exchange rates in our outlook will approximate recent rates. We now expect a slightly higher Canadian dollar, euro and Chinese RMB for 2024 relative to our previous outlook. We are narrowing and lowering our expected sales range, reflecting lower volumes in North America and Europe, partially offset by positive foreign exchange, mainly from the higher euro.

Speaker 3

We have narrowed our adjusted EBIT margin range to 5.4% to 5.5% as we are now 3 quarters of the way through 2024. Consistent with our original outlook commentary in February, customer recoveries and lower net engineering spend contributed to higher margins in Q3 compared to what we saw in the first half of the year, and they are expected to help drive margins to the highest level of the year in Q4. Our reduced equity income range largely reflects lower expected unconsolidated sales of EV components. We raised our effective income tax rate to approximately 23%, mainly due to the weak Mexican peso relative to the U. S.

Speaker 3

Dollar, leading to unfavorable foreign exchange adjustments incurred for U. S. GAAP purposes. We have narrowed and lowered our adjusted net income to largely reflect lower EBIT and the higher income tax rate. We now expect capital spending to be in the $2,200,000,000 to $2,300,000,000 range.

Speaker 3

This is down another $100,000,000 from our previous outlook, now totaling up to $300,000,000 for the full year compared to our February outlook. This mainly reflects our continued focus on capital discipline and offsetting the impacts from a weaker vehicle production environment. And our interest expense and free cash flow expectations are unchanged from our previous outlook. To summarize the quarter, we had solid operating performance and we continue to execute despite a more challenging environment with adjusted EBIT margin in line with Q3 of 2023 despite lower vehicle production in all key regions. We continue to be focused on margin expansion, capital discipline and free cash flow generation.

Speaker 3

With respect to our updated 2024 outlook, we are reducing the top end of our sales range, reflecting lower expected production projecting to be in the 5.4% to 5.5% range for adjusted EBIT margin, lowering our capital spending once again and maintaining our free cash flow expectations for the year. We plan to restart meaningful share buybacks in Q4, as always, seeking to optimize value creation. And we continue to work to mitigate the impact of market challenges we are facing. Thank you for your attention this morning. We would be happy to answer your questions.

Operator

Our first question comes from the line of John Murphy with Bank of America. Your line is open.

Speaker 4

Good morning, guys. Just maybe a first question on the 4th quarter implied. It seems like sales on a year over year basis at the midpoint would be about flat and the margin or the adjusted EBIT margin 6.4% to 6.7%. Certainly in light of everything that's going on right now, those are pretty strong implied results. Just curious if there's anything rolling on as far as new business in the Q4 and sort of what's the sort of the confidence in what looks like a very good Q4?

Speaker 4

Are there more recoveries coming in? I mean, what's driving this?

Speaker 2

Good morning, John. I think there is nothing significant in terms of rolling on or off other than the normal cadence of launches that happen in Q3, Q3 and maybe slightly into Q4. All our assumptions are based on not just the numbers, but EDIs and the releases that we are seeing. Other than that, I think there's nothing that is significant. There is portion of recoveries that we've always said are towards the back half of the year, but I wouldn't say they are any significantly different in Q4 than they were in the Q3.

Speaker 4

Okay. And then just maybe a follow-up to that, given the strength of what looks like 6.2% margins in the second half of the year and the great work you guys have done on rationalization, how do you think we should think about sort of I want to get into 2025, I'm sure you're not going to give exact outlook there. But as Pat, as we think about sort of the walk off point for 2024, given that you're putting up what looks to be very good results in a very tough environment in the second half with the benefits of some of this restructuring, what do you think the correct walk off point is for margins as we think forward, forget about even saying 2025 exactly, but the basis that we should be thinking of?

Speaker 2

John, like you said, I think it's difficult for 2025, but I think one of the key things that we talked about is the 75 basis points of margin improvement between 2024 and 25. And I would say we are on track and with very little left in 2024, we feel good that we have achieved that. So we have that operational runway with whatever we end with Q4, which we are talking about full year being 5.4 to 5.5 and that we have the operational improvement of the 35 to 40 basis points going into 2025. And I would say there is few other things we continue to look at. So I would say that's the best way to look at how we're going to end this year going into 2025.

Speaker 4

That's very helpful. And just lastly on the CapEx, is most of the pullback year on the battery enclosure and other EV spending? And I mean, how should we think about sort of that commitment that business? I would imagine it's still pretty strong, but I mean, is there a lower capacity level that you think you might need going forward?

Speaker 2

Yes. I think, John, you kind of hit the nail on the head. There's a couple of points to make, just a couple contextual and a couple current. In 2023 2024, I would say the significant investments above the normal water level has been in the PES segment specifically for battery enclosures. You're right on that.

Speaker 2

I would say most of the significant heavy lifting on that topic is behind us unless there is new programs, but those new programs would be more program capital rather than brick and mortar and other things. And John, you might know, but just for others and everyone, this is normal course. If you go back, I know I'm going a little bit into the history, but into the mid and late 90s when Magna was getting into the frame business, our CapEx to sales ratio intensity was in the level of 910 for about 3 or 4 years. And that business, we still continue to flourish after 30 years. So the battery enclosures business is in a similar vein in the same design space for the vehicle, similar capital intensity, we feel we have built that foundation now.

Speaker 2

And as I've always said, the EV is a secular trend, the trajectory is a little bit unpredictable, but when it comes that will serve as a tailwind for us given the foundation is done and it's behind us.

Speaker 4

Maybe just one last follow-up on that. The payoff pitch on that investment is not necessarily just this next product cycle. It might be many product cycles going forward. Is that a first statement Swamy?

Speaker 2

That's fair, John. I think 3 buckets I always like to consider on big investments like this. One is more like brick and mortar for which you are right. It will be multiple design cycles. In the past, we were building frame plants in Ontario, in Mexico, in southern part of U.

Speaker 2

S. So that bucket, you are right. The second part is using capacity like stamping presses, castings and so on and so forth. As there is volatility in production, we are using that capacity to bring back some of the outsourced strokes that we have to leverage that and use that capacity right now and when EVs or the critical programs come back, we can flex back and forth again. So that's the 2nd bucket.

Speaker 2

3rd bucket is really capital specific to programs like Assembly Capital that is very program dependent. So that's kind of how I look at the business overall.

Speaker 4

Great. Thank you very much guys.

Speaker 2

Thanks, Jon. Thanks, Jon.

Operator

And your next question comes from the line of Tamy Chin with BMO Capital Markets. Your line is open.

Speaker 5

Hi, good morning. Thanks for the question. Pat, I wanted to ask about the starting of your buyback, well, this quarter Q4, and it's a fairly substantial amount too for the next 12 months. It is earlier, I believe, than your previous commentary. So I just wanted to better understand what specifically moved this timeline forward.

Speaker 5

I think my prior understanding was the big hurdle was your leverage that it needed to be below the 1.5 times. I see you're still at 1.93 times. So can you just talk a bit about what moved the buyback timeline up quite a bit?

Speaker 3

Yes, I think good morning, Tammy. As far as the NCIB, we are still looking, as Swamy said, to get back into our long term ratio of 1 to 1.5. I think that's core and foundational to Magna. When we look at our business plans and we're as we progress through the year, we're getting closer and closer. So what we were talking about last year was that we were going to initiate buybacks during 2025.

Speaker 3

What we've effectively done is pulled it ahead maybe 1 or 2 quarters. It's not a substantive change. It's consistent with where we are. And I think it really just reflects our view of our execution over the past 9 months. Our 1.9 is where we expect it to be actually slightly ahead.

Speaker 3

So we're tracking and we're pulling it ahead. I don't think it's a change in our strategy. It's really just we're accelerating from where we expect it to be.

Speaker 2

Tammy, I would say that our capital allocation principles are unchanged like Pat said. It's just that we have the confidence of taking the right steps to drive margins and cash flow including the operational initiatives that I talked about, lowering capital, reducing engineering spend and as Pat said looking at what we have in terms of visibility, we believe we can increase the free cash flow even in a relatively modest production environment assumptions.

Speaker 5

Got it. And just to clarify on that, you don't it doesn't sound like you foresee any impact or issue to your investment grade rating to pulling back and starting sorry, pulling forward and starting the buybacks now?

Speaker 2

So, I mean, we are not obviously doing this in isolation. We have had discussions and meetings with the major credit rating agencies. Obviously, I cannot talk about their decision, but we walked them through and this was done in a very meaningful measured discussed with the appropriate parties.

Speaker 5

Okay. Thanks. And my other question is on the Power and Vision segment, so it's good to see the margin performance this quarter. It's been a bit of a volatile segment if I think through the quarters this year. And I'm just trying to put together all the pieces between some of your prior comments about a bit of in sourcing in China, some OEMs reassessing the entire vehicle architecture.

Speaker 5

So can you just remind us at this point here how you're thinking about the trajectory of the business, whether it's sales growth, the margin, anything there would be helpful? Thank you.

Speaker 2

Yes, Tammy. I think overall for the P and V, we've talked about the annual guidance, right? And I think it's a small change, but not substantial from where we started at the beginning of the year. And I remember the question asked in the Q1 when we were in the low-2s and I said the volatility of whether it's production or program launches and customer recoveries. And I came out a little bit and said we expect double of what you saw in the Q1 into the Q2 just to give you an indication.

Speaker 2

It's actually the volatility of the programs, the customer recoveries, the engineering recoveries when the programs launch, That's what is driving the volatility. It's not about the business. So I think I would look at what we are indicating as the margin range annually rather than look at quarter by quarter in that. Pat, I don't know if you want to add something.

Speaker 3

Yes. I think, Tammy, when you think about the volatility quarter to quarter, P and D is burdened with 3 big areas, I would say. One is equity income really moves margin based on where it is because there's no sales. That's number 1. And we're seeing it move around and we've talked about that even in our comments.

Speaker 3

Number 2 is we have engineering spend that flexes quarter to quarter and then the recoveries that relate to it. That drives profit margin into the back half of the year. And then I think the third factor is consistent with all the other groups is a lot of our commercial inflationary recoveries, as we said from February onwards, are going to be in the back half of the year and that's what we're expecting. So I think back to Swamy's comment, on the full year basis, I think that view is unchanged. We expect continuing growth in margin, but within the quarters continue to I would still expect to see this unusual cadence of a weak Q1 as margins grow throughout the year and that's what we're seeing.

Speaker 2

And to answer your question on the other part, Tammy, is on ADAS, the only one vehicle program, it was not a quality trend or we have not seen any other program, it was one customer, one change. We still continue to have traction on a lot of large programs in ADAS. So stay tuned and we'll keep you posted.

Speaker 5

Thank you.

Speaker 6

Thanks, Tammy.

Operator

And your next question comes from the line of Adam Jonas with Morgan Stanley. Your line is open.

Speaker 7

Hi, good morning. It's William Tackett on for Adam Jonas. Thanks for taking my question. I'm just curious if you guys are seeing anything new, whether it's program push outs or just volatility in this quarter or what you expect into 2025, really anything that you're seeing for 2025 that kind of help catalyze the buyback? Thanks guys.

Speaker 2

If your question is meant on sourcing and program decisions by the customers, yes, we have seen a bunch of, call it, delayed or deferments and we continue to follow that. But as I said, that is not what's driving the margin expansion into the next year. These are specific tasks that are at hand on the roadmap that we have. Like I said in, I think in the comments and one of the previous questions, the 75 basis points, half of it is already in place, the other half are based on what we have in place And if there is any other changes in terms of better volumes or EV trajectory changing to a better, all of those would be tailwinds.

Speaker 7

Got it. That's helpful guys. And then maybe are you seeing anything new in terms of pricing and mix on the EV side this quarter and particularly if you're seeing OEMs push for lower pricing as we move into 2025?

Speaker 2

Not really. As you know, right, what we're working through right now was a decision 2 or 3 years ago in the sourcing and terms and conditions and POs. So no, we're not seeing anything right now.

Speaker 3

Got it. That's helpful. Thank you.

Speaker 2

Thank you.

Operator

And your next question comes from the line of Dan Levy with Barclays. Your line is open.

Speaker 6

Hi, good morning. Thanks for taking questions. I wanted to start first with just a question on the implied guidance for complete vehicle segment. There is a substantial step up in the Q4 both in revenue and margins. Maybe you can just give us a reminder of what's going on there and the underlying dynamics as you move past the Fisker program?

Speaker 3

Morning, Dan. Yeah, I think the math shows that I agree. And the really the biggest change is coming out of the engineering segment. So for everybody's benefit, our complete vehicles has a significant engineering business in it. And most of that engineering gets a lot of the settlement and the customer negotiations happen in the Q4 and that's our expectation.

Speaker 3

So as you mentioned, Fiskars behind us, We're in the middle of finalizing negotiations with a couple of other customers, related to various programs and we expect those conversations to happen in the Q4 and settle and that's really what's driving the change in sales and in margin.

Speaker 6

And is there any update on filling the idled or vacant capacity?

Speaker 2

Good morning, Dan. We continue to have discussions, but nothing significant to talk about outside the call it the customer NDAs and discussions. But I can say there is a few discussions on going towards the I would say the 2026, 2027 timeframe, maybe more into 2027.

Speaker 6

Got it. Thank you. As a follow-up, I wanted to ask about the recovery. So I understand 3Q is a non repeat benefit. But what is the outlook on recoveries going forward?

Speaker 6

And specifically, you talked to this that you've obviously incurred a fair amount of expense, tooling validation expense for different programs that have been delayed, volumes coming in far below what was originally anticipated. So maybe you can just give us a sense of the tone and tenor of those discussions and the potential for recovery payments down the line?

Speaker 3

I think, Dan, I'll start and I'm going to have Swamy jump in as far as the customer facing piece of it. When you look at the commercial and we have in the discrete items in that role, we talk about the 75 basis points, the 50 basis points of commercial. I just want to clarify, I think what we had had was we had commercial headwinds in Q3 of 2023 that aren't recurring. So really the impact that we have in Q3 of 2024 are not as significant. And these are commercial recoveries related to various customer negotiations and they similar to the inflationary recoveries, we expect them in the second half of the year.

Speaker 2

And I think Dan, the question regarding your tooling and engineering and so on and so forth, Even with the deferments and volume reductions, the tooling remains agnostic, right? We get paid on that. And the upfront, there is 2 pieces of engineering payments, one that I would say is paid once you get to a certain milestone in the program that is usually pretty good. The question becomes the amortized engineering into the piece price that becomes a discussion, right? To your second part of the question, the tone and tenor of discussions, they're always tough like anything else, these negotiations or discussions, but I would say we are on track.

Speaker 2

They are fair but we also have no choice. We have to address all the headwinds that we've been facing and in the spirit of partnership they do realize and we put things on the table of how we need to be healthy so that we can have the partnership healthy and it's good for the industry. So yes, they're tough, but we are having those conversations.

Speaker 6

Great. Thank you.

Operator

And your next question comes from the line of Joseph Spak with UBS. Your line is open.

Speaker 8

Hi, good morning. It's Alejandro on for Joe. Just sort of following up on the recoveries, Ford publicly talked about sort of supply reimbursements for the canceled EV program. I was wondering if you could sort of give us some timeline as to when you would expect sort of that those recoveries. Is that sort of more of a 2025 event?

Speaker 2

Yes, I think it's a combination of other things because for the big customer for us and we look at overall holistically, I think it's difficult to put a specific date given the complexity of various things that are growing. It's the overall. And it's progressing and we'll have a framework that will be there, but I think it will be multiple years as we go through.

Speaker 8

And can you give us sort of a little more color as to like how much you were investing for that program and what was built out already and what still did not get built out for that program?

Speaker 2

That we wouldn't comment on that because of you would have a facility part of the facility, there is capacity allocation and there is specific program capital that would go on. So it will be difficult to go through it. Some of it was in place and some of it was phased, so which was not put in place. So it's a little bit complex question to put a discrete number on.

Speaker 8

Okay. And then maybe just as a follow-up, can you just give us a little more color on driving higher sales quarter over quarter at the midpoint based on sort of your production outlook for the year? It looks like production would be down a little more year over year in Q4. Just maybe some puts and takes on to higher sales in the 4th quarter?

Speaker 3

At the Magna consolidated level, Q3 does tend to be a low production period Alejandro. And as Dan mentioned earlier, we are seeing an uptick in sales in our CBA segment, primarily related to the engineering, which wouldn't be production based, but rather finalization of the engineering agreements. And that would be the biggest driver on the upside and have a little bit of foreign exchange benefit tailwinds.

Speaker 7

Great. Thank you.

Speaker 9

Welcome.

Operator

And your next question comes from the line of Tom Narian with RBC Capital Markets. Your line is open.

Speaker 7

Hi, thanks guys. A question on the buyback and financing the buyback. You mentioned you have $1,100,000,000 in cash balance, $3,700,000,000 total liquidity, potentially more free cash flow coming from lower CapEx. And I know you have that 1.93 leverage coming down to 1.5 or 1.5. Just putting all that together, in the event production comes down next year, there's a lot of folks some folks are expecting.

Speaker 7

How would you seek to finance given all of these different dynamics? Would you reduce the cash balance, dip into liquidity? Is your thoughts of paying down debt to get that leverage ratio in the event EBITDA comes down next year, which a lot of suppliers are talking about? Just would love to hear how you think about the different puts and takes. Thanks.

Speaker 2

Good morning, Tom. I think like I said, the key thing for us is to have that balance between maintaining the investment grade rating and sticking to the guardrails that we talked about the 1 to 1.5 but into the end of the next year, there might be some lumpiness but that's still kind of like the guiding principle. As Pat talked about, you look into the visibility of the plan that we have at this point in 2025, we have made, I would say, modest set of assumptions for volume production. That's number 2. Given all of that, we feel comfortable that we can get to the up to the 10% float buyback.

Speaker 2

But as you know, the share repurchases, we have to balance that with market conditions. If the market conditions change drastically at that point of time, we'll balance between what we're buying back and what we have in terms of balancing. But this has to be more an industry level change, which would affect everybody at that point of time and then we have to relook at how much and what we're doing and how we go about it. But at this point of time, with very modest assumptions of production into 2025, we feel pretty confident that we have a plan in place. Yes.

Speaker 2

I think the

Speaker 3

only thing I'd add, Tom, is if you go back to when we laid out this plan going back 18 months of our delevering plan, it contemplated that we have term debt that's repayable. We board against our CP programs. And you put that factor in, that's still in place. And you have to put in perspective that our cash flow expectations that we executed in 2023 against our free cash flow. We continue to expect to execute in 2024.

Speaker 3

So we're just moving along the path. And to Tammy's earlier question, we just have more confidence in that path. And so I don't think it's going to be a situation cash might bounce up and down at $100,000,000 $200,000,000 just depending on timing. But if we're going along that path of how we pay down the term debt and stop borrowing on CP.

Speaker 7

Okay. And the expectation on the better for cash flow that's coming from a combination of potentially lower CapEx and I guess better EBITDA, right, coming from your, I guess, growth over market production assumption?

Speaker 2

That's right, Tom. It's lower engineering spend, lower CapEx, better EBITDA.

Speaker 1

Yes. Not just growth over market,

Speaker 3

it's also operational excellence, right?

Speaker 7

Yes, yes, right, right, cost control. And obviously, I'm sure you guys are noticing a lot of the your suppliers in the industry, very cautious on 25. There's one OEM customer, which you guys have that's been dramatically cutting production this quarter. And potentially next year, we've heard European OEMs talking about the CO2 cliff on regulatory, which they're worried some of them are trying to shut down plants. I mean, the thinking is that in Europe, your SAAR level, so to speak, could drop to like a $14,000,000 level instead of it used to be $16,000,000 before the pandemic.

Speaker 7

Now that said, there is a pickup expected in EV sales to meet the CO2 requirements. So it's kind of like this double edged sword thing. Is it a net benefit if EVs recover for you guys, especially in Europe, in the event there's a drop in production, presumably, that's higher content per vehicle, etcetera? How do you think about that kind of disaster scenario production falling off next year if EV picks up next year? Thanks.

Speaker 2

Yes. Tom, I think there is a couple of points there. 1, the scenario planning for drastic dropouts, like you said, a COVID type scenario is something that you don't build as a baseline. You build that to figure out how we can address it if that happens, right? So that's one.

Speaker 2

The second thing between EV and ICE, I would say we would be pretty balanced. On some of the EV platforms in our beds as an example, our VES segment, the content per vehicle would be higher. So if there is tailwinds on some of the programs that we've invested for like the battery enclosures, then you would see a tailwind. If so that's on the DAS side. I think we have always been saying we are we have and continue to build for flexibility.

Speaker 2

A lot of our product lines are agnostic one way or the other, but if EVs if we are an EV platform supplying a mirror or a seat or a door or any other product, obviously it'll have an impact. But the idea is no matter which way it goes, I think we feel pretty balanced. But if EVs take off, there is a higher content per vehicle in that case.

Speaker 7

Got it. And if I could just sneak in one last one. BES, I know you talked about complete vehicle, the margin uplift in Q4, but it looks like the implied margin for BES for Q4 is the highest and the midpoint I think in the whole year. Is that coming from the what you're talking about earlier, the pricing with the recovery, sorry, from the OEMs or is there something else specific going on? Thanks.

Speaker 2

I think you got it right, Tom. It's a settlement of the commercial recoveries. Got it. Thanks, guys.

Operator

And your next question comes from the line of James Picariello with BNP Paribas. Your line is open.

Speaker 10

Hi, guys. Just on your industry volume assumption of down 2% for the full year, which largely aligns with IHS, but I assume it's informed by your customer build schedules at this point, right? So could you just provide context on what your level of visibility is for the Q4 because I mean there are a few other suppliers that are calling for a 4% cut to the full year implying almost a 10% decline for this upcoming quarter. So I guess to piggyback off John's first question, how would you handicap your industry volume assumption? And what is that level of backlog or unique seasonal timing for Magna's programs that informs this Q4 assumption?

Speaker 10

Thanks.

Speaker 2

So good morning, James. Maybe Louis can add. I think we have visibility on the program releases obviously, but you have to consider the program releases cohort 12, 13 weeks and their changes given the uncertainty and what's happening in the industry and how they're dealing with inventories and so on and so forth. So you cannot put that in the system. I mean we are dealing with on an everyday basis by flexing what we can in terms of direct labor and other aspects of the business.

Speaker 2

So we take that and continue to flex at an operational level. Absolutely, that's part of our operational process. Difficult to we are seeing softness in the Q4 for sure. But I think we have been pretty prudent. But with that said, we still got 8 more weeks to go and there are some announcements that came out yesterday, which obviously we didn't account for in the data that you're seeing.

Speaker 10

Thanks. And then just on the buybacks and apologies if this was already answered, but with respect to your leverage target, is there a presumption or an expectation to trend slightly or moderately above that for a period of time through next year? Just so we could get a sense for the bandwidth of that leverage versus your buyback commitment for the next 12 months. Thanks.

Speaker 2

James, I think we have said our principles are unchanged and we have talked about getting to the targeted range towards the end of 'twenty five and that hasn't changed. I think Pat in answering one of the questions did mention that there might be ups and downs as we go through the year in terms of the cash balances and our leverage ratio. But our directional target of getting to the leverage ratio target by end of 25 remains. Thanks. You're welcome.

Operator

And your next question comes from the line of Bruno Dossino with Wolfe Research. Your line is open.

Speaker 11

Hi. Thank you for taking the questions. I was hoping to get some more context on the free cash flow outlook both near and longer term. So I guess near term, you're still guiding to $700,000,000 of free cash flow this year at the midpoint. And if my math is right, you year to date, it's roughly breakeven.

Speaker 11

So maybe first you could help us understand the bridge to between $600,000,000 $800,000,000 of free cash flow in the Q4 alone. And then longer term, and I think this is more of a follow-up to Tom's earlier question. But look, next year, we don't need an exact guide, but we know that next year could be challenging for no other reason than you're lapping a year where your largest customers are restocking and we know that order for European customers going or have been softening. And so I was hoping you could quantify the factors fully in your control like CapEx, R and D spend and potentially for the restructuring that you could do to expand free cash flow irrespective of the production outlook? Thanks.

Speaker 2

So I think the biggest thing variable would be the volumes, right. And I've said we are kind of considering the volumes going into next year being flattish or maybe around that and we give a lot more color and specifics when we come back in February. But I think in the what you're seeing in terms of free cash flow is normal course for this year and we feel pretty good about staying in the range of the $600,000,000 to $800,000,000 that we mentioned. And we also kind of indicated in the last calls for 2026, we are expecting to be in the range of $2,000,000,000 right. So given the market economics as we sit today and the volume assumptions which are pretty flattish, our set of assumptions being flattish compared to 2024 going into 2025 and 2026, I would say they still hold.

Speaker 2

But if that assumptions change drastically like you said, obviously we have to look for it. But a lot of the things that are in our control whether it's capital, whether it's operational discipline and engineering that we feel pretty good about and we continue to scrub and look at those numbers.

Operator

And our last question is going to come from the line of Mark Delaney with Goldman Sachs. Your line is open.

Speaker 12

Yes. Good morning and thanks very much for taking my question. Just one for me is following up on James' question and just trying to understand some of your comments around the 4th quarter implied revenue outlook. I think you said there were some developments that came out yesterday that maybe you didn't account for in the industry view, but you also described the revenue forecast as prudent. So I just wanted to make sure I understood what your message is there and maybe the revenue view is more bottom up and based on schedules.

Speaker 12

And so you still feel confident in that and maybe there's some something that could impact the industry forecast. But I did want to make sure you weren't trying to say there's some rest of the revenue view to answer to James' question.

Speaker 2

Good morning, Mark. And thanks for asking that question. No, what I meant is to give you an example that announcements are coming on everyday basis. So it will be very difficult to put an exact number on everything. But just to clarify, given all the data that we have and the set of assumptions that we have taken, unless there is something very drastic, still forthcoming, we feel pretty comfortable and expect to be in line with what we have put out for the Q4.

Speaker 13

And even where we have releases, if our recent history is that the releases keep being the results actual become short of releases. We're kind of handicapping that as well a little bit. So I think we've taken a pretty prudent view here.

Speaker 12

Understood. Thank you for the clarification.

Speaker 3

Thanks, Mark.

Operator

We did have another question queue. Our next question will come from the line of Colin Langan with Wells Fargo. Your line is open.

Speaker 9

Thanks for taking my question. Just wanted to follow-up on the quarter over quarter walk from Q3 to Q4. The sales are it looks like about a 44% contribution margin on those higher sales sequentially, which is pretty high. And on top of it, most of the pretty much all the growth is actually coming from CVA, which is a lower margin business. So I think you mentioned in BES, there's maybe a settlement coming that's helping.

Speaker 9

What is driving that sort of outsized underlying contribution margin? And is that sort of Q4 rate sustainable?

Speaker 3

Yes, I think good morning, Colin. When you think about we're moving from Q3 into Q4, you're bang on on the sales change. We talked about the engineering and just the pattern of settlements in the Q4. So that's not

Speaker 1

going

Speaker 3

to have a traditional pull through. It's more binary in nature. I would say when you look overall, we are continuing to expect to see improvements in our commercial settlements, which would be consistent with what we've seen over the last 2 years. And then part of the offset is in the PMB group. We are seeing, again, everything at the midpoint, some sales softness relative to Q3.

Speaker 3

So when you put those 3 together, that's really the bridge broadly.

Speaker 9

And what is driving the sales softness in PMV?

Speaker 3

V? It comes back to everything Swamy and Lewis spoke about as far as the mix. We're going to talk macro and that's what we have in our whole volumes. You get a little bit more granular as Swamy said, we look at our releases and then you have mix within those releases. So it's across hundreds of platforms at the bottoms up.

Speaker 3

And the reduction is less than 10%, but it just all adds up, Colin.

Speaker 9

Got it. And just I have a buyback that's discussed a lot, but any framing of how we should think about meaningful? Because if I go back to 2018, 2019, you're actually doing over $1,000,000,000 a year of buybacks, which is more than your free cash flow. Is this more like $100,000,000 $200,000,000 a quarter, dollars 4,000,000 $500,000,000 a quarter? How should we be modeling it as we go forward?

Speaker 2

Yes. Colin, I won't get into the specifics. As we talked about, for us share repurchase is really a long term strategy and not a one time thing. And that's how we intend to use. And when we say we want to buy up to a 10% float, that is really our target, right?

Speaker 2

Maybe not exactly, but that's kind of how we're heading. But it's also a depends on market conditions and what happens and volumes don't drop off, then the macro doesn't change significantly. It's difficult to say this is what we are planning now, right? But the idea of saying meaningful is it's just not we are not going to sit here and wait for the 3rd or Q4 next year. We're going to start now and it's going to be meaningful in the overall scheme of 10% float.

Speaker 9

And 10% by when, the 3rd deadline when you want to get the 10%?

Speaker 2

The NCIB rules are up to 10% float and it applies for 12 months starting from the release, so this November to next November.

Speaker 9

Okay. Thank you for taking my question.

Operator

And our next question comes from the line of Michael Glen with Raymond James. Your line is open.

Speaker 14

Thank you for getting my question in. I just want to ask one on commercial recoveries and the visibility on commercial recoveries. Is there a scenario where if the industry turns in 2025, the OEMs come under margin pressure, is there a risk that we could see these commercial recoveries rolled back in a meaningful way?

Speaker 2

A simple answer, no. Because I think in the previous calls I've talked about a lot of these commercial recoveries are more procedural. So they go into purchase orders or different terms and conditions and so on and so forth. So it's not something that we are negotiating every year. There is some part of it, but that goes into productivity, that goes into various other parts of the various commercial discussions.

Speaker 2

But largely, I would say that's not the risk.

Speaker 14

And then just on inventory levels, I know we read a lot about some concern on inventory levels, particularly across the D3. Are you seeing any different communication from your customers on inventory levels versus what is being written about in the media?

Speaker 2

No, not specifically by platform, right. We look very granular on our own based on as all of us have said in various comments on releases and what we see in inventory just for our flexing of our operations. But we haven't seen anything specific other than what you're seeing in the Q4.

Speaker 14

Okay. Thank you for getting me in.

Operator

And our final question is going to come from the line John Murphy with Bank of America. Your line is open.

Speaker 4

Good morning, guys. I appreciate you sneaking me in for this quick follow-up. Swamy, when you talk about these recoveries in commercial settlements in the second half of this year, Really the genesis of those is a result of contracts not working out from a volume perspective the way the OEM originally anticipated. So effectively these are kind of hedges and they wouldn't be occurring if business was going fairly well on those programs. So I mean, you would actually prefer the business to go well, earn the money the way you were planning as opposed to dealing with these settlements, right?

Speaker 4

Is there kind of an offset here? I just want to understand, because I think there's kind of a view that these are one time and kind of like you guys hitting the lottery. The reality there is a result of things not going right at the OEM level. Is that a fair characterization?

Speaker 2

Mike, my simple answer is your characterization is correct. We would like the business to be running well. They're not looking at lump sums. There is some parts of it which is entrenched inflation, what happened in 2022, how we amend the terms, some part of it may be addressing on a yearly basis, but it's more how do we make it embedded into the normal course of business. And the overall intent, like you said, John, is normal business runs well and we recover the way we need to and the way it was intended to.

Speaker 4

Great. Thank you very much.

Speaker 9

Thanks, John.

Operator

And there are no further questions at this time. Swamy, I turn the call back over to you.

Speaker 2

Thanks everyone for listening in today. As you might have heard and hope you get that we remain very highly focused on margin expansion, the capital discipline, the free cash flow generation and obviously on normalizing our capital allocation with increasing returns of capital to shareholders. We remain very confident in Magna's future. Thanks for listening in and have a great day.

Operator

And this concludes today's conference call. You may now disconnect.

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