Magna International Inc. Stock

Great. Thanks, everyone. My name is Rajat Gupta, member of JPMorgan Auto Equity Research. We're very pleased to have with us the team from Magna to round out our conference today, Phil Fracassa, Chief Financial Officer; Louis Tonelli, Vice President. Phil has a few opening remarks that he would like to go through, and we'll jump right into Q&A then.

Sounds great. Well, thank you, Rajat. It's great to be here. Thanks, everybody, for attending the session. Yes, I just wanted to kind of maybe just maybe offer a few themes coming off of our second quarter earnings. It just -- if there were 3 things I wanted to leave you all with today relative to Magna. One would be Magna is a company that's expanding margin, growing earnings despite a flattish industry production environment.

So that's really an execution story at Magna, self-help, operational excellence. It's having a big impact. And I know we'll talk about it as we get into the session, but we feel like we've got room to run from here. Second point I would say is the free cash flow story.

Free cash flow is durable and sustainable. Certainly, 2025 and 2026 has benefited from some large recoveries, but we do believe the structural free cash flow performance for the company remains strong, which then enables not only investments in the core business, but other capital allocation as well.

And the last point would be around capital return. We have stepped up our share buybacks this year. And I do believe not just this year, but looking into the future, capital return will remain a key differentiator, I believe, for Magna in the marketplace.

So 3 themes. And with that, maybe we can go right into the Q&A

Great. Thanks for that quick overview. Maybe just to start with the recent quarter. You put up a really good quarter, raised the outlook on margins, EPS, cash flow. Can you just walk us through what's driving the strong margin performance? And like what's giving you the conviction to take the guidance higher?

Sure. So I would say, despite all the uncertainty out there around trade and geopolitical, the business performed really well in the second quarter. And again, as I said in my opening remarks, it was the execution. It was the operational excellence.

We continue to gain traction in our operational excellence initiatives. And so as we thought about the full year, given the strong first half performance, given our expectation for continued momentum in the back half of the year, all of that gave us conviction to take the guide up, and we took our guidance up. We took the sales guidance down to reflect currency and divestiture that was happening earlier than we previously thought.

We took the guide up for margins to close to 6.5% at the midpoint. Took our guidance up for earnings per share to $7 at the midpoint and cash flow to $1.8 billion at the midpoint, really on the confidence of the first half performance and second half momentum, if you will.

And really, that earnings per share of $7 at the midpoint represents over 20% growth in EPS despite really a muted production environment. So good performance and felt confident to do it. And as we sit here today, I feel very confident in the outlook.

I mean we've seen like some varied like, I would say, guidance outlooks from some of your peers. I'm curious like how we should think about the level of visibility or just conservatism in the second half outlook. And I know you gave us a third quarter, fourth quarter trajectory as well, but maybe even help us think through like the timing of the next 2 quarters.

Yes. I mean, certainly, the full year outlook that we put out a couple of weeks ago reflects our best visibility into the back half of the year, obviously, based on production releases and our expectations regarding input costs and the liking. And so really, as we think of the third -- the second half versus the first half, we do expect, as I said, revenue to be down first half to second half, mainly because of foreign exchange and the divestiture.

We're divesting our lighting and rooftop systems businesses, and that's taking place largely in the third quarter. So that's going to be a negative to revenue. And then -- but we do expect margins to be up sequentially from the first half to the second half, and we also expect earnings to be up as well.

And again, that's mainly driven by continued momentum on operational excellence as well as the expectations for some commercial recoveries in the back half of the year, which tend to be skewed toward the fourth quarter.

And that's normal commercial items we have typically every year with our customers. But the nature of the dialogue is that they generally get resolved in the back half and typically the fourth quarter, which is kind of the reason for some of that first half, second half cadence on the margins, but do expect margins to be up year-on-year in the second half.

And then third quarter, fourth quarter split will be a little skewed to the fourth quarter as we expect revenue to be a little bit stronger and then the recovery timing, as I mentioned earlier.

Understood. We'll dig into like margins and operational excellence a little more -- a little later. But one of the more interesting things on the call was you addressing the non-auto question head on robotics, automation, data centers, other adjacencies with some project wins already in hand. Magna is already one of the most diversified names, at least in our supplier coverage. So I'd love your read on what drew you to those particular areas, how you think about the return bar relative to core auto?

And whether in robotics specifically, this is supplying components and subsystems into those platforms or building the units. And then given you were clear this isn't diversification just for the sake of diversification. How do you make sure this doesn't pull capital or maybe some focus from the core areas?

Yes. No, it's a great question. And we have been getting questions heading into the call. So we thought the second quarter earnings call was a good opportunity to really kind of talk more broadly about what we're doing and more importantly, how we're approaching it.

We've always said if there's opportunities to utilize our technology or our capability, whether it's engineering, program management, manufacturing, metal forming, et cetera, and use existing capacity, we'd be open to it. And I think there's -- as we look at nonautomotive opportunities, really the point we were trying to make was, number one, we do see opportunities outside of automotive. We're actively pursuing those opportunities. We've actually booked some revenue that will hit in 2027 related to those opportunities.

But probably the more important -- and it's still -- obviously, still early days, so we'll probably have more to talk about on those fronts in terms of specifically what we're doing in our Investor Day on November 11.

But the more important point, I think, was really to communicate that we're approaching it kind of in the Magna way, which is let's be very disciplined. Let's not invest capital for the sake of investing capital. And in the early days, we're really focused on areas where we can leverage existing technology, leverage existing capabilities, use existing footprint. So it's minimal incremental capital.

And let's kind of test the market in these areas, as you said, Rajat, whether it's robotics, automation, data centers, warehousing, et cetera. And then if we find an area that we like, we certainly wouldn't be opposed to investing further, but obviously, very early days. And at this point, really trying to kind of see what's out there and see what looks attractive to us longer term.

But I think the opportunities are there. We're pursuing them, but we're pursuing them in a very disciplined way. And I would say early early indicators are will be good growth opportunities, but very good margin opportunities. But you got to keep in mind, Magna is large, $42 billion in revenue.

So it needs to be big to move the needle. So it will be a while before we see a big needle mover, but I do think incrementally accretive to margins, accretive to growth and accretive to returns.

We look forward to maybe hearing more on the Investor Day on those fronts. Maybe going back to like some of the operational excellence and the factory of the future. It was a strong driver again in the second quarter, 70 basis points margin bridge in the quarter. You've talked about 35 to 40 bps for the year. It's been 200 basis points since 2023.

And you still call it this early innings. So could you give us some color on how much runway is left, whether that annual cadence is the right one we should think about at least in the medium term? And which of the buckets, either material flow, advanced tech, just digital standardization of the work?

And how much -- what has the most -- where are the most opportunities left right now?

Sure. So I mean, if you rewind the clock a little bit, I mean, obviously, when we got to 2023 [indiscernible] chip shortages and hyperinflation and it was really -- Magna has always been focused on operational excellence. It's been a core competency since the founding of the company, frankly. But around that 2023 time frame is when we said, look, we've really got to step it up.

We've got to get that margin back that we lost through the hyperinflationary period, not just through negotiations with our customers and improved economics, but self-help and getting costs out. And so it was really an all of the above approach, whether it was between the individual programs at every plant that may be going on to reduce costs, but some bigger programs, as you mentioned, around factory automation and factory of the future. And we've seen really good margin expansion from all the initiatives.

When we talk about the 35 to 40 basis points a year that we've delivered for the last 3 years and that we're targeting for 2026, that's net of direct labor inflation. That's net of normal course customer price concession. So it really is bottom line margin expansion that we've delivered and frankly, think we can continue to deliver.

As we think about factory automation, we're probably, I don't know, less than halfway on our journey through -- maybe close to halfway on the journey through our facilities in terms of connecting them digitally, giving us better visibility into equipment performance, operational productivity. We've got a lot of initiatives around material, a lot of initiatives around SG&A.

And kind of where we're at in time and space, we don't see any reason why we can't continue to drive these initiatives over the next few years at least, which would then give us the ability to continue to expand margins even if industry volumes continue to be flat. And that's really the objective.

We're still below the peak margins we generated pre-COVID. And with operational excellence, improved economics on new contracts, growth over market, getting good incrementals on our growth over market, we don't see any reason why we can't get back and even get beyond the prior peak margins that we delivered.

Got it. Your structure, I mean, Magna is a large company, your structure is quite decentralized with divisions owning their own P&Ls. Yet a lot of these gains depend on standardizing tools and like sharing the know-how. How do you balance that autonomy against the coordination you need just to proliferate across the whole enterprise?

Yes. I mean, I would call that the magic of Magna. If you think about our work structure, it could be described as like functional oversight with operational decentralization. So if you think about the divisions and the plant managers, they're responsible for manufacturing, responsible for launch, execution, quality, et cetera.

They're happy to use the tools, the standardized tools and to share best practices because it benefits them and they paid off the bottom line of their division. At the group level, they're focused on kind of managing their products and their divisions and selling the products or marketing the products.

And then at the Magna level, the focus is on setting strategic direction and targets. So we believe that function, that structure that we have is the fastest way to kind of accelerate the efficiencies across.

Got it. I'll just pause there for like a second to see if any questions in the audience. No? Okay. So going to like some of the growth aspects of the business. You're 90% booked through '28, I think you mentioned, is that a -- is that ahead or behind or in line with where you'd normally be 2 years out? And with ICE extensions and like some EV programs being pushed out or canceled in North America, are you seeing bidding activity pick up as that uncertainty sort of out?

Yes. I mean I would say the 90% we talked about on the call would be in line, maybe a little [indiscernible] typically be. Really just wanted to convey that, look, the book of business is solid. The order book is solid, and it's -- we have good line of -- a pretty decent line of sight over the next couple of years, feel really good about the prospects.

When we talk about growth over market, you really can't think about growth over market as quarter-to-quarter or even year-to-year, it's really over a longer period of time. And with the business we've already quoted on that's already in the book, the programs we're quoting on today, put the economics and the margins aside, I mean, we feel really good about -- we talk a lot about a growth over market target of low to mid-single digits above market.

We feel really confident in our ability to deliver that over time. Am I miss anything on that?

No.

Any -- I mean we'll get into the regions a little bit in some of the segments, but any early read on '27? Any puts and takes we should keep in mind? Obviously, large diversified enterprise, but anything like we need to keep in mind, either region-wise or segment-wise that could have a different trajectory than the low to mid-single digit that you.

I would say probably a little early to talk about '27 other than to say the self-help that I talked about earlier around the operational excellence will continue, working on getting improved economics on new programs will continue. The deliberate approach to capital allocation will continue.

A little bit too early to talk about production volumes. We do have some new programs launching in 2027, one in particular in our Seating business that we believe will be a nice uplift to margins once it's fully ramped. The Seating business has done a great job of protecting margins in 2026 because we did have a big program go down with one of our customers retooling a plant.

The new program won't launch until next year. So the Seating business has done a great job protecting margins has shown really good resiliency. So that -- we have a new program that's going to -- that will help in '27 that we're pretty excited about.

Beyond that, I think we're just focused on what we can control, and that would be the operational excellence, the execution and the capital return.

Shifting to China, just thinking through some of the regional growth aspects. Chinese OEMs are now 65% of your revenue in the region. You took your China production assumptions down like 800,000, maybe 3% or so, but you took North America and Europe up.

Could you walk us through how that mix has evolved? How quickly the domestic book backfills some of the share loss in the global OEMs? And is China still accretive to the Magna average as that rotation continues?

Yes, it's evolved a lot over time. I think if you go back to 2010, we were probably closer to 20% with the domestics and 80% with the international players. And we've been able to grow our business over that 15-year period at strong double-digit on average per year of sales and still transition the business so that we're closer to 65% of the business is with the domestic OEMs.

So we feel really good about that kind of transition that we've been able to grow through that. And we think the relationships that we developed with the Chinese OEMs are going to help us as they move into new regions.

We developed the relationships, we have the capacity in the region, so we can support them in other places.

Yes. The only thing I would add to that would be that's an important part of the whole growth over market algorithm, if you will. It's not just adding content with our current big 6 customers, if you will, but it's also continuing to outgrow and grow at that rate in China as well as other initiatives as well.

And margins are still accretive in that region relative to the overall Magna average.

Understood. You sort of Chery, Geely, Changan and BYD, exactly the names localizing most aggressively. As they move outside of China, are you winning components and system business with them in these new geographies? Or does the complete vehicle relationship travel first typically?

Yes. Well, I think it's still early days, if you will. But I would say on the customers we do, we are proud of the customer base that we've developed in China, and you named them, Chery, Geely, Changan, BYD, BAIC, and they tend to be some of the bigger exporters and some of the bigger players that are looking to localize.

And we do see it as net opportunity for Magna. And where we're seeing it earliest and probably most impactful right now would be in our complete vehicles business in Austria, where we have actually taken on programs for both Xiaopeng and GAC, where we're assembling completed vehicles for them for the European market.

It's currently SKD or semi knockdown assembly. So everything is kind of manufactured in China, assembled in Graz for the local market. But we do feel the logical next step would be to localize production through component assembly, and that's what we do well in Graz. We also have a lot of our other groups with facilities in that proximity.

So we tend to be over-indexed on vehicles that we make in Graz just given the footprint we have in the region. So we're pretty excited about that. And then ultimately, as customers look to have their own facilities over time, Magna is a global supplier. We want to serve our customers wherever they go.

And I do think the footprint we have, the competitive position we have in Europe positions us well to support our customers as they move along. And frankly, I like to think of our Graz, our complete vehicles business as kind of a bridge. It's really helping customers come into the market, test out vehicles, see what meets with market acceptance. And then as they look to scale further, we feel like we can scale with them.

And maybe like because you're in the China topic and the next logical like region is to talk about Europe, given all the exports that are happening. And I think the latest run rate is like 8 million to 10 million exports from China into Europe. How do you think about just your Europe exposure in general?

I mean, is the dynamic of the Chinese entrants entering Europe and the impact that's having on Europe, the legacy European customers, is that like a net positive? Is it net neutral for Magna? How should we think about?

Well, I think it really frames up the strategic imperative that we've been talking about. And it's critically important that we continue to grow in China with Chinese OEMs. Louis talked about the fact that we've grown the business with JV revenue, the managed revenue in China last year would have been close to $7 billion. So we've done a really good job growing with Chinese OEMs.

As they export, Magna products are exporting -- are getting exported with the vehicles. So we feel like we're hitting that way. And again, as they move into Europe being well positioned to support them. So as they move into Europe, I mean, it does -- they will be taking share from some of the European OEMs.

We do have significant -- most of our business in Europe is with the G3, as you might expect. We tend to be a little bit more indexed on the premium side of the spectrum as opposed to the standard side of the spectrum. But the challenge for us, and I think the company is rising to the challenge is to make sure we're serving the market with whoever is serving the market. And that's been our approach.

When you think back when the German 3 came into North America, we had -- we didn't really serve them in North America and really didn't have much with them in Europe, but then grew with them in North America, have grown with them in Europe. And I think it will be very similar with the Chinese.

Got it. Moving to some of the segments that you have, starting with ADAS and autonomous. Veoneer active safety was meant to give you a lot of scale in ADAS and to capture the synergies. The China piece has come in a little below what you underwrote given the shifting policy backdrop and just how interchangeable the perception software piece has become.

Do you now have the scale you need? Or is there more to build or buy to round out the portfolio there? And where do you see like the medium midterm growth -- or when do you see the midterm growth like reaccelerating here?

Yes. I mean, look, we have business in China, and we see growth opportunities in China. We're taking a bit of a pause in terms of how much development we're going to do on the [indiscernible] until the whole -- the things kind of settle out in China. But we see some opportunities there, and we continue to grow. So we don't feel like there's a need to do additional acquisitions to build out our business there.

And in terms of growth, I mean, look, I think that area continues to be a growth driver, strong growth this year, and we see growth going forward generally in United States.

I mean back to -- I'm sorry, back to the theme of growth over market. I mean we feel like we can grow over market in all of our segments. But I think clearly, Power & Vision with active safety being in Power & Vision really has seen the most opportunity certainly this year and then we think over the next few years, it will be a little bit more concentrated in P&D.

Got it. And your Waymo work doesn't get much airtime. And the master plan is now integrating the driver on both the IC and the Zeekr party. Could you help investors like frame that relationship, whether it's stays primarily integration and assembly? Does it extend to components and systems over time, just as the robotaxi fleet scales or whether your complete vehicle capability makes you a natural manufacturer platform for purpose-built platforms?

Yes. I mean I think the -- I'm glad you brought it up because I do think the Waymo business is an exciting business that we have. It's not the biggest piece of business in the portfolio, but it's exciting from the standpoint of it's sort of the intersection of our complete vehicle capabilities and our systems integration capabilities.

So we've been upfitting vehicles for Waymo for a number of years now, and the volumes have been steadily rising. So it is their system architecture, if you will, but we upfit the vehicles and get them ready to hit the road, if you will. But we've got -- that is -- that sort of leverages the expertise we have and then the work we've done with Waymo helped us further develop our expertise.

And as other players come to the market, I mean, we're -- we think, in an excellent position to serve that robotaxi market as it grows, as it expands, particularly in North America.

Got it. And maybe just following up just on the Power & Vision, the broader segment. You took your guidance up on margins. Some of it is like just the lightning and rooftop divestiture. What's the clean base to think about from a margin perspective for that segment? And which product lines are going to carry the incrementals in the near term?

Yes. I think the divestitures were going to have already been in our look in May because we announced. So maybe a little bit on the timing has improved. I think it's just been execution in Q2 and our expectation that it's going to continue going forward. So I think the kind of margin range that we have for the full year is a good kind of target for going forward.

And really, it's all the businesses within Power & Vision that are kind of the incrementals on that. They're all growing. So they're all contributing.

Got it. Got it. And within Power & Vision, there's a 250-kilowatt 800-volt 2-speed drive eDrive with Chery going into your new Wuhu plant. It builds on the hybrid drive already in series production, the G700. Could you frame how meaningful that pipeline is, how content per vehicle compares across ICE hybrid and EV driveline and just how the platform and building block approach is compressing just time to market in other areas?

Sure. So we have, I'd say, a very strong pipeline of business in powertrain, not just electrification, which would be hybrid and BEV, but also in our traditional 4-wheel drive, all-wheel drive programs. And we expect to continue to launch new programs with the hybrid and eDrive technology in all regions of the world, Europe, China and even the United States.

And what's really critical about that is when you think about content per vehicle, and we've talked about it before, but for example, rough numbers, if 4-wheel drive, all-wheel drive system, say, sells for $500, a comparable eDrive on the same vehicle might be double that, might be $1,000.

And a hybrid drive may sit somewhere in the middle. So having capabilities, we like to say we manage our business to be propulsion system agnostic. Now drives are not propulsion system agnostic, but Magna makes all 3. We're developing capabilities in all 3. And then by 2027, we will be one of the leaders, if not the leading manufacturer of eDrives outside of an OEM in the world.

So really, really proud of the technology that we've developed, the work that we've done and excited about the possibilities that it creates. We talk about it being sort of a building block strategy where we built the technology across all 3.

And as the customers' needs change, as the mix changes, as the preferences change, we're able to change with it very quickly and meet the timing requirements, particularly in places like China where speed is definitely king as it relates to vehicle development.

Got it. I have a question there from Jim.

First off, congratulations on execution in this volatile environment. So you still got roughly 38% of revenue in Europe, right, ballpark of the consolidated. Relative to the G3, from what we're hearing and seeing, there is some major activity going on there in the next 12 to 36 months.

You've been aggressively rightsizing your footprint already. I'm just wondering from your standpoint is, do you anticipate another step-up in restructuring activity in Europe in terms of your footprint, maybe moving from Eastern Europe to North Africa even more aggressively, moving out of whatever you still have left in Germany because it looks like some pretty big changes are coming.

And then the other part of the investment cycle is, are we going to be moving back towards 4.5% in the next 12 to 24 months as a percentage of revenue? Because I know you were really aggressively spending back in '23, '24, then you came down. I just want to kind of double check on what's kind of normal in terms of CapEx.

Sure. So on the -- maybe I'll start on the Europe piece and ask Louis to chime in as well. But certainly, one of the things Magna has done been very methodical and systematic about getting after the restructuring we need to do, to your point. So we feel like we've sort of kept pace in our own footprint and have rightsized it as we've needed to, particularly coming out of COVID.

And certainly, as customers need to restructure, if customers are shrinking footprint, we'll have to look and see the impact on us in terms of our business with them, but also in terms of our business with maybe where some of that volume is going and who's taking that volume, if you will.

But I mean, that will be an evolving thing that I think it's kind of running the Magna playbook, if you will, and wouldn't anticipate any outside -- we typically plan for some level of restructuring, as I said, methodically and systematically get after the footprint. I think we'd probably continue to do that, and I don't see any outsized need for further restructuring beyond what we're already planning. Anything you'd like to add?

No, I agree with that. I think it's going to depend on what -- the impact on our plants depends on exactly what they do, sometimes moving things around, closing the plants, assembly plants and moving business as long as we keep the business doesn't have any impact on us. So we're going to have to wait and see how that unfolds. But I agree that we've been doing it for a long period of time.

We already plan to do this. So I don't know whether we expect -- we don't expect to be accelerating. We just expect to be continuing, I guess.

And then on CapEx, we did have elevated CapEx spending in 2023 and 2024 for -- particularly for EV programs in North America, and those did not materialize to the degree we anticipated. We've gotten some recoveries for that capital from our customers. But as I think about CapEx, last year was sub 4%. This year, the guide is sub-4% of sales.

And I see what we're doing now to achieve that. And it's a combination of reuse of equipment. So as equipment we put in place, we don't need it for EVs, getting permission from the customer to repurpose that equipment for different programs, different applications. So reuse has really helped us.

And then frankly, programs have been extended where new programs have been sort of on the come, and that's enabled us to kind of lessen the capital need year-to-year. But I don't see it jumping to 4.5%. We've talked about, if you look back 20 years, Magna kind of averaged 4% to 4.5%. So I think somewhere in that 4-ish or low 4s range is probably the average we're going to get to, but I think we'd probably step our way there over some period of time.

And Jim, you made the reference to aggressively spending. I would say that there was a need that required us to spend. I mean, if you look at the profile of our spending over time, it's been up and it's been down. It kind of oscillates around that 4% to 4.5%. So it wasn't that we were aggressively spending. There was a requirement for us to spend for programs.

And now because of program extensions and just the cycle of things, we're not spending as much. So it wasn't like there was some intentional reason that we just like -- we just -- it was required for the capital -- the capital was required for the programs that we had been awarded.

Yes. Maybe just to follow up on like Jim's just the whole Europe comment and the challenges there in general. I mean I wanted to talk about Seating in particular. You talked about the bigger program that's launching next year. Could you shed some light on what that does for the earnings power in the segment?

How should we think about normalized Seating margins? And in general, like how do you think about that segment within the portfolio given some competitors like obviously meaningfully higher margins?

Yes. Like this year, we're expecting that kind of 3.2% to 3.5% range. And that's even with the Ford Escape going down for the full year. It's a big program for us. So that's pretty good execution. We do have a program coming on that's going to be at better economics and that launches later [indiscernible] more of an impact on us in Seating next year. So that's going to contribute. I think the team has done a really good job of taking costs out. The operational excellence activities are just kind of kicking in.

So I think without getting into like what our expectations are beyond '26, I think it's fair to say we expect continued growth, and we expect margin expansion from where we are today to better levels than what we're seeing that we're seeing right now. It's a business that we've always said we like.

We have a strong position. We are #3 in North America, #4 in Europe, a strong position in China with the domestic OEMs there. So we feel good about our business, and we feel good about the trajectory.

Yes. And the way I like to look at our Seating business, and we were just at one of our Seating plants a couple of days ago is great management team in Seating, great technology. As Louis said, we're not the biggest, but we're big enough to compete and win anywhere in the world we play, got a strong business in China, as Louis said, #3 in North America.

And I think really good opportunities to generate growth over market, continue to expand margins and generate great returns.

A couple of minutes left here. I just want to make sure I ask like a few topical points. Just memory and DRAM, you said like there's not a lot of disruption so far in terms of your ability to secure supply. Is it more of like a pricing issue right now?

Like how are you feeling about just supply in general? I mean we've been hearing some comments, I think, through yesterday that pricing has maybe stabilized a bit. I don't know if that's true, but just the latest and greatest on how you feel about just the whole DRAM situation.

Yes. So it's definitely been a pricing issue. And we're not the biggest purchaser of DRAM. And if you look at last year, it would have been under $100 million of buy, if you will. But obviously, prices increased significantly. I would probably agree things are probably stabilizing a bit at a high level. It's been pricing, and it's been availability, too.

I mean the availability is kind of week-to-week, month-to-month. We've done a very good job at Magna securing supply for our customers, and we're planning for that to continue, but it's been a little touch and go, as you know.

But from an inflation standpoint, we do have inflation coming through that we've baked into the guide with some level of recovery, not full recovery, but some level of recovery in 2026 and discussions with customers are ongoing.

I'd say the discussions so far have been constructive. And what we don't recover this year, we'd look to -- if prices don't recede, look to recover next year.

Got it. One last one. We have the Analyst Day coming up, and I just -- I don't want to front run it too much, but just thoughts on capital allocation and just portfolio. You obviously have the buyback program that's ongoing, which will continue for a couple of quarters.

Curious like when does M&A come back into the picture, other assets within Magna that they for like maybe some pruning. Just curious on your thoughts there.

Sure. Well, we're looking forward to the Analyst Day or the Capital Markets Day on November 11. I do think from a capital allocation standpoint, we're in a really good spot from the standpoint of the balance sheet is very strong. Leverage is well within our range, targeted range. We like the portfolio. We've completed lighting and rooftop or close to completing lighting and rooftop. We like the portfolio.

There's no glaring holes that would say we've got to go out and make a big acquisition. So I do think we'll continue to manage the portfolio actively as we have. But I think organic is the way we're approaching growth over market in the near term.

No real need to do M&A, as I mentioned, which then says with the strong free cash flow and the strong balance sheet, we do believe capital return can continue to be a big part of the story and I think a key differentiator for Magna.

I mean you look this year, we've said we're going to complete the NCIB allocation. That would be over close to -- if not more than $1.5 billion of capital allocated to share buybacks in a single year, and we're going to end the year with leverage below where it was at the end of last year at the midpoint of the guide.

So I think that's -- it's been a good part of the story and should continue to be. And kind of more to come at the Capital.

Awesome. Great. Thanks so much, Phil and Louis.

Appreciate it.

Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome you to Magna International Second Quarter 2026 Results Conference Call and Webcast. [Operator Instructions]

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

Thanks, operator. Hello, everyone, and welcome to our conference call covering our Q2 2026 results. Joining me today are Swamy Kotagiri and Phil Fracassa. Yesterday, our Board of Directors met and approved our financial results for the second quarter of 2026 and our updated outlook. We issued a press release this morning outlining both of these. You will find today's press release, conference call webcast, the slide 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.

With that, I'll pass it over to Swamy.

Thank you, Louis. Good morning, everyone, and thank you for joining us today. We appreciate your time and interest, as always. Let's get started.

Overall, I was very pleased with our strong Q2 2026 results with continued margin expansion momentum driven by disciplined execution. In the quarter, sales increased 3% with weighted organic growth over market of 3%. Adjusted EBIT was up 16%, while adjusted EBIT margin expanded 70 basis points to 6.2%, and adjusted EPS rose 29% to $1.86, a record for the second quarter. These results demonstrate continued traction on our operational excellence activities and ability to deliver improved performance in a dynamic environment.

Our strong free cash flow is further evidence of the continued improvement in our operating performance. During the quarter, we generated $954 million in operating cash flow and $617 million in free cash flow. We were also pleased that S&P recently reaffirmed Magna's A- credit rating and improved outlook to stable. This comes on the heels of a similar action by Moody's earlier this year. And we ended the quarter with a 1.4x rating agency leverage ratio ahead of our expectations and $1.4 billion in cash on hand which further enhances our financial flexibility.

Supported by our strong first half performance, we raised our full year 2026 outlook reflecting confidence in our margin, earnings and cash flow trajectory. For the year, we expected weighted sales growth over market of about 1% at the midpoint. We narrowed and raised our outlook ranges for adjusted EBIT margin, adjusted EPS and free cash flow, again, reflecting our first half momentum and expectations for solid execution over the remainder of the year.

Our business pipeline continues to grow with over 90% of our 2028 business already booked. While macroeconomic and geopolitical conditions remain somewhat uncertain, including recent developments in the Middle East and with respect to trade policy, our outlook reflects our best estimates and confidence in our ability to mitigate headwinds and execute on what is within our control.

We remain steadfast in executing our proven capital allocation framework. We continue to invest in our business to support further profitable organic growth while returning significant capital to shareholders. During the quarter, we returned $598 million to shareholders, including $465 million through share repurchases. At the end of June, we had about 9 million shares remaining under our NCIB, and we plan to repurchase those shares in the second half.

We also closed on the sale of our European lighting business at the end of June and expect to complete the remaining lighting and rooftop divestitures sooner than originally anticipated. As a result of our team's strong execution and focus on innovation, we continue to have success winning new business to drive organic growth into the future.

We were recently awarded a driver and occupant monitoring system program with a European OEM positioning Magna's technology as a foundational platform level solution across the customer's vehicle architecture. Our mirror integrated hardware and software support scalable software-defined vehicle architectures and reinforces our leadership in driver awareness and interior sensing integration. We see additional opportunities to expand this technology across other customers and vehicle programs.

Our recently awarded 800V 2-speed eDrive program with Chery automotive further demonstrates Magna's advanced electrification capabilities. This award builds on our existing momentum with Chery following the launch of our dedicated hybrid drive system, which is now in series production for the Jetour G70. This recent award further strengthens Magna's market position and high voltage drives.

Our commitment to innovation, quality and execution continues to be recognized by our customers. Most recently, Magna earned 5 General Motors Supplier of the Year awards, spanning 5 different product categories. These awards bring our total GM Supplier of the Year recognition over the past decade to more than 40, underscoring the strength of our partnership with GM and our consistent ability to deliver for our customers.

Lastly, I want to address the topic that has come up in several recent discussions with investors and analysts, whether Magna is looking at opportunities beyond automotive, including areas such as robotics, automation, data centers and other adjacent markets. We are actively evaluating these opportunities, and we have already some initial project wins where we can leverage Magna's existing capabilities, manufacturing footprint, technical expertise and automotive grade standards for quality and reliability.

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

With that, I'll turn the call over to Phil.

Thanks, Swamy, and good morning, everyone. I'm going to begin on Slide 16 and with a summary of our strong second quarter results. Sales were $11 billion in the quarter, up about 3% from last year. Adjusted EBIT margin improved 70 basis points to 6.2%. Adjusted earnings were $1.86 per share, up 29% from last year and a second quarter record. And free cash flow was strong at $617 million, more than double last year's level. Each of these metrics came in ahead of our expectations.

Now I'll take you through some of the details. Let's start with sales on Slide 17. As I mentioned, second quarter sales were up about 3% overall compared to last year. Excluding foreign currency translation, sales were up about 2% organically. By comparison, global light vehicle production declined 2% in the quarter. On a Magna weighted basis, we estimate light vehicle production was down about 1%. This translates to a 3% growth over market for Magna consolidated and 4% growth over market, excluding Complete Vehicles.

Looking at the sales [indiscernible], volumes, launches and other added $273 million to the top line, or about 2%. The increase was driven by new program launches, including the Jeep Cherokee Recon, Zeekr 9X and RAM 1500 as well as net favorable sales mix. This was partially offset by the end of production of certain programs, including the Ford Escape, lower light vehicle production and normal course customer price concessions.

Sales in Complete Vehicles declined $96 million organically despite higher unit volumes. The higher unit volumes were driven mainly by new assembly programs and [indiscernible], including with XPeng and GAC where sales are recognized on a value-added basis. Volumes of other customers where sales are generally recognized on a full cost basis, declined year-over-year in aggregate. This resulted in net lower assembly sales dollars. Engineering revenue was also lower, in line with our expectations. And lastly, foreign currency translation was positive $172 million, driven by a net weaker U.S. dollar compared to last year.

Now let's move to EBIT on Slide 18. Second quarter adjusted EBIT was $677 million, an increase of $94 million or 16% from last year. Adjusted EBIT margin was 6.2%, up 70 basis points. Looking at the margin pluses and minuses. The largest benefit came from operational performance, volume and other, about 75 basis points. This reflects continued momentum from operational excellence and other cost reduction initiatives. We also benefited from prior restructuring actions, favorable net foreign exchange transaction gains and incremental margin on the higher organic sales. These positives more than offset unfavorable mix and higher commodity costs, among other items.

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

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

Now let's take a brief look at our business segment performance, which is summarized on Slide 20. 3 of our 4 segments posted higher sales year-over-year and growth above market, with a notable 6% year-over-year increase in Power & Vision. In Complete Vehicles, fields declined 5% as expected despite higher unit volumes as net lower sales on full cost programs and lower engineering revenue were only partially offset by favorable foreign currency translation and the benefit of increased value-added sales at higher margins from new programs with Chinese OEMs [indiscernible].

Turning to EBIT, our Vision, [indiscernible] and Complete Vehicles, all posted notable year-over-year improvements in adjusted EBIT dollars and margins, reflecting strong operational execution. Body Exteriors & Structures margin at 8.1% was ahead of our expectations but down 10 basis points from last year on slightly unfavorable mix.

Now let's look at cash flow on Slide 21. In the second quarter, we generated $954 million in cash from operations, an increase of $327 million from last year, driven by higher earnings and strong working capital performance. Investment activities in the quarter included $269 million in CapEx, representing 2.4% of sales and $77 million for investments, other assets and intangibles, offset partially by proceeds from normal course asset disposals.

Netting everything out, we generated free cash flow of $617 million in the quarter, which was above our expectations and more than double last year's level. We continue to return cash to shareholders in the second quarter with $133 million in dividends, along with $465 million in share buybacks. We repurchased 7.4 million shares during the quarter under our NCIB authorization which left us with just over 9 million shares remaining at quarter end. We are planning to repurchase the remaining shares before the NCIB expires in early November.

Turning to Slide 22. Our balance sheet and capital structure remain strong. At the end of June, we had close to $5 billion in total liquidity, including $1.4 billion cash on hand. Our rating agency debt-to-EBITDA leverage ratio was 1.4x on June 30. This puts Magna in a great position to continue our share repurchases in 2026 and beyond. And we were pleased that S&P recently affirmed Magna's A- investment-grade credit rating with stable outlook. This follows Moody's affirmation of our A3 rating with stable outlook earlier this year. Together, these actions underscore the strength of our balance sheet and resilience of our business.

Next, let me cover the macro assumptions underpinning our current outlook on Slide 23. Compared to our May outlook, we've increased our estimates for North America and Europe production by 100,000 and 200,000 units, respectively, while we reduced our China production estimate by 800,000 units. We also updated our foreign currency assumptions to reflect recent exchange rates. Our current full year outlook reflects a weaker euro and Canadian dollar, along with a slightly stronger Chinese yuan which translates to a net stronger U.S. dollar compared to our May outlook.

Also on the macro front, we continue to monitor the ongoing conflict in the Middle East. As always, we will manage input costs and other volatility through mitigation actions and commercial recoveries. Our outlook reflects our current visibility and best estimates for the balance of the year, including modest incremental cost headwinds across several key commodities and inputs.

Moving to Slide 24. We've revised our full year sales outlook essentially to reflect our updated foreign currency assumptions for a net stronger U.S. dollar as well as our expectation that the lighting and rooftop divestitures will close sooner than previously anticipated. More importantly, we continue to expect positive growth over market for 2026 in the range of 1% to 3%, excluding complete vehicles. We are narrowing up and raising our prior outlook ranges for adjusted EBIT margin, adjusted EPS and free cash flow. This reflects our strong first half results and confidence in our ability to deliver solid execution in the second half.

We expect strong margin expansion in 2026 and have narrowed up our outlook for adjusted EBIT margin of between 6.3% and 6.6%, up 15 basis points at the midpoint from our previous outlook and an increase of 85 basis points versus last year. We have also narrowed and raised our outlook for adjusted EPS to between $6.70 and $7.30 per share. At the midpoint, this represents a $0.25 improvement versus our prior outlook and an increase of 22% versus last year. And finally, we've increased our free cash flow outlook to $1.8 billion at the midpoint, up $100 million from our May outlook. This represents free cash conversion of around 95% of adjusted net income.

With respect to other key assumptions, we now expect higher equity income and slightly lower interest expense as compared to our prior outlook, all our assumptions for capital spending, the tax rate and diluted shares remain unchanged.

Finally, I'd like to give you some color on how we see the third and fourth quarters shaping up to assist you in modeling in the second half. The midpoint of our full year EPS outlook implies second half adjusted EPS of $3.76. We expect roughly a 40-60 split of second half EPS between the third and the fourth quarters as the fourth quarter will benefit from higher sales and margins compared to the third. But we do expect both quarters to post higher margins year-over-year. That's it for the financial review.

Now I'll turn it back to Swamy to wrap things up. Swamy?

Thank you, Phil. Before we take your questions, let me recap a couple of key points. We had a strong second quarter of 2026 with weighted sales growth over market, adjusted EBIT margin expansion and solid cash flow generation. We are positioned for continued margin expansion, EPS growth and shareholder returns, supported by 2026 outlook that we raised from May, reflecting our confidence in our operating performance. We are executing a disciplined capital allocation strategy, including significant return of capital. Most importantly, we remain highly confident in Magna's future.

We hope to see many of you in November at our investor event in New York City, where we will go into detail on our strategy, key initiatives and long-term financial outlook. Thanks for your attention.

Now operator, let's open it up for questions.

[Operator Instructions] And your first question comes from James Picariello with BNP Paribas.

Congrats on a great quarter. Can you speak to what drove the quarter's onetime -- to what extent was there a pull forward in your recoveries? The tariff recovery -- how are you thinking about your tariff recoveries in the back half? And then the other -- the discrete items that's called out in the bridge?

I would say there was -- this was not really a volume-led quarter. Predominantly, the driver of the performance in this quarter is the operational side, which has been really strong and consistent according to our execution agenda. And that's what gave us the conviction to go raise the full year outlook. So that's one point.

As we look at the tariffs and the commercial recoveries, Phil can add a little bit, but I think net-net, compared to the last year, this was actually negative. And those are the key things. And as we sit here this year, I think we are further along than last year in getting recoveries. So that helped us derisk the second half of the year. So those are the real key drivers for the performance. I don't think there is any onetime performance other than the tax issue that, Phil, you can elaborate a bit.

Sure. Yes. No, sure, James. Great questions. So again on tariffs, if you remember, last year, we ended with a net margin headwind of under 10 basis points. And we're thinking it will be similar this year, but the timing is going to be a little different because the recoveries are coming a bit quicker. So we did have favorability on the margin in Q2 from tariffs. But again, because we had no recoveries last year, we have recoveries this year. For the full year, though, we're expecting a relatively neutral impact on the margin. Maybe we'll do a little better than that. I mean who knows.

On commercial items, Swamy is exactly right. They were net unfavorable in the quarter. So if anything, commercial was a headwind in the quarter, yet we still posted to 70 basis points year-over-year margin improvement. So it was really operational excellence, as Swamy mentioned. And then we did -- I do want to point out on the tax line, we did have a $0.09 benefit in the quarter compared to the 23% guide. That will reverse in the second half because we haven't changed the full year guide, so $0.09 of the performance in the quarter would have been taxed. But beyond that, underlying, it was very structural in nature.

Got it. Very helpful. And my follow-on is specific to the Power & Vision segment, some really nice core growth inflection, which you guys have been promising in the guide. It's shown clearly in the second quarter. Can you speak to what's driving that? Are there a few key programs that are launching very nicely, regional wise? And then also within that segment, the divestiture -- what are you assuming for the divestiture now for the second half? And how does that compare to your prior guidance?

Maybe at a high level, James, right? As you've seen in Power & Vision, we delivered about 5% weighted growth over market and margins about 6%. the core performance really benefited from the strong incremental margins on higher sales, and the flow through is really the account of the operational excellence initiatives that we've been talking about. And it was helped by higher equity income and lower net tariffs as Phil talked about a little bit. But overall, it still had some mix and commercial items and commodity costs. And despite that, the P&V segment continued to perform, not only that, I see the same dynamics for the full year and expect a good continued trajectory in this segment.

Yes. And on the divestitures, James, so we did -- we are closing on those sooner than we anticipated. And that would be another $50 million of sales that kind of is coming out because of the sooner-than-expected closing. So about just over $400 million of revenue coming out of P&V in the second half year-over-year because of the divestitures. Last -- in May, we were talking more about kind of $350 million. So it's about $50 million higher than we previously thought.

Yes. And launches, there's a whole bunch, obviously, in [indiscernible] programs, German-based OEMs that are launched and that are helping us, some business with Subaru, some Chinese OEM launches that are contributing on the launch side.

Your next question comes from the line of Alex Perry with Bank of America.

This is Jack Joyce on for Alex. Can you maybe talk us through a little bit on the regional outlook? It looks like you've raised production assumptions for North America and Europe. But China came down a bit. Maybe talk to us through how you're thinking about the different regions. And as a follow-up, looking into 2027, industry forecasts currently imply limited global production growth based on your backlog and launch cadence, what's Magna's portfolio imply for growth over market next year?

Well, a little bit too early to talk about next year, Jack. We definitely appreciate the question. I mean -- but for the full year, we are expecting solid growth over market for the full year, as we talked about before. Global light vehicle production will be down for the full year even with the revised estimates that we put in there. On a Magna-weighted basis for the full year, we think global light vehicle production will be down about 2%, about 3% in total. And yet for the full year, our sales, as you'll see, is roughly flat, down just slightly. If you take out the FX impact, which is positive for the full year, it's going to be negative in the second half, but positive for the full year.

Take out the divestiture, we were down about less than 1% organic. So growth over market, that's our 0% to 2% positive growth over market for the full year. If you exclude Complete Vehicles, it will be kind of in that 1% to 3% positive growth over market. And then we did a little bit better than that in the first half, so it will be a little bit less than that in the second half, but it will be positive in both first half and second half.

And then regionally, you're right, we did take our estimates up for North America and Europe which, as you know, we're well exposed in those 2 regions. We took China down $800,000, a little bit difficult. China were a little bit smaller, so mix really matters in China. But overall, we rolled in the production estimates and very comfortable with the second half sales guide and the projection for growth over market for both the second half and the full year.

And I'd point out that some of the volume change in our outlook is behind us. In other words, we experienced some of that. Some of the up in North America and Europe we experienced in Q2 and some of the down in China was also in Q2.

Your next question comes from the line of Rajat Gupta with JPMorgan.

Just wanted to follow up on the third quarter, fourth quarter seasonality split. It does seem like a little more steeper seasonal step down in 3Q and obviously, you have more steeper fourth quarter pickup. Could you elaborate on what's driving that? Is it just recovery timing? Or any specific launch cadence that we should keep in mind because it would imply a pretty material like step-up in the fourth quarter margin. So I just want to clarify that, and I have a quick follow-up.

Yes, sure. Sure, Rajat. Thanks for the question. So you're right. I mean we are expecting lower revenue in the third quarter. And as we think about third and fourth quarter kings, we do expect a little bit more coming out in the third quarter, and that's going to be driven mainly by obviously, foreign currency is a little bit negative in there. The divestitures are in there as well, although that would impact probably the fourth quarter even a little bit more than the third. But overall, we think the third quarter, the guidance would imply -- if you think about it, like organically, for the second half, the guidance at the midpoint would imply we're down kind of about 1% or so, a little bit over 1% organic. Think about most of that in the third quarter, driven by model changeovers, normal seasonality, launch cadence, end of production and the like. We've got some programs kind of coming out, Ford Escape, Toyota Supra, BMW Z4 and then kind of more flattish organic in the fourth quarter, a little bit of a step-up from the third to the fourth, but then overall netting to positive growth over market for the second half.

And I think, Phil, it might be worth mentioning that the slope of the curve is actually flatter this year compared to the last year when we looked at the back half versus the first half of the year.

Yes, good point. So when you think about margin -- margins and earnings, lot of the recovery similar to last year. While we're doing -- I think we're doing a better job getting recoveries earlier. For example, tariffs, it would be normal for us to have a little bit more skewed to the fourth quarter which would kind of explain a little bit of that EPS split as well as emergence. But as we said in our scripts, we do expect margins to be up year-over-year in both the third and the fourth quarters. And frankly, the year-over-year improvement will be -- should be pretty similar across both those periods.

Understood. That's helpful. And just a question on like [indiscernible] situation around memory and DRAM. I mean, how do you feel about your position in terms of locking in supply, obviously, the second half but more for '27? Just curious how the discussions are going on pricing, recoveries, et cetera.

Thanks, Rajat. We are monitoring the DRAM, obviously. I think the group that is really impacted for us is electronics. We have been in discussions with the customers as well as the suppliers, and we have had no issues with disruption. It's something that we are monitoring very closely. In this contract, we worked, again, as I said, with OEM [indiscernible] suppliers, and we feel our first choice of -- first priority is to mitigate any disruption, and we feel pretty good about that. And if there is -- we see a little modest unrecovered cost headwind in the second half, but we've included that in our expectations or in the outlook. It's a continuing playbook that we have to go through, but nothing as we see today that's going to be disruptive.

Your next question comes from the line of Dan Levy with Barclays.

I wanted to go to the sort of first half to second half margin bridge because when we look at especially Power & Vision and b, there's a significant margin step-up even though revenue is declining and we know that revenue is going to be declining on some of the key programs you have, GM trucks, et cetera. So maybe you can just talk through that first half to second half step up in margin? And then maybe just a short point on tariff if you could just say -- you mentioned tariffs are neutral or slight negative, what the assumption is within tariffs on IEEPA refunds?

Sure, Dan. So let's start -- we'll start first with the first half to second half. So it really boils down to some of the similar things we saw in the first half itself. So when I look first half to second half, operational excellence initiatives continuing to accelerate is probably the biggest driver, first half to second half, that will certainly apply in both EES and P&V. As we said, recoveries first half to second half are going to be more second half weighted. That's certain element as well as we work to secure those in the second half before the end of the year. .

P&V does get -- does have a little bit more tariff recovery with customers, a little bit of that back half weighted as well. And that's more than offsetting first half to second half in P&V, we had a big equity income [indiscernible] in the first quarter. So that would be kind of a positive in the bridge, if you will. But overall, it's really been driven by the -- I'm sorry, to be a negative in the bridge on the equity income as with inflation, but the positives of operational excellence in recoveries and really good pull-through and good mix performance more than outweighing the negatives.

And then on the IEEPAs, if you looked at last year, and into this year, while the IEEPAs were still in place, we probably paid just over $100 million in IEEPA tariffs. We've gotten about half of that back with most of those refunds coming in the second quarter. But as we get the refunds back, we're accruing pass backs to our customers and would expect customers to get 80% to 90% of that since they funded most of that in -- as we paid it. So it's a pretty small impact to the company overall.

And then the comment on tariffs. So we said tariffs would overall be neutral from '25 to '26, neutral in dollars, roughly neutral on margins, probably -- and maybe do a little bit better than that. So if anything, tariffs may be a slight positive, but would not expect it to be a negative year-over-year.

Great. As a follow-up, Swamy, I appreciated the commentary earlier that you're looking at some other end markets outside of automotive I think one of the things that we've seen with Magna in past is because you're such a large company and you have such a dominant share across so many different products, what then happens is it can be hard to moved the needle on a $40 billion plus revenue base. So given non-auto right now is nothing for you or I assume very small, is there any confidence that these efforts can add up to sort of a material growth benefit? Or is it just that because you're still so large, this will still be smaller on the margin from a growth perspective?

Dan, great question. First point, I think we have some proof points in terms of capabilities that can translate beyond traditional Light Vehicles. We have had examples of that in our tires long-running non [indiscernible] production as an example. Star engineering that's work on aerospace-related work [indiscernible] has done work for cabin white products for heavy truck. And this has all been related to overall capability in terms of integration, in terms of some of these main core processes that live in Magna.

So all in all, I think we are going to be very selective. We are looking only at areas that we have a clear right to win. And that might include recreational vehicles, other industrial applications and it would help our growth without distracting from the core business.

The other point that we are very clear about is looking at the returns criteria and also looking at not having to have any big distraction or a significant incremental investment. So that's kind of like the backdrop. We have been awarded some projects already. Like you said, we want to come on the Investor Day to be able to talk through what's the road map, what is the size. But I believe done well, these adjacent markets can add incremental growth. and modest diversification without changing Magna's identity or operating model. So I think it's going to be meaningful. And now we'll have to decide what material means but let's talk about it in November.

Your next question comes from the line of Joe Spak with UBS.

Phil, maybe just a clarification point on some of your last comments. So it sounds like you got $50 million in IEEPA recoveries. Was that included or separate from that 25 basis point benefit in the quarter? And then are you really able to, I guess, realize this because it also sounded like you're going to still have to sort of pass it on to your customers. So maybe you could just sort of clarify some of your comments there.

Yes, sure, Joe. Sorry. Yes, absolutely. So yes, we had a 25 basis point benefit from tariffs in the quarter. So as you said, call it, $25-ish million. That would be included in there. But as I said, as we recover the we're accruing a give back to the customer of an amount, call it, 80% to 90%, whatever they funded up the tariffs ultimately, last year into the beginning of this year. So there'd be a slight benefit in that number. The bulk of that would be -- that would be a piece, I would say, a small piece.

Another piece would be we're getting recovery sooner than we did last year. So last year, we had costs with virtually no recoveries in Q2. This year, we have costs with some recoveries because we're inking deals more real time this year than we did last year. And then a little benefit from the IEEPA that we're able to keep because it was tariff that customers didn't ultimately fund.

And if you look in the first half, we had about -- I think it was a 15 basis point headwind in Q1 related to tariffs, 25 basis point tailwind in Q2. So first half, we're about 10 basis points tailwind. And as we said, move into the rest back half of the year, it'll probably flip a little negative on us because we had more recoveries last year that we got in the first half this year. And then net-net, on the margin, as I said, neutral for the full year -- relatively neutral or potentially maybe a little bit better than that.

Got it. Okay. Maybe just to some -- also quick clarification housekeeping on the outlook. The lighting sale, it sounds like it's closing a little bit earlier. So was there a change in your like -- I know you already sort of took it out last quarter, but was there any sort of change in what you're assuming in your guidance of the revenue line item, at least for it coming out a little bit earlier? And then also, if you could just -- and then also if you could just sort of -- the free cash flow guidance was raised, but if you could just remind us like how much of this year's free cash flow is really related to like either the EV recoveries or some of the IEEPA cash that you're receiving?

Yes, sure. So [indiscernible] I was focused on [indiscernible] my apologies. So on lighting, it will be just over $400 million. So when you look at the midpoint of the sales guide, we took it down about $400 million, I think, goes [indiscernible] so that $400 million was really all -- virtually all FX and then about $50 million related to increased lost sales because of the divestitures closing earlier than we thought. We closed Europe lighting in the second quarter at the very end of the second quarter, and we are seeing the rest of the pieces closing a little bit earlier than we anticipated. So about another $50 million for that, the rest call it FX with very little change organically if you will.

And then moving to the free cash flow. Again, really strong performance. We took the full year guide at the midpoint up around $100 million, reflecting both the increase in underlying earnings EPS, if you will, as well as better working capital performance that we saw in Q2 that we think we'll be able to sustain for the full year. CapEx relatively unchanged. But within that number, you'll remember in the first quarter, we had a big recovery we talked about on -- balance sheet recovery on the order of around $475 million. That's in there. We do -- we are expecting some additional recoveries in the second half of the year, but don't expect them to be anywhere near that number. So a little bit more in the second half, but not anywhere close to that number.

And then on the IEEPA, as I said, we do expect to get all the IEEPA back. We're working on it as we speak, timing TBD but do expect to get it back. But in the end, as I said, most of that gets passed back. So at the end of the day, it would be kind of in the round.

Your next question comes from the line of Ty Collin with CIBC.

So I mean, clearly, some of your larger European customers are still struggling with competition from Chinese OEMs, both in China and in Europe. I appreciate that Magna has a pretty broad reach in terms of the customers that you serve. But have those shifting market share dynamics negative for Magna? Or is it kind of neutral based on your relationships with the Chinese automakers?

Yes. I think -- if you look at China, we have talked about it. We -- over the last 10, 15 years, we have moved from a predominantly supporting Western OEMs in China to a mix where our revenue today in China is about 65% with the Chinese OEMs. So as the [ D3 G3 ] kind of lose market share in China, it will have an impact on our sales in China for now. But the important thing is to see that we have been diversifying and adding business. A proof point is one of the things we talked about in our prepared statements of the Chery win as an example. So in the short term, it's something that could have an impact, but as we continue to increase our presence with the Chinese OEMs in China will be part of the ecosystem.

Okay. Great. And then Swamy, I'm curious to get your thoughts on the proposed 50% U.S. content rule that was put forward somewhat recently as part of USMCA negotiations. Is that something that you expect to ultimately materialize in one form or another? And how would you think about the impact of that sort of rule to your business and the overall industry?

I think, Ty, I usually refrain from making comments on trade policies and national policies. But we are keeping a close watch. Obviously, as you can imagine, it will have an impact on the automotive industry as a whole. What it really means is we have to be agile and adaptable. We have a footprint in all 3 areas here. And we've been able to walk through the tariff discussions over the last 1.5 years. So all I can say is that any change is going to have an impact, but we'll have to follow the strategy of the OEMs based on their footprint and their programs, and that's what we are focusing on.

Your next question comes from the line of Tom Narayan with RBC.

The first one I have is on the slide on the 2028 backlog with over 90% already book. Just curious if you could comment at all on maybe what the margin profile of this looks like? And also what the Chinese OEM exposure is there? And then a follow-up.

So, Tom, obviously, we won't talk about the margin profiles by customer or into the future. We'll have to come back and hopefully give you a little bit more color on the long-term profile of Magna as we come to the Investor Day, and we are going through the business plan process and in normal course, we talk about 2027. The point of the 90% being booked is to show that we continue to grow our business despite all the discussions on recoveries and tariffs and so on. And its normal cadence 2 years out, that's what we see. That gives us a little bit of certainty in planning, and that is what we intended to convey.

Yes. Maybe if I could add, Tom, and not on '28 as much, but maybe on '27 because we've talked about this before with some of the new contracts we're getting and new programs we're getting with our customers. We have talked about improved economics helping as we continue to price for current economics and setting, for example, labor rates that start of production as an example. We see some benefit in '26, and then we do have some new programs coming in, in 2027, one that's going to help the seating business up quite a bit. It's a German OEM program in North America as well as new programs with one of the Detroit 3. We do expect better economics on those programs. So that will be a '26, '27. And then as Swamy said, we'll get into '28 at a later point in time.

Yes. I think maybe one comment at a very general level. What we are all really excited about is the traction on various initiatives in the company. We call it operational excellence, whether material flow optimization or advanced technologies or digital standard work, and we're going to give some color when we come to the Investor Day. We've been talking about this 35 to 40 basis points margin expansion. As we finished this year, we would add about 200 basis points from '23 to '26 and I would like to say we are still, I believe, in the early innings. And we're going to scale what we are doing here and as this proliferates. That is what is exciting going into '27, '28 and even into '29 plus.

Okay. Got it. The follow-up point I have is on Chinese OEMs into Europe. I had the pleasure of seeing your hinge making in China earlier this year. And I guess just I underestimated how much infrastructure is involved that goes into what you guys do. I think there were like 100 parts to a hinge, for example. Is the argument that the Chinese OEMs producing in Europe would have to build all of this infrastructure either on their own or Chinese suppliers build capacity very extensively in Europe from scratch. And is that the argument that you guys have for continuing to use your guys' content in Europe? And are there certain segments of your segments that maybe are more protected from either the Chinese OEM in-sourcing or certain suppliers moving to Europe than others? Or do you feel they're all kind of equally protected?

Thank you, Tom. I think there's nothing like visiting our plant, and I understand you've been at our [indiscernible] plant looking at our latches. It gives the magnitude of the complexity. So thank you for explaining that. The key as we even worked in China, we have been very deliberate, as you said, about the type of the product, we need to have a platform strategy, so where we can deploy at a scale on various programs once we develop something. And the technology and the manufacturing DNA and the integration expertise is kind of like the moat once we have that in place. That is the general strategy that we have followed.

If you go to our structural business side of things, similar large castings, large stampings and complex assembly structures with various joining technologies, that is kind of the moat there. Our seating folks have developed some really interesting technology in terms of even structures beyond some of the other interesting stuff we intend to show that helps automation from a product side. We'll talk about that in our November time frame. So this is how we are able to supply in China for China, and we are learning through that process.

And obviously, now to your question, as you know, we are working with the Chinese OEMs in our style for complete vehicle assembly. And as that continues to localization, we have similar capabilities in Europe, obviously, because we produce in Europe for any OEMs that are manufacturing in Europe. So that will be the next step. Our hope is to help through the homologation process with our full vehicle expertise and obviously, the supply of the components and systems similar to what you saw [indiscernible].

Yes. And maybe the other point would be really speed. I think Magna having capabilities everywhere in the world really gives us the ability to meet the speed demands of our customers as they move around the world, and that's another advantage we have.

And the existing footprint and capabilities there should mutually help for the returns profitably.

Got it. Understood. Looking forward to the Investor Day.

Your next question comes from the line of Jonathan Goldman with Scotiabank.

Maybe, Phil, just a couple to start off on the margins. Is it possible to tease out the basis point impact of operational excellence and the higher commodity costs in the quarter?

Sure. I would say if you look at the 75 basis points in the margin bridge, a majority, I would say, a good -- close to majority that would have been operational excellence and the rest would have been pull through on the sales, et cetera. And I would say inflation in second quarter would have been -- on commodities was relatively modest. I mean we didn't -- we probably anticipated a little more than we saw -- but we did see -- because of the lags involved, we did see a little bit more in the second half, which we've rolled in to the guide to make sure we were covered for the rest of the year. So we feel like we've got good coverage, if you will, based on our visibility as we see it today. But operational excellence is -- I would say a majority of that 75 basis points, right in line with Swamy's comments around 35 to 40 bps of improvement, it would have been right along those lines in the quarter.

Okay. And then I guess, same exercise though for the full year guide. You raised the margin guidance by 20 bps at the midpoint. Could you bucket how much of that incremental upside is from operational excellence recoveries or lower commodity inflation? Anything else there?

Yes. I mean, obviously, a lot of -- a lot of puts and takes. As we said, we adjusted the top line mainly for FX and divestitures. So not much bottom line impact there on the margin, if you will, maybe a little bit of a benefit from the divestitures, call it, maybe 10 bps but most of that was already in the guide. But in terms of guide to guide, it would have been operational excellence, getting better. We layered in a little bit more for inflation. Those would have been the primary puts and takes. I don't know, Louis, if there's anything else you'd call out?

Yes, those would be...

Those would be the primary puts and takes.

Okay. Great. And then maybe, Swamy, I guess, one for you. Could you talk a bit more about the award that you recently won with Chery? Maybe the broader implications of how this win positions you in China going forward beyond just a independent program win?

Yes. I think the key -- we had a word already with them in terms of a powertrain product. And this is a the next win. Broadly, I think this speaks to the platform technology that we've been talking about, Jonathan. If you look at the building blocks that we have talked in the past, the speed at which we could have a strategic conversation with the customer and bring it to production is the example. And we have taken some of these things and are now starting to gain traction in other parts of the world from a hybrid product perspective.

So there's learning in terms of the speed, there's learning in terms of our executing to what we've been talking about is taking building blocks in a platform and being able to deploy in different regions with different customers. So that's kind of like the broad message here.

Your next question comes from the line of Emmanuel Rosner with Wolfe Research.

Maybe just one question. So you raised this -- the free cash flow outlook to a pretty strong number for this year. I know it's a bit early to sort of like look forward. But during the quarter, Phil, I think you expressed some confidence that even though this year's free cash flow includes pretty major sort of like OEM recoveries that are more like onetime in nature. The overall ballpark of free cash flow is still something that sustainable in the future. So first, is that sort of like the right understanding and thinking? And if so, what are sort of like some of the puts and takes, which would sort of like enable free cash flow to stay at these levels even without like $0.5 billion plus of recovery?

Yes. No, thanks for the question, Emmanuel. So no, you're right. I mean, the current midpoint this year of $1.8 billion does include some recoveries, but strong underlying free cash flow performance. And as we look ahead, we do expect to convert a similar amount of earnings to free cash flow. And it really does boil down to, obviously, generating the earnings growth, managing working capital very well, a lot of initiatives across the company. You see we talk a lot about operational excellence, hitting the bottom line and it does. But a lot of the initiatives are really designed around improving working capital performance, inventory turns and the like.

And then managing CapEx within that historical range of 4% -- low 4s and we feel the combination of all the above should generate strong free cash flow into the future. And again, that will enable things like investment in the business as well as significant capital return. When you think about this year, $120 billion of free cash flow, we raised the dividend and then we're going to buyback the full end CIB, which would be north of $1.5 billion, plus or minus, yet still bring leverage down and yet still have the ability to continue to invest in the business.

So I think it's a good story. It was a good story last year. It's a good story this year. And I think it will continue to be a good story moving forward.

Your next question comes from the line of Colin Langan with Wolfe Research -- I'm sorry, Wells Fargo.

Just broadly, last couple of years, we've had quite a big jump in margins first half to second half. Is that largely just because of the large amount of inflation? Or is this going to be the new cadence going forward? I mean how should we think about this on a go-forward basis? Is this kind of just the new norm? Or does it actually start to sort of be a little bit more stable in the forward years?

So Colin, I think what Phil explained last year, we were going through the development of the framework for tariff recoveries and there were significant recoveries that were EV-related. So we did talk about the second half being more indexed as the first half. When we came at the beginning of the year, we talked of a similar cadence. But as we went through the year, since we had the frameworks in place, the tariff recoveries and some of the EV-based commercial recoveries got pulled forward, right? So the cadence of first half to second half, the second half being heavy in recoveries and all that stuff continues, but the slope has softened this year.

But I think going forward, who knows how this whole conversation goes. But the cadence of first half to second half, I think, will continue. But let us work through and we'll give you some color when we come back next year again, right, at the beginning.

Absolutely. No, I think it's a great question. So we did think coming into the year, we thought we'd be even more back half weighted. So to Swamy's point, we were able to accelerate some stuff into the second quarter. So I mean, obviously, we hope for a day where it's a little more even. But when -- as you pointed out, with inflation and tariffs and commercial, et cetera, any time you've got a lot of commercial items and recoveries, it's going to be a little more back half weighted. But it is softening or it is moderating, which was nice to see.

Got it. And just secondly, the guide has at the midpoint, about 85 basis points of margin expansion. I think you called out it was roughly $50 million-ish maybe in JV income that's more recovery driven. How should we think about anything else in that increase that might not be repeatable next year? I know in the past, you've talked about recoveries being sort of neutral year-over-year, but recoveries have been high for the last few years. is recovery a drag into next year as well? Or how should we be thinking about that?

Yes. I don't know that I would necessarily call it a huge drag into next year. No, I think -- but you're right, we did have a recovery at one of our JVs in the first quarter. But for the full year across all of Magna, we do see recoveries as being relatively neutral year-over-year. So not a big driver in the margin expansion for the full year, if you will. And then looking forward, recoveries they bounce around and they can -- they're probably higher in the last couple of years, maybe will moderate a bit. But with the operational excellence momentum and the other things we're working on, we don't really see a margin drag, if you will, head into next year.

Point I'd make, we do see recoveries in equity income this year because of the win in the second -- in the first quarter -- sorry, third quarter of this year. So that was a positive. But if you look at the consolidated business, relatively neutral especially here.

Yes. And I think the key point that you mentioned before, as we continue the initiatives that we've been talking about and the new programs coming on with new economic terms, right, all of these things should continue to help the momentum that we are talking about.

Your next question comes from the line of Mark Delaney with Goldman Sachs.

First one was on revenue and recognizing that the change to the full year guide was driven by FX and the timing of divestitures. But I'm hoping to better understand the 1H to 2H trajectory in terms of growth over market. And the first half, a good start. I think you said 3 points of growth over market in both 1Q and 2Q. I think the full year growth over market is 0 to 2%. So that would imply slow growth over market in 2H. So just trying to understand the mechanics of what's happening with the growth over market in 2H?

Great question. So I think you've got the numbers directionally right. So it is higher in the first half than the second half, but positive in both periods. What we are seeing in the second half, we do have a few significant programs in the second half that are going to drive lower volumes year-over-year for Magna, which is sort of muting that growth over market, if you will, but will contribute solidly in '27 in terms of, we think volumes and economics as well includes the full-size trucks at one of our big customers in North America as well as a new program with a German OEM in North America as well.

We also have some end of life or end of production that's hitting when you think about the Toyota Supra and the Ford Escape and then lower production at some of other key customers. But basically, all sort of discrete things, if you will, that's sort of muting our growth over market in the second half. Still positive, still positive for the year, but I think sets us up well for growth over market to reaccelerate in '27.

And just to clarify, you'll see it on our what we call financial review or the analyst report -- the quarterly report that's on our website that there's always some restatements of volumes. So if you look back at the growth over market that we had in the first quarter, there would be some changes there. So I'd say on a year-to-date basis, I think you were pointing to about 3%, it's more like about 1.5% to 2% kind of year-to-date. So we still see a bit of a dip down, but not from, let's say, 3%.

Very helpful clarification. And the other was on the nonautomotive opportunities and recognizing you guys will give a fuller update at -- an outlook at the Investor Day in November. So looking forward to that, and I appreciate some of the comments you shared on a preliminary basis so far. Just one question for today, maybe, Swamy, I think you said you've won some business already there. So just with what's already been won. I don't know if you can give a little bit more detail on sort of the degree of bookings you've already achieved.

Mark, I would rather not talk about little programs at a time or programs [indiscernible], we just want to walk you through the entire strategy. And as I said, material or not could be decided, but they are meaningful wins, and we want to talk about the strategy rather than just talk about single programs.

Okay. Understood. Look forward to hearing more about that at the Investor Day in November.

Your next question comes from the line of Michael Glen with Raymond James.

Just on capacity utilization in North America and the U.S., are you able to give some indication where your capacity utilization is right now and where you might have some excess capacity?

Yes, Michael. I think we usually manage that very closely. There's going to be some ups and downs. And in the past, I've talked about managing or flexing through capacity by in-sourcing some of the things that we have -- we would have put out. So I don't think we'll be having capacity built and wait in the long term. As the programs get delayed or canceled, obviously, there will be some capacity at some point in time. So we'd rather look at it from a long-term perspective to manage how that works. So I don't think there will be excess capacity sitting there.

But to the extent that we have good visibility, we look at it from a restructuring perspective on the long term. And you've heard me talk about 40-plus plants either restructure closed, resized, whatever you want to say, those activities continue, that's how we optimize capacity overall.

Okay. And just one on working capital. The seasonal cadence this year it's quite a bit different than other years. Are you still expecting -- typically, you would get a kind of this big Q4 inflow on working capital. Is that something we should expect to see this year? Or is the cadence different?

Well, certainly, with the recovery we had in the first quarter with kind of skewed a bit the normal seasonality. And then obviously, we had really good performance in the second quarter, again, on working capital. So it is more first half weighted this year than you normally expect to see but if you take the full year guide [indiscernible] year-to-date, what we're going to generate in the second half, it will be more fourth quarter weighted than third. Just as things slow down in December, you tend to release some working capital at the end of the year. So it would be more fourth quarter weighted than third, but you're right. The first half performance at Magna this year was quite good, aided by the recovery in Q1, but really driven mainly by just strong balance sheet working capital performance.

And that concludes our question-and-answer session. I will now turn the conference back over to Swamy for closing comments.

It's Louis here, actually. Thanks, everyone, for listening in today. If you have any follow-up questions, please don't hesitate to reach out to me. Thanks for your interest in Magna and have a great day.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.

Ladies and gentlemen, thank you for standing by. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to Magna International First Quarter 2026 Results Webcast and Conference Call. [Operator Instructions]

I would now like to turn the conference over to Louis Tonelli, Vice President of Investor Relations. Louis, please go ahead.

Thanks, operator. Hello, everyone, and welcome to our conference call covering our Q1 2026 results. Joining me today are Swamy Kotagiri and Phil Fracassa. Yesterday, our Board of Directors met and approved our financial results for the first quarter of '26 and our updated outlook. We issued a press release this morning outlining both of these. You'll find today's press release, the 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.

With that, I'll pass it over to Swamy.

Thank you, Louis. Good morning, everyone, and thank you for joining us today. We appreciate your time and interest. Let's get started.

Overall, I was very pleased with our strong Q1 2026 results, where we drove margin expansion with disciplined execution. In the quarter, sales were up 3% with weighted growth over market of 3%. Adjusted EBIT was up 58% with adjusted EBIT margin expanding 190 basis points to 5.4%, and adjusted EPS rose 77% to $1.38. We continue to demonstrate traction from our operational excellence initiatives across the company.

Our robust cash flow reflects improved operating performance. We generated $677 million in operating cash flow and $372 million in free cash flow. In addition to strong earnings growth, our team did a great job securing additional commercial recoveries related to previous EV investments. Moody's recently reaffirmed its A3 credit rating for Magna and improved the outlook to Stable. We ended the quarter with a 1.5x rating agency leverage ratio, ahead of our expectations with $1.6 billion in cash on hand.

Our 2026 outlook reinforces our confidence in our margin, EPS and cash flow trajectory. We continue to expect weighted sales growth over market of about 1.5% at the midpoint. We are reaffirming our prior outlook ranges for adjusted EBIT margin, adjusted EPS and free cash flow.

While the situation in the Middle East introduces some uncertainty, we have a track record of navigating external disruptions, and we are confident in our ability to execute on what's within our control. Importantly, we expect to mitigate most cost headwinds over time. We remain focused on executing our proven capital allocation framework. We continue to invest in our business to support further profitable organic growth while returning $575 million in capital, including $440 million in stock repurchases to shareholders in the quarter. At the end of March, we had about 17 million shares remaining and available for repurchase under our NCIB. We plan to repurchase the remaining shares during 2026.

We recently announced the margin accretive dispositions of our lighting and rooftop systems businesses. The transactions are consistent with our long-standing principles around portfolio management. We have highlighted in the past that we manage our portfolio using an objective set of criteria and regularly assess our product lines based on their addressable markets, market positions and returns. Specifically, we want to participate in meaningful or growing markets with stable or growing profit pools, strong or a clear path to strong market positions, profitable growth and sustainable competitive advantage. This has long been a key principle that ensures that we manage Magna for long-term success.

The dispositions allow us to streamline the portfolio and focus on businesses that advance our long-term growth, margin and return objectives. The transactions are expected to close in the second half of the year. In our outlook, we have removed about $350 million of sales with minimal earnings and free cash flow impact. One example of our team's execution and innovation is the recent expansion of our hybrid driveline portfolio with the introduction of a dedicated hybrid drive for range-extended electric vehicles. The new system offers several advantages, including reduced size, weight and system cost, multiple operating modes and applicability across a broad range of vehicle segments. It underscores our commitment to providing OEMs with adaptable driveline solutions that support a wide range of vehicle performance and market expectations.

Our team continues to partner closely with our OEM customers to deliver solutions that support Magna's growth. With that in mind, I would like to highlight a couple of recent complete vehicle EV program launches in Austria for China-based OEMs. This past quarter, we launched a second complete vehicle program for GAC. We also recently launched a third model, the P7+ for XPENG. Since September of 2025, we have now launched 5 vehicle models for these 2 China-based OEMs.

More recently, we were awarded a fourth program with XPENG, which will launch later this year. This reinforces Magna's strong position in vehicle manufacturing and highlights the value of our flexible state-of-the-art production process, enabling fast-to-market, high-quality vehicles for any customer in the European market.

Recently, Magna was once again recognized by Ethisphere as one of the world's most ethical companies marking our fifth consecutive year of recognition. This reflects our ongoing commitment to integrity, ethical decision-making and doing what's right, something we are very proud of.

With that, I'll turn the call over to Phil.

Thank you, Swamy, and good morning, everyone. I will begin on Slide 19 with a summary of our strong first quarter results. Sales were $10.4 billion in the first quarter, up 3% from last year. Adjusted EBIT margin improved 190 basis points to 5.4%. Adjusted earnings were $1.38 per share, up 77%. And free cash flow was very strong at $372 million, up $685 million from last year. Each of these metrics came in ahead of our expectations. Now I'll take you through some of the details.

Let's start with sales on Slide 20. First quarter sales were up 3% overall compared to last year. Excluding foreign currency translation, sales were down about 2%. Global light vehicle production declined 7% in the quarter. On a Magna-weighted basis, we estimate light vehicle production was down about 5%. This translates to 3% growth over market for Magna consolidated and 5% growth over market, excluding Complete Vehicles. Looking at the sales walk, foreign currency translation was positive $520 million or about 5%, driven by a weaker U.S. dollar compared to last year.

Volumes, launches and other was relatively flat as lower light vehicle production, the end of production on certain programs, including the Ford Escape and normal course customer price concessions were largely offset by the launch of new programs, including the Ford Expedition Navigator, Mercedes-Benz CLA and Jeep Cherokee Recon and net favorable program sales mix.

Sales in Complete Vehicles, excluding foreign currency, declined $172 million despite higher unit volumes. The higher unit volumes reflected new assembly programs and grants, including with XPENG and GAC, where sales are recognized on a value-added basis. Volumes with other customers where sales are generally recognized on a full cost basis, declined year-over-year collectively. This resulted in net lower assembly sales dollars. Engineering revenue was also lower, in line with our expectations.

Now let's move to EBIT on Slide 21. First quarter adjusted EBIT was $558 million, an increase of $204 million or 58% from last year. Adjusted EBIT margin was 5.4%, up 190 basis points. Looking at the pluses and minuses, our largest benefit came from operational performance, volume and other items, about 80 basis points. This reflects continued momentum from operational excellence and other cost reduction initiatives. We also benefited from prior restructuring actions and favorable net foreign exchange gains. These positives more than offset the impact of lower organic sales and unfavorable mix.

Equity income contributed around 70 basis points in the quarter, reflecting a favorable commercial settlement at one of our Power & Vision joint ventures that was originally planned for the second quarter. Margins were also supported by higher sales, favorable mix as well as productivity and efficiency improvements. Discrete items added around 55 basis points, driven mainly by lower warranty costs as we had a large expense accrual last year in seating. We also benefited from net favorable commercial items year-over-year in the quarter.

And finally, tariff costs net of recoveries, reduced margins by about 15 basis points. While recovery mechanisms are in place with some customers, discussions with most OEMs for 2026 are ongoing, and we are following the frameworks we established last year. We remain confident that our net tariff impact for 2026 will be similar to 2025. In other words, a roughly neutral impact to EBIT margin for the full year.

Looking below the EBIT line on Slide 22. Interest expense was $13 million lower than last year due mainly to our strong first quarter free cash flow. This led to lower short-term borrowings and higher cash balances, resulting in lower net interest expense for the quarter. Our first quarter adjusted tax rate was 23.8%, an improvement of 190 basis points versus last year. For the full year, we continue to forecast an adjusted tax rate of approximately 23%. Adjusted net income was $386 million, up $167 million or 76% from last year, driven mostly by the higher EBIT. And first quarter adjusted EPS was $1.38, up 77% from last year, mainly reflecting the higher net income as well as a slightly lower share count.

Next, let's take a brief look at our business segment performance, which is summarized on Slide 23. Three of our four segments posted higher sales year-over-year and growth above market in the quarter with a notable 6% year-over-year increase in Power & Vision. The exception on the sales line was complete vehicles, where sales declined 4% as net lower volumes on full cost programs and lower engineering revenue were only partially offset by favorable foreign currency translation and the benefit of recent value-added program launches with China-based OEMs.

Turning to EBIT. Body Exteriors & Structures, Power & Vision and Seating all posted notable year-over-year improvements in adjusted EBIT dollars and margins, reflecting strong operational execution. Power & Vision also benefited from a favorable commercial settlement in equity income, while Seating benefited from lower warranty costs. Complete Vehicles margin was lower than last year, but in line with our expectations, reflecting the impact of lower engineering revenue, offset partially by productivity and efficiency improvements.

Now let's look at cash flow on Slide 24. In the first quarter, we generated $677 million in cash from operations, an increase of $600 million from last year. Operating cash flow in the current period includes over $450 million in balance sheet-related customer recoveries for certain EV programs in North America. We had originally expected to receive most of these recoveries later in 2026.

Investment activities in the quarter included $219 million in CapEx, representing 2.1% of sales and $168 million for investments, other assets and intangibles, offset partially by proceeds from normal course asset dispositions. Netting everything out, we generated free cash flow of $372 million in the quarter, above our expectations and the most cash we have ever generated in the first 3 months of the year.

We continue to return capital to shareholders in the first quarter with $135 million in dividends, along with $440 million in share buybacks. We repurchased 7.6 million shares during the quarter under our NCIB authorization, which left us with close to 17 million shares remaining at the end of March. We're planning to repurchase those shares before the NCIB expires in early November.

Turning to Slide 25. Our balance sheet and capital structure remain strong. At the end of March, we had almost $5 billion in total liquidity including $1.6 billion of cash on hand. Our rating agency leverage ratio was 1.5x on March 31, better than we anticipated 3 months ago. This puts Magna in great position to continue our share repurchase strategy in 2026 and beyond. And we're pleased to note that Moody's recently affirmed Magna’s A3 investment-grade credit rating with an improved outlook of Stable.

Next, let me cover our current outlook on Slide 26. Compared to our February outlook, we've reduced our North American production forecast by around 100,000 units to $14.9 million, and we reduced Europe by 200,000 units to $16.6 million, both reflecting current market conditions. Our China production assumptions remain unchanged. We've also updated our currency assumptions to reflect recent exchange rates. We're now expecting a slightly stronger euro, Canadian dollar and Chinese yuan in 2026 as compared to our February outlook.

We continue to actively manage input costs and other volatility through commercial recoveries and cost actions. Our outlook reflects our current visibility into the balance of the year, and does not assume a prolonged geopolitical conflict in the Middle East.

Moving to Slide 27. We are reaffirming our prior outlook ranges across key metrics including adjusted EBIT margin, adjusted EPS and free cash flow. We have slightly lowered our sales outlook range for the updated light vehicle production estimate provisions we covered earlier along with the expected second half closings of the lighting and rooftop systems divestitures within Power & Vision, offset partially by the benefit of foreign currency translation from a weaker U.S. dollar.

We're also forecasting lower interest expense, reflecting the favorable timing of commercial recoveries, which should result in less borrowings throughout the year. All other outlook metrics from February are unchanged. Note that we continue to expect strong margin expansion with adjusted EBIT margin between 6% and 6.6%, despite slightly lower sales. Adjusted EPS between $6.25 and $7.25 per share and free cash flow between $1.6 billion and $1.8 billion.

And while we don't provide a quarterly outlook, I would like to offer a framework for how we're thinking about EBIT and margin cadence for the rest of 2026. We expect 2026 adjusted EBIT to be back half weighted with first half EBIT just under 45% of full year EBIT. We're taking a measured approach to the second quarter, given the ongoing geopolitical dynamics and the potential for near-term volatility with adjusted EBIT margins expected to be relatively flat with the second quarter of last year.

That's it for the financial review. Now I'll turn it back to Swamy to wrap things up. Swamy?

Thank you, Phil. Before we take your questions, let me recap a couple of key points. We had a strong start to 2026 with adjusted EBIT margin expansion, cash generation and solid weighted sales growth over market. We are positioned for continued margin expansion and shareholder returns, supported by a solid 2026 outlook that is largely unchanged from February, reflecting our confidence in our operating performance. We are executing a disciplined capital allocation strategy, including significant return of capital and portfolio actions aligned with long-term value creation. Most importantly, we remain highly confident in Magna's future.

We hope to see many of you in November at our investor event in New York City, where we will go into detail on our strategy, key initiatives and long-term financial outlook.

Thank you for your attention. Now operator, let's open it up for questions.

[Operator Instructions] And your first question comes from Alex Perry with Bank of America.

Congrats on all the progress. I guess just first, I wanted to ask, can you give us an update on your raw material exposure. I guess, particularly on the resin side, what is the impact expected to have on the margins. Were there any other offsets that allowed you to keep your EBIT margin guide? And how should we think about sort of the flow-through there?

Sure, Alex. This is Phil. I'll start and then Swamy can chime in. Relative to raws, if we take a step back, if we look at exposures like steel and aluminum, as an example, we're largely protected through OEM resale programs and other pass-through mechanisms. The vast majority of our exposure there is covered. On resins, it would be a little bit less. A meaningful portion would be covered by pass-throughs as well or not resale, but more pass-throughs. But think of it as sub-50%, so a little bit exposed there.

But as resins move, we would do what we normally do, which is kind of work with customers to recover the higher input costs. Looking at the first quarter, I'd say we saw minimal impact on all of that. We saw a little bit of higher freight costs in the quarter, but minimal impact across other input costs. And as we've talked about kind of many times, as we see input costs move, we typically recover on a lag basis to the extent if oil stays high, resins stay high, we would work with our customers to recover that over time and frankly, would expect to recover the bulk of any swings over the course of the rest of the year.

Last comment I would make on, we get a lot of questions on energy, particularly in Europe, but we're in a much better position now than we were, say, in 2022. We're hedged about 2/3 of our both electricity and natural gas spend in Europe for this year and about 50% hedged for next year. So swings in costs, near term, we're pretty well protected there as well. Swamy, anything else?

No, I think you covered it well, Phil. The one thing that you might look at is the logistics and the freight costs. But that's the reason why we talk in terms of ranges. We feel pretty confident based on everything that you said, we would be able to contain it.

Really helpful. And then I guess just my follow-up question. So the production outlook came down a bit, but you kept sort of all the segments the same other than Power & Vision, which came down a bit. Maybe walk us through why that is and sort of how you're thinking about production in the various segments?

Sure, Alex. So what happened there was we had 3 things that happened in the outlook. First, we took the production estimates down, as you referenced, which was a slight downward revision in the revenue, if you will. We took foreign currency up as we're modeling a slightly weaker U.S. dollar than before. And that sort of offset one another as compared to February across most of the segments. And the one exception was P&V, where we also layered in the anticipated closing of lighting and rooftop systems and kind of in the second half, call it, near the end of the third quarter sort of what we modeled.

And that kind of had the effect of bringing P&V revenue down about $400 million or so if you look at the outlook. But it was really kind of FX and vehicle production offsetting one another in the other segments. And honestly, the fact that we held the margins despite that because oftentimes when foreign currency improves, we don't get the same incremental that we do when volume goes up or down. So we were able to kind of offset that, hold the margin range where it was, hold the EPS range where it was, just given the -- given how well the business was performing, particularly in the first quarter of the year.

That's incredibly helpful. Best of luck going forward.

Your next question comes from the line of James Picariello with BNP Paribas.

Can you just speak to the favorable commercial item? Can you just provide more color on what actually took place? Was it unexpected for the full year? Or was it more of a timing shift within the year in terms of the ability to get that recovery, which showed up in equity income, right?

Yes, exactly, James. So 2 things there. It was a recovery in the first quarter in equity income, it hit P&V. We had initially planned for it in the second quarter. So it wasn't a variance for the full year. It was a timing shift between Q2 and Q1, and it really related to recoveries for past investments in EV programs. And just to kind of give you an order of magnitude, it was the bulk of the equity income improvement in margins year-over-year was probably 60 basis points of that improvement was that item.

And again, hitting in P&V, you'll note that P&V had really strong performance in the quarter, revenue up strong incremental margin on the revenue. But even excluding that item, the incrementals in P&V would have been quite strong on the order of 30% even without that item. So P&V performed really well, good growth across several different launches, good growth in some of our camera businesses, et cetera. But to answer the question, it was a onetime item, but it was timing between Q2 and Q1.

Okay. That's crystal clear. Appreciate that. My apologies if I missed this in the prepared remarks. But for the lighting and rooftop divestiture, should we expect any proceeds from that? Or is it more of a partnership handoff type of arrangement because it's zero -- has neutral EBIT?

James, as I said in the remarks, the transactions will be closing later this year, obviously, subject to approvals. They are margin accretive because they were below the Magna average, I would say. But it is a -- going back to the guiding principles, if you look at it from a strategic perspective in terms of market position, in terms of returns, we did not feel it was the right home and not the right path with us. That was the reason why the divestiture was done. We'll continue to look at portfolio just like we've always said with an objective lens.

Yes. And maybe just to round that out, James, I would want to point out that on our GAAP results, we did have -- we did book a loss related to those divestitures in the first quarter, just given where they were in terms of negotiations at the end of the quarter. So that was over a $400 million impairment that we took in the first quarter, which would be in the GAAP results excluded from adjusted.

And there are some modest proceeds that will be used in the normal course, James, right, in terms of the cash flow looking at the balance sheet and how it will be used for share repurchases.

Is this the beginning of a like ongoing pruning of the portfolio of smaller businesses? Or is this mainly a one-off? I'm just curious if there's anything strategic and sustained behind this type of sale for you guys?

Yes. I don't think it is a onetime or it's -- if you go back into the last 10 years, you would have seen few pressure controls, you would have seen in the years. Honestly, James, this is an ongoing process. We continue to look at it every year. Can't speculate or won't comment on future actions, but I can tell you this is really a very rigorous ongoing process.

Your next question comes from the line of Dan Levy with Barclays.

So your guide assumes 35 to 40 basis points of operational excellence. And you just did in the first quarter, I think it's 80 basis points. I know there's other stuff in that category in your earnings bridge. But maybe you can just give us a sense within the quarter, why you were out punching on that 35 to 40 basis points? And what changes in subsequent quarters? Or is there potential upside on that 35 to 40 basis points?

Dan.The 35 to 40 basis points that we talked about obviously encompasses a lot of things that go on. The specific larger operational excellence initiatives that I mentioned in the past are really specific, for example, enterprise-wide digital architecture, data backbone, real-time performance management through data streaming dashboards and scalable automation of material handling and so on and so forth.

But beyond that, there are thousands of initiatives that every division looks at in terms of material savings, in terms of OEE improvements. You can't really put an exact cadence. Definitely, with some of the programs in place and feel comfortable, the proliferation is a little bit accelerated. And it also depends on the cadence of how many ideas or VA/VE initiatives are in place in the fourth quarter and how they can materialize in Q1, right? But all in all, I would say we feel pretty good about the 35 basis points, 40 basis points. And if the macros hold good, yes, we feel pretty good that we'll keep that and continue the path.

Yes, Dan, just 2 things I might add there. We did accelerate really well last year with the operational excellence initiative. So probably a bit of an easier comp in the first quarter than maybe the comps we'll have as we move through the year. That would be one. But I would say, stepping back, a stronger than we expected performance on the operational excellence front in Q1. So to your point about if we can keep that going, I would agree with you that, that would present some upside for us.

And that's why I keep saying, as we look at the proliferation, we are still in the early innings of the factory of the future.

Great. Okay. And then I just wanted to follow up on James' question on the divestitures here. So I get, there's constantly a portfolio review process to make sure that the products that you're in, that you have a strong market position, that's a relevant market and these businesses didn't clear that threshold.

I guess I would just ask more broadly, the broader Magna portfolio, what percent of that would you deem to be in a market position that is not where it should be and where it's a tougher path to sort of getting to an appropriate market position? And how would you characterize Seating as it relates to your market position and path to improving the market position?

Yes. It's a long question, Dan, and, you know, it's a complex one. As you look at most of the products, right, we're not really saying we have to be #1, but you need to have meaningful market position, but along with it also good returns and good profitability. And it's not at any one point in time. You have to look at it, you invest, you go through cycles. And if you see a good path and if you see good progress, we continue to stay on it.

Specifically to seating position, we -- again, it's not just looking at it broadly as a global market. In North America, we have a good position. We have good position in Europe. We have really good position now in China. And more importantly, we have some really good innovation in terms of not just the product, but how we assemble the seat and how we take it forward. And as part of this operational excellence or Factory of the Future initiatives, you'll start seeing that. Hopefully, we can talk to you a little bit more when we see you in November for the Investor Day. But we feel pretty good, and you'll continue to see the traction on the profitability and the returns in that segment.

Your next question comes from the line of Chris McNally with Evercore ISI.

Swamy, a little bit of a broader question around some of the risks in the second half of the year. And I know this is high-arching question that, you know, I think everyone is getting asked. But I'm curious your perspective, if you're more worried about sort of the known, unknowns in the second half or the unknown, unknowns. So when I think about known unknowns, raw materials transport, second half volumes sort of the typical that you're curious duration of the issue of the conflict.

But the unknown unknowns is the one that we are having the hardest time grappling with as investors in the self, and things like memory availability, chip availability or just other disruptions. Just maybe you could opine on those 2 buckets for what you're seeing sitting here in April?

Yes, Chris, I'm going to use your terminology, known unknowns and unknown unknowns. Honestly, I think if it's a known entity or variable, right, for example, things that you just mentioned, we at least have a scenario analysis and a playbook to say how we are going to address it. And that's the reason why we talk about outlook and ranges and not specific numbers. The bigger question is the unknown unknowns, right? Because you haven't thought about it. You might have some scenario planning, but it's not as granular.

So those are the bigger questions. If you look at the DRAM, we are focused on it. We are tracking it. We are monitoring it. We're working with our customers. Continuity is the most important in terms of supply. We are doing that. We're managing costs through sourcing actions and customer alignment. That we believe, if the world doesn't flip upside down, we can manage it within our outlook ranges. That's an example of something that is a scenario planning and we can address. Things that we don't know in terms of complete volatility, big macro issues, lack of certainty and volatility are the 2 things that you have to constantly worry about.

That's great. And if we could just double click, Swamy, on the one on memory because we obviously get this question a lot. We see obviously everything going on with AI and the hyperscalers. But -- is it fair to summarize that the industry's view because I think that many companies have been asked this, that right now on memory, there's more of an issue around price, meaning you may have had some contracts and basically memory providers are coming back and asking for closer to spot as opposed to contract, and that's some of the risk as opposed to literally pulling the volume, which would not allow for cars to be made. Is that a fair summary of where the industry kind of view is right now that there's a little bit more of this price discussion, I want to be paid for spot as opposed to pulling volumes?

The short answer, Chris, I would say your summary is correct in the short term, right? It's more a pricing and how do we manage that in terms of demand and keeping capacity and so on and so forth. In the long term, you've got to look at design options and so on. In short, your summary is correct.

Your next question comes from the line of Joe Spak with UBS.

Phil, just -- I'm sorry to go back to this. I just want to make sure I understand some of your comments on recoveries because it sounded like maybe it was, I don't know, $60 million, $70 million in EBIT. I'm trying to just sort of figure out how that relates to -- in the report, it said the recovery for your investments in the quarter was like $475 million in cash flow. So I just want to make sure those numbers are correct, that part of that recovery in the cash flow was not in the operating income. And then on that recovery in the cash flow, I just want to make sure that is what you sort of expected? And is that mostly done? Or do you still expect more cash recovery to come down the pike?

Yes. Thanks, Joe. Great question. So I think you've got it right. So first of all, the 60 basis points or call it, $60-ish million, the equity income item was did run through the P&L, but it's the $475 million that we called out in our MD&A was really balance sheet only. So the vast majority of that recovery was a balance sheet recovery. So getting sort of reimbursed for prior investments that we made that were sort of sitting on the balance sheet. So very little P&L impact from that.

And we did largely expect that in 2026, but just later in the year, maybe a little bit overall for the full year, maybe a little bit higher than we previously anticipated. But -- so is there any more to come? There's a little bit more we would expect between now and the end of the year, not of that same order of magnitude. It's reflected in the full year outlook as we continue to work with customers on other negotiations that are ongoing. But the -- beyond that $60 million that ran through equity income, we had very little running through the P&L for the other recoveries. It was really just cash only.

Okay. Really appreciate that clarification because I was having trouble connecting those 2. Second question, Swamy, and I apologize in advance because I don't want to put you in the middle of a geopolitical storm, but there have been reports of Chinese OEMs looking to maybe build vehicles in Canada. And I was wondering if you were able to comment on any conversations you might have or even more broadly, how you would view that potential opportunity? Because obviously, you mentioned some of the wins with the domestic Chinese, whether it's Complete Vehicles or others. So you have that good relationship there. And I was wondering how that could sort of spill over to this region.

Yes, Joe, for the exact reason that you mentioned, I would like to remain a businessman and a capital allocator and not a policy commentator. So I won't comment on speculation. I can say that Magna's model is to be neutral global partner to all OEMs. And we are not -- as you've heard me talk about it, we continue to win business in Europe with our Complete Vehicle assembly with all OEMs. Today, it happens to be the Chinese OEMs. And we continue to win business in China with Chinese OEMs. Any OEM that continues to grow in the ecosystem, we have an opportunity to supply Magna systems and components and also do vehicle assembly where possible.

Your next question comes from the line of Tom Narayan with RBC Capital Markets.

This is Thomas Ito on for Tom. It looks like your guidance implies some pretty substantial margin uplift in BES and Seating for the remainder of 2026. Just wondering, is this sort of just the timing of customer recoveries or are there other factors going on in these segments?

No. I mean, I would say it's really continued progress on the operational excellence initiatives and then obviously getting really strong pull-through revenue. The P&V was a -- we're expecting strong growth in P&V for the full year. We didn't have the item in the first quarter. For the full year, the margins will be on the implied guide would be pretty close to the first quarter performance, but still really solid growth year-over-year. And the BES and Seating over the course of the rest of the year would expect the operational excellence really being the biggest item that's kind of sticking out relative to the improvement from Q1 through to Q4. I don't know, Louis, anything else you'd add.

Okay. Got it. And I guess as a quick follow-up, we saw another supplier announce some revenue impacts related to the IEEPA tariff adjustments. Could you just comment on whether any such adjustments are incorporated in that '26 guidance?

Yes. I mean it's a great question and I figured we would get it. So on tariffs, let's just take a step back. We came into the year based on last year's rates, if you will. We had about $160 million gross impact last year. The run rate would have put us at around $200 million this year. Again, looking to recover that from our customers. We had a lot of development. IEEPA came out, 122 came in. We had some changes in 232. Net-net, our gross exposure has come down. So from $200 million, now we're thinking it's closer to last year's number actually, right around $160 million.

Our net exposure relatively unchanged and we still expect maybe a little bit better, but relatively unchanged. We still expect a margin headwind of less than 10 basis points, but year-over-year would be neutral in that scenario. And then relative to the last element would be the refunds, I would say we are working to file those refund claims sort of as we speak. We're in the midst of filing them as we speak. And it's a good sized number. We talked about it was probably over half of our tariff exposure, roughly half of our tariff exposure was IEEPA.

So as those refunds are filed, as those refunds come in, we didn't book any of those refunds in the first quarter. As those refunds come in, we'll obviously work with our customers on that given that they funded -- they covered about 80% of our tariff costs last year. So we'll work with them as those refunds come in to make sure that they're allocated appropriately.

Your next question comes from the line of Emmanuel Rosner with Wolfe Research.

I was hoping to follow up on the comments you made in the prepared remarks about the expected cadence of earnings this year. And in particular, I think you said Q2 margins would be broadly stable year-over-year. Can you just give us a few of the puts and takes in there? Is there some timing of things that shifted from Q2 into Q1? Or I guess, how should we think about the stable margin year-over-year this quarter?

Yes. I think it's -- well, relative to expectations, we had that equity income item that kind of moved from Q2 to Q1. But as we sort of set up the cadence for the rest of the year, we did, I would say, deliberately take a little bit more measured view on the second quarter, a little bit more cautious view, if you will. And so as you look at year-over-year at sort of the midpoint of the guide, we'd probably see a little bit of increase in revenue year-over-year with kind of a proportionate incremental margin kind of keeping margins relatively flat.

We've got foreign currency as a positive in there, which kind of come through as with a little bit lower margin and then the volumes kind of coming down a little bit with a little bit bigger impact. So really nothing more than that. The operational excellence continues, but it was really more just trying to be a little bit more measured in how we were thinking about the second quarter as kind of we're sitting here in time and space.

But as we look out to the rest of the year, still very confident in the full year guide and very confident in the margins and earnings, et cetera. And if you remember in February, we talked about first half EBIT being kind of slightly above 40%. This time around, we're probably seeing a little bit more one half weighting on the EBIT, maybe sub 45%. So think 43-ish kind of percent first half, second half, and that should kind of get you in the ballpark.

Okay. That's helpful. And then I was hoping to ask about your growth over market, which I think you said you measured it as like 3 points for this quarter, I guess, for Q1 or 5x Complete Vehicle, still good conviction in, I think, 0% to 3% for the full year. Can you talk about some of the upcoming big launches that you have that will drive this growth of the market and potentially serve like any sort of cadence within that?

Emmanuel, I think like you said, it's really a reflection of the launch activity. It's a bit of good program mix and also content growth across all our core segments. So net-net, if you look at the end of production programs and compare it to the new production launches that we have, which is many across these different geographic regions, different customers, different programs. And if you take the content, so that's positive net-net, right? So that's the reason why we are seeing that. And the Complete Vehicles, you heard me talk about the specific program launches with GAC, with XPENG and the discussions continue.

Your next question comes from the line of Colin Langan with Wells Fargo.

I just want to follow up again on the recovery impact. You mentioned the 60 basis points from JV. If I look at the slides in discrete items, it looks like half of the discrete items are also recoveries. So is there another $25 million, $30 million outside of the JV recoveries? And then I thought last quarter, you had said that recoveries for the year were neutral, and yet we have a big help in Q1. So does that mean as we go into the second half, that there's headwinds as those recoveries are down year-over-year?

So on the first part of the question, yes, in the discrete items, we did see the favorable warranty costs, which was a big item. And we also had the net impact of -- we did have favorable commercial items as well, which sort of spans the gamut of not just EV-related recoveries, but recoveries for other commercial matters as well. And as you know, that can sort of vary quarter-to-quarter. I think we did talk about coming into the year thinking we'd be largely neutral for the full year on the P&L with respect to recoveries.

But on the cash, we did get a fair amount of cash for EV-related recoveries last year. If you remember, in the fourth quarter, we had a big cash inflow in the fourth quarter. So we did expect recoveries as it related to the EVs to be a fair bit comparable. So we do expect to be that way for the full year. So we -- it was more front-loaded this year. It was a little bit more backloaded last year. But our guide of free cash flow of kind of $1.7 billion at the midpoint sort of implies about $1.3 billion for the rest of the year, and that will be, as always, is kind of back half weighted.

On the recoveries, the recovery related to equity income was kind of in the equity income in the roll between '25 and '26. So I guess it's just bucketing. We had that in equity income is part of the reason why we had higher margin this year, not in this kind of recoveries. Recoveries we're talking about here are more on a consolidated basis.

You still expect recoveries to be neutral for the year. The initial guide did incorporate the JV help from recoveries.

It did, yes.

And then just broadly, if I go into the second, I mean, Q2 is supposed to be flat. Organic sales are -- I think the guide implies are fairly slightly down actually. You have $100 million sort of implied EBIT improvement. I kind of feel of like we're out of some of the puts and takes outside of warranty. JV incomes are, I think, kind of most of that good news in the initial guide is done. So is it all just operational efficiencies or other items that are kind of going to add some help to kind of offset the -- at least at the midpoint, weaker sales?

Yes. I would say some of it is as you talked about operational excellence, but as new programs come in, they have different economic terms, and there is a mix of, as I said, launches, right, that are happening towards the second half of the year. So I would say it's a combination of the 2 columns.

Your next question comes from the line of Andrew Percoco with Morgan Stanley.

I wanted to start out on your disposing of your lighting and rooftop systems business. But I kind of want to get a sense for is there anything -- as we think about the evolving landscape, particularly around ADAS and AVs, are there any areas where you might want to grow your portfolio or add to the offerings that you currently have around that ecosystem?

Yes. Andrew, I think I've said that the last couple of quarters, and we feel pretty good where we stand with our portfolio right now. I think the focus is really on organic growth and trying to get the efficiencies up, get the traction that we have in operational excellence continue, focus on the cash flow and continue the journey right now. But if there is some really good opportunity in terms of small tuck-ins that add value here and there, obviously, we'd be open to it. But our focus really is on continuing to keep the roadmap that we have in front of us for cash flow and good value.

Okay. That makes sense. And then maybe just around these recoveries. I'm curious like if you -- if you or the industry in general, are planning to adjust how you maybe strike these contracts with your OEM partners going forward. I know there's been a big kind of rightsizing exercise in the industry around EV manufacturing capacity, but the OEMs are still very much committed to exploring new vehicle platforms. So I'm just curious, as you kind of think about that next cycle, how you might evolve that contracting structure to maybe avoid some of the overinvestment that we've seen in prior cycles?

Yes. I don't know if we can change the decision of the OEMs, but we definitely can bring our opinion to the table. And there are cases where we have looked at different terms, right, there is sharing of capital deployment, let's say, looking at volumes and how we band them and how we look at the step function of cadence as you go into the program rather than putting all the capacity upfront.

There are several of those discussions. We are fortunate to have those strategic discussions with the customers. And as an industry, I think the big elephant in the room is like how do you become good stewards of the capital, right? How do you extrapolate what's there, what's capacity that's existing, how do you use it more efficiently rather than just adding more. But like you said, it's a 2-way traffic, and we have many of those discussions.

Your next question comes from the line of Jonathan Goldman with Scotiabank.

Most of them have been asked already. I guess just one on the guidance. I think you talked about the rooftop and lighting business being below the Magna consolidated margin levels, but you maintained the margin guidance for the year. I would have thought the divestiture may have been margin accretive. So I just want to know what are the offsets there?

So I think, Jonathan, good question. But we are looking at the broad picture of Magna, given the uncertainty in the market that we have. And what we're looking at, that's the range we are talking about.

Yes. The only -- yes, that's exactly right. The only thing I would add, Jonathan, is it was really -- we're talking about, call it, 3 to 4 months of the year, so not a big number in the current year. And the other point to keep in mind, too, is we took revenue up for currency, which comes through at an EBIT margin, if you will. We took revenue down a little bit for volume, which sort of comes out at an incremental or a decremental as the case may be. So there's a little bit of that going on there, too. But there's no question to both P&V and to Magna as a whole, that the divestitures would be modestly accretive to margins just given where they were operating.

Okay. That's good color. And then maybe just circling back on that one, Phil, the revenue guidance, maybe switching to mix, maybe more currency in the sales this year. Is the offset the lower production volumes that you've updated the guide for?

Yes. I would say when you think about -- so we're kind of holding the EBIT -- we're holding the EPS guide, we did see a little bit of a benefit on the interest line below EBIT as, you know, the free cash flow in the first quarter was much sooner than we anticipated that cash coming in. So it will result in lower borrowings throughout the year, a little bit of interest benefit.

So while revenue is down a little bit, with holding margins would bring EBIT down a little bit, a little bit of offset in interest expense, which kind of enables us to hold the range where it was before. And again, kind of holding the range despite the strong Q1 was really as much just being a little bit prudent on the rest of the year at this point.

Your next question comes from the line of Mark Delaney with Goldman Sachs.

One on margins. When considering the efficiency efforts that the company has underway for this year, the expectation of 35 bps to 40 bps as well as the portfolio optimization you announced relative to lighting and the rooftop part of the business. Maybe put that into the context of where Magna thinks its EBIT margins can go over the medium to longer term. And in the past, the company has spoken about the potential to get to a 7% plus type range. I'm curious where you think you are on that journey, especially in light of some of the decisions and progress you reported today.

I think I can tell you we are in a good path to the roadmap that we laid out. Right now, we are focused on executing like we did in Q1 over the last 2 or 3 quarters, and we see a good path into '26. That's why we were able to reaffirm the outlook of 2026. Now regarding the midterm and long term, I would say the best time to get through that without confusing anything is the November Investor Day. We will be able to lay out the next 3 to 5 years.

Looking forward to that. And my last question was around the production environment. You already described your view on overall production volumes by region, but we're hoping you can share a bit more around mix. And curious if you're seeing any changes in the kinds of vehicles your OEM customers are looking to manufacture? And perhaps is there some increase in the number of EVs and hybrids that they're planning to make in light of the recent increase in gasoline prices?

Not really a significant shift in what's been talked about. Obviously, there's an increased interest in hybrids, and it's very regional. In China, we continue to see the EV proliferation. In Europe, it's a little bit more hybrids and EVs continue there at a slower pace maybe. In the North America, we see renewed interest in hybrids. But in terms of vehicle segments, no, not really, we are not seeing a material shift in anything else.

Your next question comes from the line of Michael Glen with Raymond James.

Swamy, with the wins happening in Europe with the Chinese OEMs, are you at all supplying any parts to those vehicles yet? Or is it strictly assembly? Is there an opportunity to expand and supply parts?

Yes. I think, Michael, right now, it is just assembly. Obviously, the conversations as this expands into volume, there is a localization discussion, and that's where we see the opportunity for other system and component supply.

Okay. And then just following on that, maybe just broadly with Europe. I know you don't break Europe out separately as a segment. But how do we sort of think about gains with new entrant OEMs into Europe and then what appears to be the lagging legacy OEMs. As a whole, is this a net negative to Magna? Or are the gains being made with the new entrants offsetting a difficult legacy business?

Yes. Difficult to break down at that granularity for sure, Michael. I think I would say with the presence of Magna in China and as we continue to build that relationships, we believe that they come to different parts of the world, we will have a seat at the table. At this point of time, it's very difficult to talk at that level to say how much and how it's offsetting and so on. But overall, we still continue to grow our business in Europe.

That concludes our question-and-answer session. I will now turn it back to Louis Tonelli for closing comments.

All right. Thanks, everyone, for listening in today. If you have any follow-up questions, please don't hesitate to reach out to me. Thanks, and have a great day.

Ladies and gentlemen, this does conclude today's conference call. Thank you all for joining, and you may now disconnect.

The next leg of our corporate series here. We're very excited to have Magna International here with us today. They've been great partners with this conference for many years. Magna is one of the most strategically important companies in the global automotive supply chain, over $40 billion in revenue, combining deep engineering expertise with a truly global manufacturing scale. I think unlike most suppliers, Magna operates across nearly every major vehicle system and is one of the few suppliers capable of designing and assembling complete vehicles, giving it a really unique partnership role with the OEMs. So with us from Magna, we have Phil Fracassa as well -- Executive Vice President and Chief Financial Officer; as well as Louis Tonelli, Vice President of Investor Relations. So thanks again for joining us today.

I guess let's start big picture. So many Tier 1 suppliers are specialists in powertrain or axles or seating, but Magna has such a breadth of products to really integrate the body powertrain electronics and seating systems into final assembly. I guess what type of advantage does this portfolio give you over the competition to partner with the OEM at early stages?

Great. I'll take that. Thanks, Alex, and good afternoon, everyone. It's great for us to be here. And as Alex said, I mean, Magna is one of the largest and most diverse auto suppliers in the world. We -- our product and systems breadth, along with that Complete Vehicles competency really does allow us to understand the interaction of systems and components in a vehicle in a way that very few other suppliers can. And we do believe that provides an advantage to us in the marketplace in developing technologically advanced systems and components for our customers.

So as customers look for ways to enhance technology, reduce assembly complexity and cost, be quicker to market and improve their competitiveness, Magna can be that supplier of choice, if you will. In our Complete Vehicles business, which is about just over 10% of our revenue, that's more of a partner relationship and a supplier relationship. We do get pulled in early -- in the early stages of vehicle development, which does provide opportunities for us to find solutions, which often involve involving including other Magna groups as suppliers on the vehicle. And then with respect to the remainder of our business, again, it's the breadth along with deep capabilities, strong customer relationships across the enterprise that really enable us to compete and win even in a more traditional automotive supplier role, if you will.

So your team really has a unique advantage because of the breadth of the products that you have to really see how the market balance and shift is happening between ICE, hybrid and EV. It's really at the front of the table with these manufacturers. How are you positioned in each of those three categories? And what advantages could you help us be smart on of how this is evolving globally?

Yes. No, great question. So first of all, I think the advantage for Magna is over the vast majority of our portfolio, so I think north of 80% of our portfolio is agnostic to the powertrain configuration. So items like or components or systems like body, chassis, fascia, seats, mirrors, power systems, ADAS, et cetera, apply to all the vehicles, whether it's ICE, hybrid, EV. It's mainly the powertrain business that we have that tends to be more propulsion specific, if you will. And powertrain for us is really drive systems. So systems that take power to the wheels. So we're predominantly -- or we're a leader in ICE, that would be 4-wheel drive, all-wheel drive, dual-clutch transmissions.

Over the past number of years, as electrification has grown, we've developed and invested in powertrain electrification. So fully eDrives for electric vehicles, hybrid drives, and we've won programs across the spectrum, whether it's components like motors, inverters, or systems like hybrid drives, hybrid dual-clutch transmissions, fully eDrives for electric vehicles. Another point would be our body and chassis business, where it's also powertrain agnostic largely, but we did see the opportunity to develop battery enclosure technology, which is a high-content system using many of our core technologies like metal forming. And that -- and right now, we developed that business organically, and we're now one of the most, if not the most capable supplier in the product category.

And every EV needs a battery enclosure. So we know the electrification shift is happening. It's undeniable. But as it happens, even if it happens more slowly in North America, we're really well positioned across the portfolio to support the industry regardless of powertrain configuration. Another development, I think, has been favorable is the initial configurations were EV-specific, ICE specific. Now we're seeing a more balanced single platforms with both powertrain technologies or all three powertrain technologies, which again enables us to serve the OEM in a more balanced way. So I mean that's positive for us as well.

So 80%, you're agnostic on either side and the 20% that you're not, when we had primarily North American companies pull back in the EV, Europe, a little less so, but still a little slower growth in China, it's gangbuster still. How are you able to kind of modify your capacity? Were you able to get your refunds from some of the OEMs? Just give me an idea of how you kind of navigated that.

Yes. Well, especially, as you mentioned, I mean, China is continuing to see strong EV growth. Europe is continuing to grow EVs, again, maybe a little bit less than before. But North America was really the big impact. We invested a lot to be prepared to support the EV market in North America as that has kind of pulled back. It has resulted in discussions with customers for recoveries for investments that we made, which has materialized. We had a recovery we talked about in the fourth quarter, north of $400 million. We're continuing to dialogue with our customers for additional recoveries that we're working on in 2026. But that did allow us to derate some lines, repurpose some lines and enable us to reuse equipment to a level we've really never done before, which resulted in lower CapEx in 2025, and we're planning for below, call it, long-term average CapEx again in 2026 because we invested a lot in '23 and '24 and we're now able to...

Silver lining there, right? The CapEx...

We've managed through it really well. Obviously, we'd rather have the volume than the recovery, but the recovery does enable us to at least recapture some of our costs and repurpose some of the equipment.

And I'd add that if you look at the powertrain side, those facilities rather than, let's say, having a brand-new facility to do, let's say, eDrives, we are producing the eDrives in the same facility as we're producing a 4-wheel drive system. We're producing the hybrid DCTs in the same facilities that we're doing the traditional DCT. So we're utilizing the same capacity, utilizing the same labor source. So that gives us flexibility to move things around if volumes are higher or lower one of the things...

Exactly fungible, yes.

Perfect. I guess given the global uncertainty we've seen in the high-pricing vehicles, we're trying to ask many of the suppliers that are here with us. Just how do you feel about the overall automotive industry in 2026 from a demand standpoint?

Yes. So if you look at where we gave our outlook last month, and we were calling for relative to 2025, a little lower production in North America and a little lower production in China and a little bit higher production in Europe. If you look at it on a net basis on a Magna-weighted basis because we're stronger in North America and Europe, our business is bigger, we would be down about 1%. Obviously, global events have kind of had an impact on oil prices and economic uncertainty. So that could have an impact overall on demand. But I'd say at this point, we're not seeing it. I mean, so far, so good after a couple of months. We're going to have to look at it as we give our update in Q1. We have to look at what that might mean to production and adjust if there's a need to adjust. IHS at this point hasn't really made many changes to our key markets. So that's helpful for us at this point. I think we've shown over the last number of years, our ability to flex both the cost side and the capital side where production has come in less than what we expected. So we expect we're going to be able to continue to do that.

Yes. So I would just add, as Louis said, we're monitoring it, not a lot to report on at this point. But as you said, so far, so good 2 months into the year. And then again, whether it was COVID or semiconductor chips or hyperinflation, I mean, I think the business model that we've developed and implemented and managed at Magna has really enabled us to kind of deal with whatever comes our way. And I think we're running a very similar playbook or we will, if need be this time around.

Maybe segue into margins a bit. So you guys are one of the companies that are driving margin improvement. I think that you are expecting 40 to 100 basis points of EBIT margin expansion in 2026. How are you able to achieve that in such a tough market? And what are some of the drivers behind it?

Sure. So just to level set everyone, when we provided our outlook in February, we did indicate we expected adjusted EBIT margins to be in the range of 6% to 6.6%. So at the midpoint, that's up 70 basis points from 2025. And over the -- and that's really going to be driven by operational excellence initiatives across the enterprise. We started that a few years ago. And through last year, we've generated around 150 basis points of margin expansion from net operational excellence initiatives. So think of that as continuous improvement, cost savings, big initiatives like Factory of the Future, and that would be sort of net of normal course customer price concessions. And then with 2026, that would get us closer to 200 basis points over the 4-year period. So that's a big driver of the margin increase. And that's kind of volume indifferent, if you will.

At the midpoint of the guide, it would assume -- so of our 70 basis points, call it, half or a little bit more than half would be net operational excellence, the other half would be good pull-through on the higher revenue that we expect because we do expect a higher revenue year-over-year, as Louis talked about. And then within that range, it really depends upon how the volume and mix kind of play out as we move through the year. We do expect a little bit higher equity income this year as well. But overall, those are the big drivers. And I think really, if you go back 3, 4 years, margins did compress at Magna like they did at many auto companies and suppliers with the inflation that came through beginning in 2022. So this is really our ongoing journey to get the margins back up to where they were. And this margin improvement, I think we really feel like we're in the early innings, and it's something that can continue for the next few years and as we continue to work our way back up to our historical margin levels.

I wanted to go through growth over market and the guidance this year. The growth over market guide, pretty impressive, 0% to 3% this year. I think excluding Complete Vehicles, plus 1% to 4%. I think one of the better sort of growth over market sort of embedded in 2026. Can you just maybe help us with the building blocks of what's driving that? Is it new programs coming online that maybe people aren't thinking about? Just maybe walk us through sort of the growth over market in 2026?

Yes. So I mean, our business in 2026 is essentially 100% booked. So our sales reflect really our assumptions on volumes for every single program out there. And that's kind of the mix impact and the launch impact. We do have a lot of launches that are going on all over the world with multiple customers, and that's definitely a big contributor to our growth this year. If you look at what's happening in Complete Vehicles, it's declining. We come to the end of production on the BMW Z4 and the Toyota Supra, but volumes are actually up overall. because we're launching on the XPeng and the GAC business. It's just that the revenue is such that you may recall us talking about the outgoing programs being on a full cost basis, how we're accounting for that and the incoming programs with the Chinese are on a value-added basis. So net-net sales are down, but our volumes are up in that business.

So basically 100% booked business and then will trend in line with sort of the production assumptions in the guide?

Yes. I mean it's really driven by -- if we have a lot of content on incremental launches, that's a big driver of that content.

And I really think you got to look at kind of growth over market over a period of time because it is very much launch dependent. So last year, we were -- we talked about it for the full year, we were -- I think we were minus 1% growth over market as we anticipated, very much launch and some of it was geographic driven in China relative to what we saw in 2024. Moving into this year, the 1% to 4%, excluding Complete Vehicles is again, driven mainly by the content on the launches coming out. And over a longer period of time, we continue to target low single digits growth over market across the portfolio and very confident that we can continue to deliver that.

I may touch on -- want to hit cash flows. I mean to all the auto companies I cover in the supplier world, I mean, I think you've got the highest free cash flow. If I got it correct, $1.6 billion to $1.8 billion is a range for 2026. How sustainable are those levels? And then we'll probably -- once we get through the cash flow a bit, we'll talk about some of the priorities of using that cash.

Yes, sure. So it was -- so you're exactly right. Our full year outlook was for $1.6 billion to $1.8 billion, so call it $1.7 billion at the midpoint, actually down a couple of hundred million. We actually have a very strong free cash flow year in 2025 of $1.9 billion, aided a lot by some of those customer recoveries I talked about in the fourth quarter. But the point on free cash flow, I think it's really important. The free cash generation capability in the business is very good. We do expect that level in terms of conversion on net income. The guide would be roughly -- a little bit more than 90% of adjusted net income at the midpoint. And I think we expect that we can continue at that level.

And you look at it, it's really the walk, we are down a couple of hundred million from 2025, but it's mainly -- we have higher earnings, which are helping. We do have higher CapEx. As I said, last year, we did have lower-than-normal CapEx or lower-than-expected CapEx levels because of some of the repurposing of the equipment we were able to do and some of the programs that got pushed out. So despite higher CapEx, despite slightly unfavorable working capital, which includes some of the customer recoveries I talked about, we're still going to generate very strong free cash flow at $1.7 billion at the midpoint, which is enabling the next step, which I'm sure we'll get to around capital allocation. So the cash generation is quite good. We expect it to continue to be very strong with working capital management, managing our CapEx within long-term averages of around 4% to 4.5% of sales and then continuing to grow earnings should set the table well for continued capital allocation for the benefit of the shareholders.

So maybe we could just roll into the strong free cash flow. I think you said you had a goal to repurchase all 22 million shares available under the current buyback plan in 2026. And also, you'll -- I mean, of course, have money to invest in the business, but also we have some credit investors that have talked to you. We wanted to maybe a little color on the balance sheet and your high rating and how you feel about the rating relative to your peer group, which is typically much lower rated.

Yes. I mean I would say capital allocation at Magna really starts with the balance sheet. It always starts with maintaining a strong balance sheet. Why? Because that enables us to drive the strategy, invest, take advantage of opportunities in the marketplace through cycles. That's always been a hallmark of the company. So it starts there. The solid investment-grade ratings has always been part of the capital allocation philosophy. We're currently A- rated across all three rating agencies, and we would endeavor to keep that rating. Our leverage is right in line with where it needs to be. So that does create the ability with $1.7 billion of free cash flow after dividends to allocate all of that -- basically all of that free cash flow toward share buybacks and maybe a little bit -- even a little bit beyond that. We have some cash on hand as well.

And -- but again, it starts with the balance sheet and then it goes to investing in the business to support growth, support margin expansion, that's R&D, that's CapEx, winning new business, growing the business. And then beyond that, it would be continuing to pay a competitive dividend, a dividend that we can increase as earnings grow, and we've increased our dividend 16 years in a row now. And then where there's excess capital, we don't really see the need to do big M&A at this point, maybe a tuck-in here or there. It does free up the bulk of that excess extra cash flow or excess capital to share buybacks while still keeping leverage on side and well within the rating.

Really helpful. I'd love to shift a little bit and go through the segments and do a dive into each segment. I guess, first, what factors contributed to the expected margin expansion if we start with Body Exteriors & Structures in 2026?

Sure, I'll take that. So Body Exteriors & Structures or BES is our largest segment. It's about 40-ish percent of total company sales. We do expect margins to range in 8.2% to 8.8% EBIT for 2026. That's up from 8.1%, so call it, up around 40 basis points at the midpoint year-over-year. And that's despite revenue -- expecting revenue to be kind of flat to up slightly, flat to up 3%. So what's really driving that is good pull-through on the revenue growth, number one, and then continued contribution from operational excellence initiatives as well. And both of those would offset. We do expect less contribution from commercial recoveries in BES this year than we had in 2025. So net-net, continuing to expand margins there. And that's a business where we have strong positions in both bodies and structures as well as exteriors in that segment.

I guess just rolling into Power & Vision. So really, really 5% to 7% weighted growth over market. I think it's the strongest segment for this year. Can you just talk about what's driving that growth if we just isolate that segment? And then maybe walk us through sort of the margin profile of that business this year.

Yes. So I mean, I talked about it a bit earlier, like in terms of the launch of -- I'd say it's really launch and mix, launch of new programs as well as just mix overall being strong in that segment in 2026 relative to 2025. Margins, we're expecting between 6% and 6.6% this year versus about 4.5% last year. And I would say the big drivers are really the pull-through on the higher sales given the growth of the market.

Operational excellence continue to be strong in -- across all of Magna segments, but certainly, Power business contributing. We had some commercial hits last year and some warranty late in the year. We expect some returning or rebound from there. So commercial should be a positive. It's neutral for Magna, but it's positive in Power & Vision and warranty should be positive as well in Power & Vision. And then lastly, equity income is up across Magna. It's -- most of it is in Power & Vision, and that's also contributing to the margin expansion.

Maybe we'll transfer over to the Seating business, one of the top manufacturers in Seating of all different types. How are you navigating the ebbs and flow in Seating? What are some of your core competencies that put the moat around some of the best parts of your business?

Yes. So I mean our Seating business is a very good business for Magna. We do expect in '26 for sales to be down a little bit kind of mid-single digits, if you will, due mainly to the end of production at a roll off at a Ford program, the Ford Escape in Louisville as that plant goes down to get retooled. That's probably the biggest single impact to the top line for us in 2026. That's a high-volume program, so we got a lot of content on it. But later in '26, we will launch some replacement business and other high-volume programs, including with the European OEM that we've talked about for some time, like the importance of us, we've been working on the margin.

We are going to launch some replacement business with a European OEM that should have better economics or will have better economics than the program it replaces. And that will provide some benefit in '26, but a lot more in 2027. So we expect -- so despite revenue being down kind of mid-single digits, we expect to hold margins reasonably well. Margins will be down slightly, call it, 35 basis points, and it's mainly the operational excellence. Again, it's a recurring theme at Magna. But in Seating, we are kicking -- we've kicked off a lot of operational excellence initiatives to mitigate the impact of the lower revenue and it should enable Seating to kind of hold margins pretty close to prior year levels despite the volume impact. And then as new programs come back on, including some of the replacement business with Ford in 2027, I think we'll be in a really good position to continue to expand margins as we go.

Perfect. And then I guess, not to go off track, but before we go to Complete Vehicles, you've used the term operational excellence quite a bit. And I think it's a pretty important margin driver across all of the segments. Can you just help us understand exactly what you're doing there that's driving that level of margin improvement even in some of your segments that are softer this year?

Yes. I mean I would say it's always been a core competency at Magna. But I do think as you've seen in the last 3, 4 years and again, in 2026, we're stepping it up. And I would put it into two main buckets. Bucket one would be your normal continuous improvement initiatives across our plants. We've got over 350 plants around the world. Each plant will have a double-digit number of CI initiatives as they call it, to generate savings in the division, which then roll up into the company, and that's a big component of it.

And then the other piece, and that's a lot of little things, literally thousands of initiatives every year that add up to be a pretty big number. And then -- and we do have some larger company-wide initiatives, if you will, around Factory of the Future, automating our facilities. We've got 140 of our plants now on a single digitized architecture where we're able to monitor what's going on in the plant kind of real time across the company. I think that will ultimately lead to less downtime, more predictive maintenance, et cetera. We're also employing a lot more AMRs, automated material handling in the plant. And again, so Factory of the Future automation would be the kind of the big project that's kind of going along with the thousands of other projects. And anything you'd add, Louis?

I think you got it. I guess let's just go through Complete Vehicles then. So I think expected to be a bit softer in 2026. Maybe just walk us through how you're thinking about that business, both this year and longer term. I know there's some program roll-offs like the Ford Escape, for instance, that's pressuring that business. But how are you thinking about that business this year and then longer term?

Yes, it's not Escape. Escape is seating in North America, but Complete Vehicles is as I said earlier, the Z4 and the Supra are rolling off. It rolls off kind of in the first half of the year, but we are ramping up with the Chinese OEMs. Net-net, sales are down because of the mix of full cost versus value-added. But net-net, it's down in sales, but not much impact on an economic basis. And our margins are holding in there. We continue to have discussions with customers about new opportunities. So I think it's still an area that we're pretty confident is going to continue to be a solid performer for Magna going forward.

And I think the wins with the Chinese OEMs were significant in terms of Chinese OEMs looking to get a little more local in Europe, so in XPeng and GAC, we're able to assemble the SKD, the modules form now in our facility in Graz, Austria. I think that was enabling sort of a bridge for those OEMs into Europe. And I think as that continues, that can create not only more opportunities for us in Complete Vehicles in Graz, but also other Magna businesses in Europe as well.

That's a good point, actually. We've always done well in terms of component and system content on the vehicles that we're producing there in Graz.

We know you guys are very global. We've kind of asked every panel this, how are you dealing with commodity inflation, potential supply chain disruption, whether it's DRAM or aluminum even steel. And of course, we have oil at, I don't know where it is today, but plus/minus 100. So it will affect resins, certain plastics that have derivatives of oil. There's a lot to navigate right now in the cost side.

No, no doubt, particularly in the current environment. But I would say we're managing it as we always have very actively. When you think about different commodities, steel and aluminum as an example, the majority of what we're exposed to is covered either under OEM resale programs or through annual contracts. So we don't see significant exposure there. We do have exposure to resins. Much of our resin buy is tied to indexes, so suppliers can adjust prices as indexes move. So if oil remains high for an extended period of time, that would be something we have to manage. We would see higher costs, and then we'd have to work with customers to recover those costs as we've done in the past.

And then with respect to specifically DRAM, we do have DRAM exposure. It's not huge. It's -- we've said it's under $100 million, but we are coordinating with our customers on the issue. First and foremost, we're managing it such that we haven't had any disruptions nor have we disrupted any customers, but we do see the potential for higher costs. We're working to mitigate as we speak. It's a very fluid situation. And where we can't mitigate, we're working with our customers to get recoveries where we can.

But we did include in our full year guidance in February, we did include a net headwind for the year in P&V or DRAM, but continuing to manage it. And again, I think if -- as Louis said earlier, I think if Magna has kind of proven anything over the last 5, 6 years, it's the ability to manage through situations like this in terms of avoiding disruption, maintaining high quality, high customer service and then getting recoveries where we're unable to mitigate cost increases. And obviously, there's lags involved in that sort of thing, but I don't view this situation as any different.

Just to level set, other than the DRAM and Power & Vision, as still said, we haven't really assumed much change in our outlook that we provided in February. It basically was neutral on net input costs. So we're going to have to revisit that as we get to the end of the quarter and to see how that might impact us going forward.

As far as DRAM, there's a lot of fear of maybe a month ago before we had a lot of new problems, but -- bigger problems. I want to understand DRAM, the chips are available, just they got a lot more -- it's a price issue. This pricing, which is a lot different than -- because there are some big reports that were saying DRAM is going to end up in autos are in trouble again. And they kind of compared it to semiconductor shortage, which to me seems completely different than what we had during COVID. We just couldn't get chips, and this is like you can get them. They're kind of more expensive and you can navigate it a bit. But do you see -- it's a very different issue.

We do see it as more of a price issue than an availability issue. But one of the reasons the prices is going up is the data center market is pulling hard. But as semiconductors, I do think ultimately, the market will compensate for it. There'll be new players. There'll be new capacity that may take some time. But in the interim, we're looking to other sources of supply and then obviously working with our customers to get recoveries.

Sorry, can you -- did you quantify the DRAM cost impact?

Yes. What we've said on the -- in the past has been it's under $100 million of annual buy.

Got you. And that wouldn't be -- you wouldn't be able to pass that through to the customers at all.

Well, there -- that's the annual buy. So there'd be a price increase off that as we were talking about. And then it's just a question of can we recover some of that from our customers. And I think we will recover some of that. And then what we don't believe we can recover, we've included an estimate in our outlook for a net headwind for the year in P&V. So that P&V margin expansion that Louis talked about off the good growth, operational excellence, it's sort of embedded in there, and we're still able to expand margins...

It's not huge. If it was $100 million, you could double the $100 million then you reclaim half of it, it could be $50 million. I'm not giving numbers, but it's not a game changer yet.

Exactly. It's certainly at the company level.

Yes. Perfect. Well, I just want to do a quick pulse check and see if we have anyone in the audience that I'd like to get any in.

Thank you so much for the question. In terms of the battery enclosure, is there an opportunity for you on the BESS side? Or are your battery enclosure business strictly for automotive? Because LG is kind of repurposing their capacity into battery electric -- sorry, battery energy storage.

I would say we're primarily geared toward automotive, although I would tell you, if Swamy were here, he'd say, look, if we have the ability to utilize capacity to serve other markets, existing capacity and without a significant incremental investment, then we'd certainly be open to doing that. But I'd say right now, the battery enclosures business is mainly geared toward our light vehicle business.

When we think about your customer exposure, pretty diversified, obviously. But when I look over at Europe, a lot of activity going on there with plants reshuffling by the OEMs. And I just wondered, anything that you're going to be addressing or need to address in terms of utilization of your facilities, additional restructuring opportunities with pretty fast payback. Anything on that front that we should be thinking about in '26?

Well, that's -- I would say '26, yes -- I mean that's been ongoing for a few years now. European production is well off peak, which was 21 million units or what have you. So we've been doing a lot of restructuring in Europe for the last several years. I don't know exactly the count on facilities we've consolidated, but it -- it's quite a few, and I think that will continue. And typically, when we do that, it is a short-term hit from a restructuring standpoint, but then does provide longer-term benefits to us. But it's really more rightsizing, getting margins back to where they were as opposed to net margin accretive, if you will. But no, I think that's continuing in '26. And I think Europe is where we're seeing most of that.

And so if we think about '25, '24 and that level of restructuring, how is '26? More the same or...

More the same, pretty confident.

Any numbers you can share with us on how much you're spending on restructuring?

I think it's about $100 million this year. $100 million or less, expecting this year. And that's already in our outlook and our cash -- free cash flow expectations.

And from a utilization standpoint, have you -- I know it's 350 plants, it's a little bit...

It's tough to do utilization, but it's been improving.

And really, what I'm thinking about here is this something we should assume continues for the next couple of years. It's an ongoing challenge.

Yes. I mean I don't know, I would say for Magna, it's been a systematic thing. I mean we don't sort of sit around for several years and all of a sudden, you got $1 billion of restructuring. It really is something that we try to manage annually and kind of systematically adjust capacity where we need to. And so we do have an amount of restructuring every year that we plan for. It's been a little bit elevated the last couple of years, but I would expect that to continue to manage capacity kind of proactively, if you will.

Any more out there? So on the tariff recovery, can you just talk about how much tariff recovery you had in 2025, sort of what's assumed for 2026?

Yes, sure. So in '25, it came in midyear. So we talked about our kind of our tariff costs in '25 being around $160 million is the number we kind of talked about. We were able to recover most of that from our customers such that our net tariff exposure was around $30 million. So we talked about less than 10 basis point headwind for the year, and we hit that number. We're expecting a similar net impact in 2026, so call it, less than 10 basis points again or roughly that $30 million, if you will. And that reflects the annualization of tariffs off of '25 as well as higher mitigation as we look for new suppliers or look to localize activities and as well as some higher recoveries from customers as well.

There's been a lot of action in the tariff front the last month or so, as everybody knows. We're still working through the Supreme Court case and how it impacts with IEEPA going out, Section 122 coming in, potential refunds, how that might affect customer recoveries, et cetera. But right now, I wouldn't expect a windfall for Magna. I think we'll probably be close to what we're planning on already, but we'll be in a better position in a few weeks with the first quarter call to kind of provide more color. But for right now, we're not expecting material change from what we've already assumed.

And then customer recoveries -- our customer recoveries for higher input costs expected to remain neutral year-over-year in 2026? Could you just maybe walk us through that?

Yes. As I said earlier, I mean, we're -- excluding the DRAM, we're expecting to be more or less neutral, and we'll have to look at it if prices remain elevated and may have an impact on the future oil prices in particular. So we'll have to look at that. But we're pretty much neutral in '26 versus '25 other than the DRAM.

And then I guess, multiyear contribution of the operational excellence initiatives. I guess, as you sort of look longer term, 2026 and beyond, can you just maybe walk us through sort of the cumulative impact?

Yes, sure. So we've really talked about it kind of this margin expansion piece of the operation. Historically, we've always done operational excellence to try to offset customer price concessions kind of be neutral for the year. It's really -- in the last 3, 4 years, we've generated this net margin improvement. So through '25, the 3-year period, '23, '24, '25, about 150 bps. So after this year, we'll be closer to 200 basis points. And again, I would tell you, I've only been with Magna 6 months now, but I've never seen as concerted an effort across an enterprise around operational excellence as I've seen here. And I do think if Swamy were here, he'd say, look, we're in the early to mid-innings and we would expect continued margin uplift from operational excellence for the next few years, if you will. And then again, that will help us ultimately get our margins back to where they were before pre-COVID.

So I wanted to end with a deeper dive into China. So I guess with 60% to 65% of the China revenue tied to Chinese OEMs, I guess, how does Magna expect to participate in the Chinese OEM export expansion that seems to be taking off?

Yes. I mean it starts first with serving Chinese OEMs in China, which we've done. If you look at our business in China today, our consolidated revenue, it's about $5 billion of our revenue or about 11% of our revenue is with -- in China, and that's about 60% to 65% of that is with Chinese OEMs. And if you include our unconsolidated JVs, so revenue that's not in our consolidated number, our China revenue that we manage "would be more like $7 billion." And again, with, call it, close to 2/3 of that with Chinese OEMs.

So the OEMs we serve are the kind of the household names, if you will, Chery, Geely, Changan, BAIC, BYD. And those are the players that have been the biggest exporters, if you will. So serve those guys in China as we have. Also, as they export, we're supporting them. And then as they localize, we talked about earlier with Complete Vehicles, as Louis talked about, supporting them as they localize. So we believe we're very well positioned to serve our customers, both in China, outside China as they grow. We grow. And when we talk about growth over market, that will be a huge component of our growth over market longer term because we've got strong share with our Detroit Three, German Three customers. We want to maintain that and then really continue to outgrow the market in China with the Chinese OEMs.

Perfect. We are exactly at time. So I want to thank the Magna team, Phil and Louis, for a great conversation, and thank you all for joining us.

Thanks, Alex. Appreciate it. Thanks for having us.

Good morning, and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Magna International Fourth Quarter Full Year 2025 Results and 2026 Outlook. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Louis Tonelli, Vice President of Investor Relations. Please go ahead.

Thanks, operator. Hello, everyone, and welcome to our conference call covering our fourth quarter and full year 2025 results and our 2026 outlook. Joining me today are Swamy Kotagiri and Phil Fracassa.

Yesterday, our Board of Directors met and approved our financial results for the fourth quarter of '25 as well as our 2026 financial outlook. We issued a press release this morning outlining both of these. You'll find today's press release, 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. With that, I'll pass it over to Swamy.

Thank you, Louis. Good morning, everyone. I appreciate you joining our call today. Let's get started. Overall, I was very pleased with our strong fourth quarter and full year 2025 operating performance. These results reflect the resilience of our business model and the continued traction of our operational excellence initiatives. Throughout 2025, we delivered meaningful margin benefits from operational excellence. We secured important commercial recoveries and across Magna, we executed our tariff mitigation plans, offsetting the vast majority of direct impacts.

Together, these efforts contributed to our third consecutive year of adjusted EBIT margin expansion. Our relentless focus on cash generation delivered strong results. We generated $3.6 billion in operating cash flow and $1.9 billion in free cash flow for the full year. This reflects a disciplined approach to capital spending, improving to 3.1% of sales last year and continued improvements in our fixed cost structure and engineering optimization. As a result, we ended the year with 1.58x leverage ratio ahead of our expectations and $1.6 billion cash on hand.

Now looking ahead to 2026. Our outlook reflects continued improvements in our operating performance. We expect weighted sales growth over market of 1.5% at the midpoint, adjusted EBIT margin expansion of 40 to 100 basis points and free cash flow of $1.6 billion to $1.8 billion. We remain confident in executing our deliberate and proven capital allocation strategy and driving EPS growth together with strong free cash flow.

As of today, we have approximately 22 million shares available for repurchase under our NCIB, and we plan to repurchase all remaining shares during 2026, all while maintaining our strong balance sheet and financial flexibility.

Now turning to our financial highlights. As you can see from the slide, we delivered solid performance in both the fourth quarter and the full year. In Q4, sales increased 2% to $10.8 billion despite a 1% decline in global production. Adjusted EBIT margin expanded 100 basis points to 7.5%. Adjusted EBIT increased 18%. Adjusted EPS rose 29%, coming in at $2.18, and we generated more than $1.3 billion in free cash flow, well ahead of a strong 2024.

For the full year, sales were $42 billion, down slightly due to softer volumes in North America and Europe. Adjusted EBIT margin rose 20 basis points to 5.6%, adjusted EBIT grew 2%, reaching $2.4 billion despite lower sales and tariff headwinds. Adjusted EPS rose 6% to $5.73. Free cash flow increased $849 million, reaching $1.9 billion. Phil will take you through the quarterly details shortly. Our 2025 results were strong relative to both our initial and most recent outlooks. Sales, adjusted EBIT margin, adjusted net income, free cash flow and capital spending all landed within or better than our stated ranges.

Our teams also achieved several important milestones in 2025. We hit our annual bookings target across multiple product areas. Our 2028 business is already about 90% secured. We strengthened our collaboration with NVIDIA, advancing AI-powered active safety solutions. And we were recognized with an Automotive News PACEpilot award for our thermal sensing technology.

Let me take a moment to expand on the operational excellence work underway across the company. This contributed meaningfully to margin expansion in 2025 and is expected to add an additional 35 to 40 basis points of margin benefit in 2026, bringing our cumulative contribution to almost 200 basis points over the '23 to '26 period. We have built a unified digital architecture that now covers about 80% of our divisions, giving us clean, consistent data and real-time visibility into performance.

Our material flow optimization program continues to expand, supported by our internal fleet management platform and is delivering safer, more reliable material flow while reducing operating costs. We continue to launch and scale AI solutions to provide valuable insights into scheduling, process quality control and condition-based monitoring. The common thread across all these initiatives is standardization, scalability and measurable outcomes. We expect them to support durable margin expansion going forward. And we received an all-time record 151 customer awards for quality and operating performance, another clear sign of our execution.

Our performance is driven by our people. Our Operational Management Accelerator Program earned a Best Manager Development Award in just its second year. And Magna was recognized again as one of the world's most ethical companies and one of the world's most admired companies. Our team has a lot to be proud of. With that, I'll turn the call over to Phil.

Thank you, Swamy, and good morning, everyone. Let me start on Slide 19 with a detailed review of our strong fourth quarter results. Sales were $10.8 billion in the fourth quarter, up 2% from last year. Adjusted EBIT margin improved 100 basis points to 7.5% and adjusted EPS came in at $2.18 per share, up 29% from a year ago. Each of these metrics came in ahead of our expectations for the quarter.

Now I'll take you through some of the details. Let me start with sales on Slide 20. Fourth quarter sales were up 2% overall compared to last year. We benefited from foreign currency translation, the launch of new programs, including the Ford Expedition, Navigator and Xiaomi YU7, higher sales from other ongoing programs and customer recoveries for tariffs. These benefits were offset partially by lower engineering revenue in Complete Vehicles, the end of production of certain programs, including Jaguar E and I-PACE assembly in Graz that ceased at the end of 2024, less favorable commercial items compared to last year and normal course customer price concessions.

Global light vehicle production was down 1% overall in the quarter, with North America and China down, but Europe up. On a Magna-weighted basis, light vehicle production was also down about 1%. Our fourth quarter sales were up 2%, as I covered earlier. Excluding currency, our sales declined 1%, roughly in line with the market. And if you take out Complete Vehicles, our sales outgrew the market by 2%.

Now let's move to EBIT on Slide 21. Fourth quarter adjusted EBIT was $814 million, an increase of $125 million or 18% from last year. Adjusted EBIT margin was 7.5%, up 100 basis points. Looking at the pluses and minuses, we benefited significantly from operational performance improvements, about 130 basis points. This includes continued progress on operational excellence and other cost savings initiatives, our ongoing efforts to optimize engineering spend and the benefits of prior restructuring actions, which more than offset the impact of higher labor and other input costs.

We also saw a benefit of around 50 basis points from tariffs in the quarter. This reflects recoveries from customers for costs we incurred earlier in the year. With customer recoveries and other mitigation, our net tariff costs were less than a 10 basis point margin headwind for the full year, right in line with what we expected. Discrete items in the quarter reduced margins by around 50 basis points. This is comprised mainly of the unfavorable year-over-year impact of commercial items in the quarter, offset partially by the nonrecurrence of expense incurred last year related to 2 Chinese OEM consultancies.

And finally, volume and other items reduced margins by about 30 basis points. This includes higher profit sharing and incentive compensation expense, lower engineering income on a tough comp last year and unfavorable mix, which was offset partially by earnings on higher production sales in the quarter.

Next, let's take a brief look at our business segment performance, which is summarized on Slide 22. Here, you can see that 3 of our 4 segments posted higher sales year-over-year with a notable 8% increase in Seating. The exception on the sales line was Complete Vehicles, which was down 10%. This was largely expected and reflects lower engineering revenue and the end of production of the Jaguar E and I-PACE at the end of 2024. However, we did benefit from recent new launches with Chinese OEMs, namely Xiaopeng and GAC. Looking ahead, this should continue to represent a growth opportunity for our Complete Vehicles business.

Moving to EBIT. Both Body Exteriors & Structures and Seating posted strong increases in adjusted EBIT margin year-over-year. Note that Seating margins benefited from the reversal of a warranty accrual in the current period, but margins would still have been up more than 200 basis points without this reversal. Complete Vehicles margin was in line with last year's solid fourth quarter despite lower sales. And in Power & Vision, margins were negatively impacted by a few discrete items in the quarter, the largest of which was a customer settlement for a product-related matter. Mix was also unfavorable in the period.

These headwinds were partially offset by continued productivity and efficiency improvements and net tariff recoveries from customers. Excluding the discrete items, Power & Vision margins would have been up year-on-year and in line with our expectations. And as you will see in our outlook, we are expecting considerable margin expansion in this segment in 2026.

Now let's look at cash flow on Slide 23. In the fourth quarter, we generated $2 billion in cash from operations, an increase of almost $100 million from last year. Operating cash flow in the current period includes over $400 million in customer recoveries related to investments for certain EV programs that have been canceled or pushed out. Investment activities in the quarter included $532 million in CapEx, plus $157 million for investments, other assets and intangibles.

When you net everything out, we generated free cash flow of $1.3 billion in the quarter, well above our expectations and $316 million higher than last year. The increase reflects the customer recoveries I highlighted earlier as well as lower CapEx, offset partially by a smaller seasonal working capital reduction than we saw last year. And for the full year, free cash flow rose $849 million to $1.9 billion or almost 120% of adjusted net income.

And we continue to return capital to shareholders, paying $135 million in dividends, along with $86 million in share buybacks in the fourth quarter. And just yesterday, our Board approved a $0.01 increase in Magna's quarterly dividend, which marks the 16th straight year of dividend increases. For the full year, we returned close to $700 million of cash to shareholders through dividends and share repurchases.

Turning to Slide 24. Our balance sheet and capital structure remains strong. At the end of December, we had $5.1 billion in total liquidity, including $1.6 billion of cash on hand. We reduced leverage throughout 2025, including the repayment of a $300 million term loan in the fourth quarter. Our rating agency adjusted debt-to-EBITDA ratio was just under 1.6x at year-end, better than we anticipated 3 months ago, and we expect to be below 1.5x in 2026. This puts Magna in a great position to increase share repurchases significantly in the current year.

Let me now turn to our outlook for 2026, starting on Slide 26. In terms of key macro assumptions, our outlook assumes a relatively flattish light vehicle production environment overall with slightly lower output in North America and China, offset by a slight increase in Europe. On a Magna-weighted basis, this would imply about a 1% decline in vehicle production. And with respect to foreign currency, you can see that we're planning for a weaker U.S. dollar against key currencies like the euro, Canadian dollar and Chinese yuan.

Turning to Slide 27. Our outlook range for sales in 2026 implies that sales will be near flat to up 3.5% versus last year. Our sales should benefit from the launch of several new and replacement programs, including new assembly business for Xiaopeng and GAC in Graz, higher light vehicle production in Europe and foreign currency translation from a weaker U.S. dollar.

This should be offset partially by expected lower light vehicle production in North America and China and the end of production of certain programs, including the BMW Z4 and Toyota Supra that we assemble in Graz and the Ford Escape in Louisville as Ford is changing over that plant for new programs to launch in 2027. If you remove currency translation and take out Complete Vehicles, that would imply growth over market for Magna in the range of positive 1% to 4%, a nice step-up from 2025.

Let's move to EBIT margin on Slide 28. Our outlook is for adjusted EBIT margins to be in the range of 6% to 6.6%, which implies margin expansion of between 40 and 100 basis points from 2025. We anticipate positive contributions from operational excellence initiatives, earnings on higher sales, lower costs in areas like warranty and new facilities and higher equity income, which should more than offset the unfavorable impact of normal price concessions, higher launch costs and less contribution from tooling.

And while we don't provide a quarterly outlook, I do want to provide a framework for how to think about first quarter margins. Similar to last year, we expect 2026 adjusted EBIT to be more back half weighted with first half EBIT just over 40% of full year EBIT. We also expect first quarter EBIT to be lower than the second. And looking at margins, our full year outlook implies that adjusted EBIT margins will be up 70 basis points at the midpoint. In the first quarter, we expect margins to be up year-over-year, but not as much as the full year guidance would imply.

Slide 29 shows a summary of our full year 2026 outlook. I covered sales and EBIT already, so I'll focus on some of the other items. Most notably, we are now providing an outlook for adjusted earnings per share. For 2026, we're planning for adjusted EPS in the range of $6.25 to $7.25 per share. Below the EBIT line, EPS reflects approximately $180 million of interest expense and a 23% adjusted tax rate.

With CapEx below 4% of sales, we expect 2026 to be another year of strong free cash flow in the range of $1.6 billion to $1.8 billion or over 90% of adjusted net income. After dividends, we expect to have significant cash available to repurchase shares while still reducing leverage and maintaining financial flexibility to support the business. Last November, we renewed our normal course issuer bid or NCIB share buyback authorization. This permits Magna to repurchase up to 10% of its public float over a 12-month period.

There were about 24 million shares authorized for repurchase under the NCIB at the end of 2025. We've been in the market since the start of the year, and our outlook assumes we will complete the NCIB and repurchase the remaining available shares, about 22 million shares as of today. For purposes of the EPS outlook, we have assumed about 270 million shares as our full year average diluted share count, which reflects our planned share repurchases.

Slide 30 gives you a view of 2026 sales and adjusted EBIT margins for our business segments. Let me point out just a few things. First, you can see the expected positive sales growth and meaningful margin expansion in our 2 largest segments, Body Exteriors & Structures and Power & Vision, which together represent roughly 3/4 of our sales. In Seating, we're planning for strong margin resilience despite lower expected sales. And in Complete Vehicles, we expect lower margins on lower anticipated sales. That's it for the financial review. Now I'll turn it back to Swamy to wrap things up. Swamy?

Thank you, Phil, for walking through the details. Before we take questions, let me recap some of the key points. We ended 2025 with very strong fourth quarter and full year results, including adjusted EBIT margin expansion, adjusted EPS growth and strong free cash flow despite incremental tariff costs. Operational excellence remained a key driver of margin performance in 2025 and is expected to continue delivering benefits in 2026 and beyond.

We have a solid outlook for 2026 with a fourth consecutive year of expected margin expansion, further EPS growth and strong free cash flow. We remain highly focused on shareholder value creation. We increased our dividend for the 16th consecutive year, and we expect to repurchase all of the approximately 22 million shares available under our current buyback authorization. We remain confident in executing our proven strategy and in continuing to drive EPS growth and strong free cash flow. Thank you for your attention. Now operator, let's open it up for questions.

[Operator Instructions] Our first question comes from the line of Dan Levy with Barclays.

I wanted to start first with a question on your guidance for outgrowth ex-Complete Vehicles of 1% to 4%. This is better than what you've done the last 3 years now. And this is, I think, a bit of a positive surprise in light of, I would say, your key customers generally being down if we look at D3, D3 or with the exception of Stellantis, Ford and GM both down year-over-year. So maybe you could just talk about the underlying assumptions for the outgrowth of 1% to 4%.

I think as I said in my prepared comments, the most important thing was the operational excellence activities that we have been working through over the last 3 years. as I said, I would say still we are in the early innings. We continue to get traction. We have been working at the cost structure -- the fixed cost structure again over years, and we are starting to see benefits into the statements now.

We also talked about the new programs rolling in with new economic terms that we also talked about, which is, in some cases, labor being reset at the start of production. We are talking about capital inlay in some cases. And underlining that is our continued self-help activities. So that is the real reason for the margin improvements. And I would still say, if you look at some of the activities that I mentioned in our self-help again, we will continue to see that. This is just the -- I would say, still in the early innings. And as we proliferate these activities even further, we'll see more benefits going forward.

And maybe, Dan, I would just add one point relative to the 1% to 4% growth over market, excluding Complete Vehicles. So our organic guide was for roughly minus 1% to plus 2% at the midpoint. So if you take Complete Vehicles out, you get to plus 1% to plus 4%. And that's really driven, as you look at the segments, expected good growth in body Exteriors & Structures, Power & Vision, we do expect revenue declines in complete vehicles, which we excluded in that plus 1% to plus 4%, and also expected some declines in Seating just given model changeovers and end of production. But with good growth coming from DES and P&V and with launches and in the mix that we have, we feel really good about the ability to outgrow the market in 2026.

Okay. Great. The second point is to go back to the comments on the operational excellence. Maybe you could just give us a sense of the 40 or so basis points you're going to do this year was on top of another 30 or 40 basis points last year. How much more runway is there? And maybe you could just talk about also the extent to which commercial recoveries are being factored in here. We know that they seem to help you out in '25. What's the assumption on commercial recoveries in '26 for programs where the volumes maybe didn't materialize as planned?

Yes. As I said, Dan, I think the operational excellence is a continuing journey. For sure, we see this continuing going forward. We have very clear visibility of the 35 to 40 basis points this year. But as I said, this is still an early play. This is based on some of the facts that I talked about, like 80% of our divisions now are kind of on a unified architecture, which gives us better visibility, about 140 divisions have real-time dashboards showing uptime, quality and throughput.

We are looking a lot in terms of material flow optimization, which are showing the operating cost benefits, we are looking at about 120 divisions that are using vision-enabled robotics. There are applications of cobots, which are helping boost repeatability and to reduce some ergonomic strain. We are having some automated work instruction pilots that are helping cycle times. So all in all, I would say the standardized playbooks make these improvements repeatable across the footprint, and we can scale. So I would say this is a multiyear margin tailwind.

Yes. And relative to commercial iterms, the second part of your question, Dan, on commercial, '25 versus '26, we're sort of expecting relatively neutral year-over-year. You are correct. We did see a net benefit in the -- for the full year, it was slightly negative year-over-year in the fourth quarter, but a net benefit for the full year in 2025, and we would expect relatively neutral '25 to '26, and that's what's embedded in the guide.

There is some plus and minuses by segment, but that's still said on a consolidated basis, it's relatively neutral.

Your next question comes from the line of Joe Spak with UBS.

Maybe just to sort of quickly follow up on that last point. But when you're saying commercial benefits neutral year-over-year, so if we relate that back to the organic growth, that is really program win and content win driven. There's no sort of pricing benefit baked into that organic growth assumption.

I think that's right, Joe. It would be primarily volume...

Launching new programs at higher content.

Yes. Okay. I guess I just wanted to focus on in Seating here for a second and the outlook. It seems like you're able to manage the margins decently here with a 6% decline. I know you mentioned some program roll-offs. Maybe you could talk about some of the cost actions taken to sort of help manage that margin. And then just bigger picture and longer term, there have been some reports of there being business conquested away from, I think, facilities that you've historically supported. So in those cases, what do you do with those facilities? Do you start selling assets? And just how you're sort of thinking about feeding to the Magna business case going forward?

Maybe I'll answer a few questions right one at a time. To clarify, Magna has not lost any incumbent Seating programs to competitors, right? Our customer relationships remain strong. Our launches are on track, and the Seating pipeline continues to perform the way we expect. Maybe a little bit of clarity on Orion, which has been talked about in public. GM pivoted from all BEV trucks and SUVs to all ICE due to market dynamics.

And most of the ICE vehicle production moving from Canada and Mexico and some SUV from Arlington, Texas, these were all competitor incumbent seats. Magna still remains incumbent for BEV seats, right? So Magna did not lose the BEV business. This was kind of a customer change in direction. I would say Magna Seating has been core and continues to remain a core and a really good returns business for us and profitable. I have to give kudos to the Seating team for working through all the dynamics that have been happening.

And I think you also mentioned, right, the reason why we see a little bit of dip now is due to program-specific end of production, Ford Edge cancellation of EV Explorer and Chevy Equinox moved from Ontario, as I mentioned. And in the past, I also talked a little bit about high-volume North American program with a European-based OEM. That is rolling off or starting to roll off end of this year and the next generation launches fast launching end of this year, finishes into next year. So that drag we had on that program gets back to, I would say, the normal metrics for this segment. So that should be accretive.

So all in all, I can reinforce or you would have seen the fourth quarter performance showing up, really good kudos to the team, '26 looks good. If you look at the revenue and the corresponding continuing traction in profitability. So all in all, I would say, no, we have not lost any incumbent programs. Yes, Seating is a core. And yes, we remain focused on executing, winning and delivering product for our customers.

Yes. One thing I'll add in '26, Seating continues to launch new programs, but the Ford Escape is a program that we have ceased on it's a high-volume program. As you probably know, Ford has taken that down to retool for another program that starts in '27. So that's what's impacting the '26 number pretty significantly given the size of the project.

Okay. Maybe just one quick one. I know you're sort of not giving the year -- or forward outlook anymore. But just in terms of free cash flow, right, which is guided pretty strong this year, is that sort of high $1 billion, approaching sort of $2 billion, you think that's fairly sustainable? Or does CapEx need to sort of tick back up to support some of the wins that you've been able to book?

Yes. No, thanks for the question. So yes, on free cash flow, obviously, very strong performance in 2025. I did mention the fourth quarter did benefit from some customer recoveries from past EV investments. But when you look at the 2026 guidance of $1.6 billion to $1.8 billion, CapEx last year was around 3.1% of sales. We're guiding to sort of the mid-3s, so stepping up a little bit, but still below 4%. We believe that level of free cash flow is sustainable. And we're targeting a conversion of 100% on net income. So we do expect that level to be sustainable and should support a capital allocation strategy for us, not just in 2026, but moving ahead as well.

Our next question comes from the line of James Picariello with BNP Paribas.

I just wanted to first ask about the Ford recall that Magna called out as of last quarter, covering the 3.6 million vehicles tied to your -- the company's camera. Is that now behind Magna? Because I mean, in the fourth quarter, there was a warranty hit. Just curious what's the latest update on that?

Yes. Thanks for the question, James. I mean the way we would break it down is really 2 separate matters. There was one matter that relates to a recall that was initiated in 2023 that we've been in discussions with the customer for a while on. We actually resolved that matter in the fourth quarter, made a payment to the customer, that matter is completely behind us. And we did take expense in P&V in the quarter for that settlement. That was settled as a commercial resolution, if you will.

And then we also had the recalls that were announced in the third quarter, and that is an ongoing sort of process with the customer. We're working collaboratively with them, kind of developing the facts, getting to the root cause analysis. And that will continue into 2026, if you will. Whether that could be more or less what we've estimated, but we feel like we're pretty well covered.

Yes. Because I imagine with that OEM customer, Magna also has some commercial settlement -- commercial recoveries tied to EV program cancellations as well, right, hypothetically.

Right. And then circling back on P&V, that was the main driver of the margin decline in P&V in the quarter. If you take the -- we had warranty charges even outside of the camera, but the camera settlements and accruals that we booked really more than explained the decline in margins. And if you take those discrete items out, if you will, margins would have actually been up year-over-year in P&V in the fourth quarter and would have been well in line with our expectations. And as we talked about, we do expect with those matters behind us, a real nice step-up in margins in 2026.

And then just on the Power & Vision segment, specifically within this guidance, it looks like you're pointing to up 5% to 7%. Can you just provide some color as to what's driving that strong growth?

Yes. I think Phil mentioned some of the things, right? We -- if you take away the discrete items that we had in the Q4, it performed the way we expected in 2025. And excluding this, the PV margins -- the P&V margins were good. All the structural improvements and the cost action support that we've talked about continue to add to the margin expansion in 2026.

In 2025, we had some highlights that we're mentioning -- have been mentioning over different calls. We have some significant wins, award of eDrive programs on China-based OEMs, some of the programs we are launching that we had won in the past. So all in all, if you put these things together, including the operational excellence activities, that's what's driving the margin in PMV.

Yes. And really the growth being driven a lot by those new launches, James, that are coming on next year -- coming on this year.

Your next question comes from the line of Emmanuel Rosner with Wolfe Research.

Just 2 quick follow-ups on earlier questions. The first one is on the commercial recoveries and items. I think you said at the EBIT line, it's about neutral on a year-over-year basis. Just curious from a timing of impact to free cash flow, it seems like some of these big, big EV-related payments that the D3 are making, they're all more like 2026 weighted rather than '25. So is the free cash flow benefiting from -- on a year-over-year basis of the favorable timing of some of these recoveries this year?

Yes. I think it's a great question. I think if you take a step back, so we did see in the fourth quarter on the free cash flow line, significant recoveries. I said over $400 million in my remarks. Now most of that was balance sheet recovery, if you will, did not affect EBIT. There was a small amount that affected EBIT. But actually in the quarter, commercial settlements or commercial recoveries year-over-year was actually a slight unfavorable on the EBIT line, but positive to free cash flow in 2025. We do expect some additional in 2026.

And when I talked about neutral, I was really speaking more on the EBIT line. And oftentimes, the recoveries can be -- they can be a lump sum in the period like we saw in the fourth quarter. They can be spread out over the remaining life of the program through piece price adjustments or other things. But we do expect an incremental benefit in 2026 on the cash line, but not to the same level of what we saw in 2025.

Yes. I would say, Phil, the strong operating performance, the disciplined CapEx and our continued effort on engineering optimization and efficiency are really the structural part that's driving the cash flow.

Your next question comes from the line of Colin Langan with Wells Fargo.

Just trying to follow up on the walk of sales and margin. You're talking about $700 million in sales increase. You have -- it sounds like $500 million is FX based on your organic growth comments of $200 million organic growth, you have $330 million at the midpoint of adjusted EBITDA improvement. You've highlighted the 35 bps to 40 bps of help from cost. But if I adjust out for FX, I'm still getting like a 70% conversion on higher sales on organic sales, I sort of convert the FX at average margins. So what is driving that extremely high conversion that I'm missing? Is there additional restructuring actions in there? I mean I assume there's a little bit of positive mix.

No, I think you've got -- hey, Colin, I think you've got the FX piece about right. I mean it would be in the order of, call it, 1% to 1.5%, somewhere in that range. So the net organic kind of embedded in the guide would be that minus 1% to plus 2%. Operational excellence is going to play a significant role in the margin expansion. So we've talked about 35 to 40 bps in a neutral environment. I think as we're looking at 2026, likely doing a little bit better than that.

And then I would say, yes, getting a pretty good pull-through, not to the level you've talked about, but pretty good pull-through by historic standards for Magna on the incremental volume. And really the range around the margin would be at the low end of the range, that 40 bps of expansion would be sort of at the low end with the operational excellence. And then as if we get some help on -- to the top end of the range on the sales, if you will, getting good pull-through on that volume to take us to the high end of the margin range.

And keep in mind the decrementals on the Complete Vehicles decline is not as high.

And the other point, too, is on the FX, also keep in mind, so with FX is helping us to the tune of, call it, 1% to 1.5%, the pull-through on the FX tends to be pretty low, just a lot of times, that's coming out of Europe where we run a little lower than the fleet average. So if FX is positive, that can tend to mix you down just slightly as well.

But just overall, I would still say, over the last few years, we've been talking about restructuring plant closures and efficiency efforts. So we talked about 40-plus divisions that have -- that we have focused on restructuring and so on. The net benefit of this cost is starting to flow through and will flow through, right? And we continue to look at more of these activities even this year going forward. So I think it's some of this that helps improve our incrementals as the volume stay steady or even increase, that would be a tailwind.

And any color on what you're assuming for DRAM and raw material costs? I think your ADAS business is around $3 billion. That's probably one of the most impacted by the DRAM issue. And aluminum is up a lot. Is that -- how much should we think about that in terms of sales dilution and then potential cost headwinds if you don't get all that recovered?

Yes. I think -- good question, Colin. I think there's a little bit of wait and watch to on that DRAM topic. But we are coordinating with our customers on this issue. We have not seen any disruption yet. We do see the potential for higher costs. To the extent we know we have included a modest amount of unrecovered cost headwinds in our guide. But obviously, this is something that we have to work with our customers, and we are working with them.

So it's going to be a combination of how do we manage the supply, trilateral, figure out how we address the inventories and how do we protect supply. But as you said, the product line that's going to be exposed to this would be electronics and not much else. But as you said, there could be indirect effects, obviously, right, based on what happens to the production in general for the OEMs, which we have to wait and see.

Our next question comes from the line of Brian Morrison with TD Cowen.

A few details. So more a high-level question here. I'm curious if a planned rollback in steel and aluminum are speculated to be implemented by the President this morning. Would that be a positive impact on Magna? Or is this largely flow-through and affordability would be the likely benefit?

Yes. I haven't seen the article today, Brian, in the morning. But typically, most of our steel is on customer resale, right? And even aluminum and other commodities, we try to either peg and have terms and conditions in such a way that we have an equalization quarterly or yearly or something like that. So we try to mitigate that risk to the extent possible. I haven't read the article today, but that's something we have to work with our customers still. But typically, commodity, especially steel and aluminum are pretty much on some program which mitigates our risk.

And then second question, Pure announced a turbine contract to power data centers yesterday. I wonder if there are any consideration or anything non-auto you may add to your repertoire.

I think our focus has been looking at the skills and capabilities that we have. And if there is a use in terms of our engineering, our capacity that can be used without distracting from our core strategy, then it is something we would look at, right? But I have to say our focus has been efficient use of capital. And if there is something that does not require a specific new investment, then obviously, that's an advantage that we can bring forward. And given the product portfolio and the expertise that we have in different, call it, manufacturing processes and assembly processes, I think there could be opportunities there, but we are really focused on what we need to execute right now.

Your next question comes from the line of Mark Delaney with Goldman Sachs.

Congratulations on the strong results. I had one on Complete Vehicles to start. You had mentioned the wins with XPENG for Europe on your last call and then in November, also announced the GAC business. So I understand the guidance for Complete Vehicles for '26 that you gave. But as you look at the momentum that you have with some of those new customers, what does it suggest about when complete vehicles can get back to growth?

Mark, I think a couple of points, right? One, yes, you got the GAC and the Xiaopeng, you know, it's launching and -- it has launched, and we continue to expand that. One thing to take note, though, the way these contracts are done is just a value add that goes through the revenue, Louis, that's the right way to say it.

So when you look at the growth in the past, whether it was the Z4 or I-PACE or E-Pace or a few other programs, the way you would look at the revenue line was bigger, right, although the value add in the EBIT kind of remains unchanged. So you have to consider that when you compare growth. We still see a kind of a slower year this year, as Phil talked about, because of the end of production of the few programs that we mentioned. But as these things come on, there is a few other discussions that continue to.

So we see a good pipeline going forward and continuing growth there. And I would say engineering has been a little bit weaker. But we don't have visibility in engineering like we have production programs. So the teams are working through that, and we have optimized that to look at the trends in engineering demand. So we feel pretty good about it.

Understood. My other question was trying to better understand Magna's exposure at this point to autonomy. You've made some investments bolstering your sensor portfolio. You also have some upfitting you're doing on AVs with one of the leading AV offerings. As you think about some of those opportunities, you're seeing the progress you're making in the P&V segment. Maybe just help us better understand how much might be coming from things like sensors and upfitting AVs and how sustainable you see that over the medium to longer term? And to what extent that some of those bookings you mentioned today?

Yes. We continue to see the pipeline. As I said before, our focus has been on assisted drive, right? We stay -- continue to stay very disciplined on that part of it. But the use of any of the products or the software features or technology that applies to AV, obviously, we are looking into that. So we see a good growth in that segment from an ADAS perspective, too.

Our next question comes from the line of Ty Collin with CIBC.

Maybe to start, can you maybe just provide a little color around your plans going forward for incremental megatrend investments, EV investments this year and beyond? And has there been any change in thinking around that in light of some of the announcements recently by some of your larger customers around their EV strategies?

I would say no, no change in strategy, right? We have been talking about optimizing engineering investments as well as capital. The significant investments in DES in terms of capital side for EVs for our product line is behind us. If the EV penetration increases and they come forward, I would say, is a tailwind.

If you look at the engineering side, our -- we've always talked two aspects of it. One is platform development. That is significantly or substantially behind us. Now we are talking about application. So if you remember, we used to talk about $1.2 billion in the, call it, the PMV megatrend areas. Right now, it's about $850 million to $900 million, that spend would remain at that level. We are not restricting it. We are just optimizing it based on what's out there. If there are program wins, then the application spend would go along with it, but that would be recoverable in the program. So no shift in strategy.

Okay. Great. And then how are you feeling about your positioning at this point with respect to Chinese vehicle exports? Like are you viewing that as more of an opportunity or something that could be a longer-term opportunity, but maybe create some near-term frictions with some of your European and your North American business?

We are producing in China for China and international OEMs, right? Of the total revenue that we have from China, about 60%, 65% comes from Chinese OEMs. The reason I make that point is we are in their ecosystem. As they come to different parts of the world, we hope to grow with them. We have done that in the past as Europeans came to North America, I don't know, 15, 20 years ago. So with our presence in China, if it continues to increase, that is helpful. If the Chinese OEMs start producing locally, wherever that is in the world, we are present there, I would say that should be an opportunity for us.

Our next question comes from the line of Jonathan Goldman from Scotiabank.

Most of them have been asked already, but maybe just one, I'm sorry if I missed it. Could you discuss the delta versus the margins for the full year in BES and Seating versus your last guidance in November? And if there are one-timers in there that caused you to beat in both those segments, why should we be using the current run rate as the starting point for next year?

Yes. Thanks for the question, Jonathan. So looking at the fourth quarter, BES, really, the story was good pull-through on the revenue and then good performance on some commercial recoveries in BES. So good over 10% margins in the quarter. But we do -- as we've said before, given the year was a little lumpy with recoveries and the like that the full year margin is the good jumping off point, we are expecting another year of margin improvement in BES in 2026, again, driven by operational excellence and good pull-through on the revenue.

In Seating, you did see a really nice step-up in margins in the quarter, and I'm glad you asked the question. So we did have a large warranty reversal in the fourth quarter, and it was actually the reversal of an accrual we set up in the first quarter. As we work through that issue that we accrued in the first quarter, it ended up being significantly less than we anticipated. So we did reverse that out. So we had, call it, unusually high margin in the fourth quarter. But even when you take that out, margins would have still been up nicely year-over-year, reflecting operational excellence and really efforts by the team to keep costs in line and then obviously, good leverage on the sales increase, too.

And then looking ahead, again, because of the volume reductions we're going to see in Seating with the Ford Escape that Louis talked about and some other things, we are anticipating lower sales in that segment in '26, but we'll -- working hard to kind of hold the margins, as you can see in the range, we're looking for resilience on the margin line just through operational excellence, cost containment and the like.

Okay. That makes sense. So I mean, if we're thinking about the bridge for next year, you talked about OpExcellence, maybe just some pull-through on the FX, Commercial seems flat. On the decrementals, are we supposed to be thinking about them as being higher than the normal kind of historical range, I guess, for BES in the low 20s, BEV kind of 20-ish range in 15% for the Seating business?

Yes, I'd say pretty close to normal would be the right way to think about it. The big thing, as I said, is operational excellence will be -- there'll be puts and takes as we show on the slide, but operational excellence is the big plus. FX, we're going to benefit from. But again, from a margin standpoint, that doesn't really help us then it hurts us a little bit just because it pulls through at a slightly lower level than the company average. And then obviously, on the volumes, pretty close to normal in greenhouse too well.

And at this time, we have no further questions. I will now turn the call back over to Swamy Kotagiri for closing remarks.

Thanks, everyone, for listening in today. I would say our confidence is rooted in what's within our control. We have demonstrated consistent execution across varying macro environments. I would say operational excellence continues to be a meaningful value driver. The management team here is really focused on delivering another solid year, including margin expansion, strong free cash flow and significant returns of capital to shareholders. We remain really highly confident in Magna's future and in executing our plan. Thanks for listening again. Have a great day, and have a great weekend.

This concludes today's conference call. You may now disconnect your lines. We thank you for your participation.

All right. Very pleased to have with us as we continue toward the tail end here of day 2 of the conference, Magna, third largest global auto parts supplier. Where are you in the ranking? Top 5, Top 3.

Yes. That's right. Top 5.

Okay. And very pleased to have with us Swamy Kotagiri, the company's CEO; as well as Phil Fracassa, new to the CFO role. So we're going to go through a series of questions, fireside chat style. And then anyone who has questions, please feel free at the end. And if you have questions through the webcast, you can e-mail my colleague, [email protected], and he can ask them on your behalf. But with that, Swamy, Phil, thank you so much.

Thank you, Dan.

Maybe we could just start on the very near term because I think folks have been wondering on what's happening as far as some of the supply chain disruptions. What are you seeing? Is there anything that we need to be watching for on a near-term basis?

Besides the new fire today.

You can comment on that one if you want to.

No. I think given what we have seen about the disruptions to the extent that we could, and we have conversations with the customers and the information that we have based on releases and other stuff, I would say we have included the impact of that in the numbers that we've given about 3 weeks out -- 3 weeks ago. The plant is supposed to be back online in December from the Novelis side and gathering speed for the next months into the next year, but let's see what today brings.

From an [ NPU ] perspective, working with, again, the market, we have a SWAT team going through the places to figure out how to gather inventory. That's -- we're in a good place, working with our customers there. Again, very fluid situation, but we don't see any impact as we sit here today.

Okay. And then maybe just one more on the near term. The margins for the fourth quarter, a large step up, implied roughly 7% versus year-to-date, you've been running at 5%. You talked about a number of things, commercial recoveries, some tariff benefit, lower engineering. Still a line of sight on those benefits materializing in that margin ramp?

Yes, maybe I'll take that one, Dan. So the short answer is yes, you've identified the drivers perfectly. It's mainly commercial recoveries and tariff recoveries that are driving those margins up sequentially and year-on-year despite revenue being kind of flattish sequentially in the fourth quarter per the guide and actually down a little bit year-on-year. But the main drivers would be the recoveries, which, again, at this point, we feel like we have good line of sight to getting what we included in the guide.

Yes. And in the engineering spend, I think we talked about being lower by $100 million or so compared to the last previous year. We are on track for that. And going into the next year, we see that continuing optimization on the engineering side.

Okay. As we look into next year, maybe we could just frame the broader environment because I think this is a question that's coming up quite a bit that we're looking at the setup right now, LVP on the third-party estimates is flat to down. I think there's questions on customer mix. There's questions on sort of programs. And so, is it broadly fair to say, just from a macro setup, we're looking at another, call it, flattish environment. And so the onus is going to be on you and your sort of own internal initiatives to drive profit growth.

Yes, it's a fair assumption. If you look at the last 4 years, we've been doing about 35 to 40 basis points year-over-year starting '22. So we've done about 150 basis points, including this year. We have a clear path for an additional 35 to 40 basis points going into '26, assuming flattish '26 compared to '25, right?

When we did the February outlook '26, North America was 15.4 million units. Right now, it looks to be nowhere near that. But on the self-help side, if you look at 5.5 as the midpoint coming out of this year and an additional 35 to 40 basis points with production being flattish is a good setup going into next year. I would say that's how you frame '26 going forward.

And I know you'll disclose what you disclosed in February. But from a backlog new business perspective, I think one of the themes we've seen here, S&P was saying yesterday that you're seeing a lot of ICE extensions, a lot of the new programs, especially in North America, where EVs, which obviously have been either heavily delayed or the volumes are lower or maybe even outright canceled. Is there a backlog or launch air pocket? When you combine that also with maybe some changes on the reshoring side, at least in the -- for the next 12 months?

Yes, a few points here. If you look at 2025, we came in a little lower than what we had expected in EV, but it was offset by the ICE side of things, right? If you look at the general mix, I think we would be aligned in our revenue ICE to EV compared to what we see in North America today. A lot of the investments from a platform bigger perspective for our BES segment or our P&V segment, either in engineering or capital are behind us. So when the EV comes, it's going to be a tailwind.

In terms of winning programs with our customers, we have not seen a difference in cadence. As a point, 2 years out, '27, we are 90-plus percent booked business, right? Obviously, the variable is going to be the volumes going forward. So that's in place. if you see the AV take rates increase because of the CPV, we would see an uptick because the content for us is higher in EVs than it's on ICE just because, for example, in our BES segment, we would have battery enclosures as an additional content per vehicle.

If you look at our driveline, $500, $600 for a transfer case. But on an EV side, a primary or secondary drive, $1,000-plus in content. So as this transition happens, the content is higher in EVs. On our driveline business, which is more directly involved with the EV stuff, it's a great transition for us. That's what we see in both content. And if you look at the booked business going out to '28 on the outsourced content, we would be the biggest e-drive supplier, right? So we feel we're in a good place. Reshoring, we don't see anything significant now, but with a given footprint that we have, we see that as a possible tailwind.

Okay. I think that's actually a pretty good summary of maybe some of the programs and the pipeline. Maybe on the margins, and you talked about that net performance, just maybe help us unpack that 35 to 40 basis points that you're on track for, you guided to for next year. This year, you've seen that benefit as well. What is that -- how much more runway is there on that? How -- what's the low-hanging fruit versus maybe initiatives that are going to take a little more effort?

Right. So the first part is the simple block and tackling, which has been part of the DNA of Magna, and we continue to do that. We have been working on the cost structure since 2018, 2019. You remember, North America had 17.5 million units. Europe was about 21.5 million or so. Today, we are building our cost structure for North America to be around 15 million units; Europe to be about 17 million, 17.5 million; China about 30 million, right? So that's one part of it.

The normal course that we do in terms of material savings, in terms of the regular block and tackling productivity improvements, that's the second bucket. The third one is automation. We have been talking about it, I would say, automated material movements, collaborative cobots working in regions outside the fence, stamping, assembly, molding, all of that stuff was already automated. We believe just blind automation is not the right thing. You have to think automation plus maintain flexibility where possible.

The one last bucket is digitization, knowing preventive maintenance ahead of time, not just scheduled maintenance, knowing where is the health of the equipment, what should you do, knowing the state of assembly lines, what should you do to take bottlenecks out. That is operational visibility. I would say that we are still very much in the early innings. So when I talk of 35 to 40 basis points in '26, that's not the end of the road. That's just the beginning. So it's not a onetime lift. This is a continuing path of operational excellence.

So I want to unpack that comment in 2, a lot here. And by the way, I appreciate these forums because there's -- like Magna is like 4 separate companies rolled into one. So there's a lot to discuss here. But maybe help me understand on that idea, how this is -- because I think we're all well aware that Magna is a very unique structure that the businesses themselves have the ability to run themselves, what you call an entrepreneurial structure. So when you're talking about the 35 to 40 bps and some of these initiatives on material costs and productivity, is that coming from initiatives within each segment and then all aggregated? Or is there still sort of a debate or a dialogue between the sort of the senior management team, the central office down to the business segments themselves? Help us explain how this is forming.

Yes. Maybe I'll try to break down the word decentralized or entrepreneurial. When we say that, it doesn't mean everybody is doing what they want. We have a framework in terms of capital structure, in terms of compliance, in terms of governance, in terms of strategy and so on and so forth. Entrepreneurial decentralization really means non-bureaucratic ability to make decisions without having a bunch of layers, right? If you win a program, how do we win a program, which customer at what metrics is a standardized process. But the outlook is given by the business unit because they know it best. How do you put it together? How do you code this? Where do they stand in the market segment and so on and so forth.

Now you asked about communication. There is no central library tower, by the way. I visit -- I've seen about 35 plants this year. I've met every general manager of Magna this year, 350 general managers, right? So there is nothing centralized here. So when we say that, it's trying to coordinate communication and get standardization. I'll give you an example. We talk about material flow in plants. We talk about having a digital twin in a plant. That is not done by every plant by themselves. We have the set tools. We say this is how we look at material flow, get the material flow right. Now here is the chances of automation that can be done by putting AMRs or whatever you want to call it. Here is the 4 AMRs that work by region. Now let's go implement it.

There is onetime implementation done in one place, all debugged, everybody is watching it, then the proliferation starts to happen. The proliferation is done by each of the division on their own, you don't need a central place. But do I put the data in a cloud? Yes, everybody is not going to put their own server. They don't have that decentralized ability, right? So that's what we mean by taking away the layers, taking away the bureaucracy, that's the entrepreneurial spirit.

And the block and tackling, if I'm making it part in a stamping process, I look at my blank operation, and I want to optimize material. That's not done by Magna. That's done by the division there because the structural division knows that, the molding division knows that, the machining division knows that. There is centers of competence where this information is shared. So if somebody else wants to do it, you don't need to reinvent the wheel. Long answer, but I could go on for a few more hours.

Yes. And maybe I would maybe just add, Dan, as the new person to the company coming in, I've been really impressed so far with the level of ideation in the company, both at the group level or segment level as well as the company level and the knowledge sharing. So when something is working in one part of the company, there is the ability to extend it across other parts of the company where it makes sense. And I agree with Swamy. I think this is embedded in our culture. So I would expect that to continue even after '26.

Okay. Great. Let's -- I want to pick away at some of the other initiatives here. You talked about improved economics on recent launches. There's an opportunity to reprice some of your programs. Maybe just give us a sense how much runway there is? And broadly, I think you're generally top 3 in most product lines that you play in. Does this strong position give you maybe extra leverage when you're redoing some of your agreements to make sure that inflation realities are being properly priced in and you're getting the proper economics that you need?

So maybe the first point, Dan, is if you look at the repricing, call it, the new economics, we started putting that into play when inflation began in '22. So the programs that we won at that time are just starting to launch. And that's the 2026 we're talking about. So by the time all of the stuff rolls over, we are just in the early innings. So as the new programs keep continuing to come, with the new economics, we are just in the beginning, early innings of that. So there's a lot of tailwind there.

The second part of it, what you said, the OEMs run a very competitive process by each product, and we have to win that. But given our ability to bring value either by putting things together, having the footprint that we have, I believe it's an advantage when we talk about these new terms, whether it's capital sharing, whether it's resetting labor economics at start of production versus when you won the job. I think we have a little bit of an edge there when we have those discussions.

Okay. Another area, warranty. Can you just unpack, this has been a headwind this year, what's going on? And what's the path to reversal?

So about $9 million or so warranty year-over-year. It was a onetime on a seating that happened in the first quarter. Generally, I would say this year is no different than the others, been very good in launching with quality with our customers working very collaboratively with them. Other than that one topic, I don't see a significant cadence change from year-to-year in terms of warranty.

Okay. And then maybe the last one is megatrend engineering, help us understand how much when you add it all up, was the benefit this year. What's the opportunity in '26? And maybe just more broadly tie that into, given how sharply the North America EV environment has changed, is changing, how much more does this change the trajectory of your resource allocation, megatrend spend, et cetera?

So maybe start off, if you go a couple of years back, we said megatrend spend was roughly $1.2 billion 3 years ago.

Per year?

Per year. But that included recoverable expense as well as expense that we spend on, call it, R&D, non-program related. We are developing a platform or a technology that's going to be launched. That's what we call the core, right? Then we have program-related expense, which is either reimbursable onetime or through piece price. That's the $1.2 billion. As of this year, I think that $1.2 billion is more towards the $900 million or so. Last year, I think we said $100 million or so reduction. We are on track doing that.

Going forward, the big spend in terms of the core technology development or platform development is behind us. That will vary now on how you win the programs, right? So fair to assume that it's going to be flat around the $800 million. We'll continue to optimize that. We were ahead of what we thought this year in terms of optimizing it. So going into '26, fair to assume it will be in the ballpark of $800 million or so.

Okay. Before I jump into the segments, I want to talk about China, which obviously has been very topical for suppliers. Now it's a smaller piece of your revenue. I think it's like 12%. But you're more heavily exposed to the domestic. I think it's roughly 2/3 of the mix. So a, what -- how much more are you leaning on China as a source of growth? And b, if there's more heavy domestic mix here, and I think this has been coming up that some suppliers that are winning programs, it's dilutive, the economics are tougher, the pricing is tougher. Is this a potential -- you're trading maybe some margin for revenue? How do we look at the margin impact?

Your stats are pretty good. I think 65% of our business in China is with Chinese OEMs. We've been growing over 10, 15 years, roughly in the low teens year-over-year. So if you take the year-by-year out, I think we still see the 10-plus percent growth in China, right? But one important fact, our China business is accretive to the Magna average. So we are not doing it at the expense of margins or returns. We have been able to do that.

We started off mainly supplying to Western OEMs. But like I said, we have migrated now to Chinese OEMs, like you said, 2/3 roughly is Chinese OEMs, big ones, Geely, Chery, BYD, Changan and so on and so forth. So we are integral to their ecosystem there. We are being very deliberate on focusing on complex technology or an asset-based differentiation, not every product. And that's what has helped us in the last 10, 15 years to maintain our competitiveness, but also market share and profitability.

So as they come to different areas, like we did in the past when Europeans came to North America, we continue to gain share with them. We believe that's what we're going to do as they make more there and export or come into Europe or other parts of the world.

So Chinese export -- that was actually my next question, Chinese exports to Europe or localized production of Chinese in Europe is an incremental opportunity for you, not a risk.

That's correct.

Okay. Okay. Why don't we just unpack some of the segments. First, actually, let me go into the technology. Look, I think that the industry has faced a dilemma on capital efficiency, right? And I think there is this dilemma of wanting to spend on new technologies, but at the same time, trying to be capital efficient. And I think where everyone has been burnt is just the uptake curve that we all expected had been wrong on EV, on ADAS, et cetera. So how does that balancing act maybe impact the way that you're looking at technology development, the types of returns you need, et cetera? Has it changed today versus the '21 when you obviously were very megatrend focused, but others were as well, understandably, and that environment is very different today.

Right. When we say megatrend focused, if you -- again, I think it's worth looking at Magna over the last 20, 30 years, right? There have been periods where sales to CapEx ratio has peaked and one of those peaks was in '22, '23. We've been talking about megatrends, but part of that really is protecting for our content per vehicle and our design space in the vehicle for BES segment.

We've made frames, truck frames for 30 years now. If you go back into the mid-90s, there was an investment peak where we were just getting into the frame business. And we have been doing that for 4, 5 generations now. The battery enclosure sits right where the frame sits. It's based on the same capabilities that we have. And we believe it's a specialized capability that we have. The high content per vehicle. Part of the investment was that, about $1.5 billion in 2 to 3 years. So that was a peak you saw behind us now. Would we go back to it again? Yes, because it was a defensive move setting ourselves up for the future.

Now that, that investment -- you got to look at the investment in 2 ways, right? One, dedicated investment like assembly lines, which the customer pays, non-dedicated investment like presses, casting machines, molding machines and so on and so forth, which are non-dedicated. But as the EV take rates changed, we were able to flex by bringing in-sourcing some of the stuff that we had outside. We never build everything to 100% capacity, right? 80% or so, things changed. We brought that back in. Is it ideal? No. But we have done that. That's how we are getting the margin expansion as part of the operational excellence journey and path. When the EVs come back, the big lift is behind us, we can still flex back again, go outsource, get the stuff back in. We'll see that as a tailwind.

On the ADAS side, I would say a little bit more cautionary with the change in, call it, geopolitics and policy. We have seen China and the Western world in software interchangeability and perception and chips and so on. They're a little bit more cautious in how much we do in China for the time being unless we understand the landscape a little bit better. So it's a little bit dampened. But 85% of our business is really agnostic to propulsion. We just have to think through which of them is EV platform, which of them is non-EV platform. I would say we -- our revenue mix is pretty aligned today in terms of EV to non-EV in North America. So if the EV comes, which we believe is a secular trend in the long term, the haziness is what's the slope of that line, but it's going to be a tailwind.

Okay. And then maybe related, I think tying to the earlier discussion on the macro setup, sort of flattish growth. This has been the environment really like the last 3 years. Given this more muted growth outlook, how does this impact the way you're looking at the portfolio mix? And really specifically, how is this changing maybe the ROIC or return threshold that you need to justify staying in certain product lines?

The risk profile adjustment, Dan, depends on the customer, the region and the product, right? In terms of the take rates, what we assume it's going to be. And in some cases, we are talking about the capital share, sometimes we are talking about volume banding of pricing, which we have talked about in the past. That's our way of thinking through the winning new business and how do we rationalize. I don't think we would change our returns or profitability metrics. We have to risk adjust it by varying that and putting terms like we talked about this new economics.

I think given -- we feel pretty good with our portfolio, where we stand today. With our operational journey, the traction has been there for 35, 40 basis points year-over-year. We want to stay focused on that, unless there is a little bit more stability and clarity in the market. Focus is on just free cash flow generation right now.

Some segment questions. BES, should we generally look at this -- continue to look at this as Magna's free cash flow machine?

Well, I would tell you, all 4 segments are really strong free cash generators. Now BES is our biggest segment. It's -- this year is running the highest margins of the 4 segments. So it's a strong cash generator. But to Swamy's point, now the focus of the company has been on free cash flow. It will continue to be on free cash flow, and then it's up to us to deploy that cash to its highest and best use between organic growth, capital return, what have you.

Power & Vision, I think you were talking about this before. Where does ADAS -- where does your ADAS business currently stand? And what is maybe the path to unlock growth? And are you at the -- I think Veoneer was meant -- the purchase was meant to give you better scale. You feel like you have the scale you need now?

We're about $2.5 billion in revenue. Louis, correct me if I'm not wrong, $2.5 billion. If you just look at -- we talked about a $70 million or so in synergies. We got that. It's behind us. Like I said, the one factor that is different than what we had assumed 3 years ago was the China growth, right? In terms of policies and all they're not the same. So that's a little bit dampened, but we feel pretty good about it in the mid- to long term.

Seating, which has been through some challenged margins over the last years. And I know some of that is a lot of product mix dependent on certain programs. If we actually look at 2Q to 4Q margins, the run rate is actually closer to 4%. It's improved. Is that the right run rate? And what is there maybe opportunity to get further? Because I think we know that the Seating business as a whole for everyone is just a tougher area where the automakers know the bomb and the returns are trickier. So help us understand the path forward on Seating margins.

Yes. I think you mentioned one of them is a mix. We have had a challenging mix for the last couple of years. That's always going to pay a role. We had a program that I always talked about that was challenging, had a lot of challenges. It's going to be behind us, third quarter '26 or the new program life going into '26 and '27, that will help quite a bit. So there is a lot of blocking and tackling in terms of automation and what the team is doing there. I see no reason in the mid- to long term for that segment to be 5% and normalized seating profile. So there is a lot of good work being done by the team, and we'll see that continue going into next year.

CEV, Steyr, what are the opportunities to bring on more Chinese OEMs into Graz? What's the -- I would imagine you have Xiaopeng. I would imagine there's more discussions to be had given they need capacity and you can offer 150,000 units of capacity.

Yes. I think the key is we cannot only offer just the capacity, but more than the flexibility of being able to do different models in the same lines, right? So we have launched 2 models of SKD, one other with Xiaopeng and one other with a different Chinese OEM. There's more conversations there in terms of being able to do that with other OEMs.

This doesn't get -- I don't think this gets enough airtime, I think it deserves more. But what's your collaboration with Waymo?

Interesting. It's a lot of building or upfitting the vehicles with their driver module, let's say, right? Great relationship. We are doing it with various models right? I want to be careful how much I go. But the relationship is good, and there is more opportunities with them as a partner.

Okay. And then just lastly, before we just go into some of the questions more on free cash. Can you just give us an overview of your nonconsolidated business because I know there's a few things going on there. That was where the JV with LG is. I know you have a seating JV that's actually done okay. Help walk us through the nonconsolidated piece of the business.

Yes. It's been a really good year for our nonconsolidated JVs. They're more than just EV-based businesses, as you pointed out, Dan. We have a powertrain ICE JV that had seen improved results this year. The LG JV, which is more targeted to EVs, was a little bit down, but we did have some commercial recoveries there that kind of propped it up this year. And then Seating, as you said, has been a strong contributor. So it's been kind of across the board, again, with the LG JV with some of the recoveries being more probably unique to 2025. But no, I mean really good performance by those JVs this year.

Okay. One last one just before I open it up. What's it going to take to start buying back some stock?

Well, we've done a really good job delevering as we've been talking about for some time now. We ended the quarter below 1.9 as we calculate it. We expect to be below 1.7 by the end of the year. We do have a 1.5 target out there. So I do feel like with the new NCIB we announced a couple of weeks ago, 2026 is setting up nicely for us to lean in a little bit on buybacks with the free cash generation as well as some of the margin expansion that Swamy talked about.

And all we need is a path to 1.5. We don't have to get to 1.5.

And even last year, with delevering being the focus, we still -- under the old NCIB, which just expired, we bought back close to 6 million shares even in that kind of an environment. So buybacks always played an important role for us in terms of shareholder value creation. And I think 2026 is setting up well. I leave it there.

Questions?

Good to see you again. Two follow-up questions on Dan's. The economics on the contracts and that you really kind of took a hard look at back in '22, '23, and you mentioned that's going to start kicking in. Besides some of the contractual changes that you put in, were the targeted returns on capital kind of similar to what you were looking at before? Were you building in a little bit more cushion? How do we think about the profitability? Because you walked us through some of the programs, EVs maybe strong, ICE better or what have you. But the contracts themselves, as your business evolves over the next 3, 4 years and captures those contracts, so are they higher return on capital contracts?

Yes. High return on -- return depends on what you put in as a risk factor, right? If the OEMs are putting in certain part of the capital or all the capital, if there is volume banding versus not having a volume banding, in automotive, you typically don't have volume banding. When we get both of those, the way you look at returns is different than when you're taking the risk, right? And the way you take the risk is if I know of the program that I produced for the last 20 years, we kind of have a view of how this platform performs in general. When it's a new vehicle, then yes, our returns profile is different. It's basically adjusted to higher returns unless we have some guarantees on pricing based on volume or they have put in the capital.

So it's pretty subtle stuff. There's no big numbers that you're kind of saying this is changing over the next 3 years as our business shifts as we get the new business that started in '22. No big...

But there's a couple of big things, though, right? When you win a job, you used to have labor fixed at the time of the win and you don't start producing 2 or 3 years after. Now there is a reset of labor economics at start of production. So that's significant. The other one might not be as related to customer, but energy was a surprise in '22. In Europe, energy went 10x, 12x. So we have a hedging strategy. If you had asked me at that time, why would you hedge energy, maybe not, but we are now. We have that in place. So there's a bunch of these things that make us feel comfortable going -- comfortably is maybe not the right word...

Pretty helpful. And just a follow-up then on that. 35 to 45 bps, all that hard work that you're putting in to get that, that then builds on the 5.5 outside of volume, which is incrementals. That's the nature of these contracts. Or are there -- no, there's still a couple of big variables that could be a headwind that could eat into that 35 to 45 bps.

Unless there is a black swan of some kind that I cannot, there is no recognized headwind. Volumes is the key, right? We all know that. Other than that, we feel pretty good.

And you're saying you need flat.

Flat is what we're assuming right now. What I gave you is coming out of this year at 5.5 midpoint of the range, everything remains flattish. We have a way for another 35 to 40 basis points.

Got it.

And more to come in February when we finish our business plan and have a better sense for what we're actually planning on for '26.

So are you in the camp that China could be down 5% next year because there's some of the Chinese analysts now are saying China is probably going down, incentives take a step down, et cetera, et cetera. Any thoughts on China or stay tuned...

I would say that the projection, I would leave it to experts like Dan, but it's more like we go through releases, we go through the customer parts, and then we'll come back in February based on that triangulation.

Swamy and Phil, thank you so much.

Appreciate it.

Thanks so much.

Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin and I will be your conference operator today. At this time, I would like to welcome everyone to the Magna International Third Quarter 2025 Results Webcast. [Operator Instructions] I would now like to turn the call over to Louis Tonelli, Vice President of Investor Relations. Please go ahead.

Thanks, operator. Hello, everyone, and welcome to our conference call covering our third quarter 2025 results. Joining me today are Swamy Kotagiri and Phil Fracassa, our CFO. Yesterday, our Board of Directors met and approved our financial results for the third quarter of 2025 and our updated outlook. We issued a press release this morning outlining our results. 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 slides included in our presentation that relate to our commentary today.

With that, I'll pass it over to Swamy.

Thank you, Louis. Good morning, everyone. I appreciate you joining our call today. Let's get started. I'm pleased to share a few key highlights from our strong third quarter. Our financial performance reflects continued solid execution across the business and meaningful progress on our performance improvement initiatives. Quarterly results exceeded expectations and showed year-over-year improvements. Sales grew 2%. Adjusted EBIT increased 3%, adjusted EBIT margin expanded by 10 basis points despite a 35 basis point headwind from unrecovered tariffs. Adjusted diluted EPS rose 4% and driven by stronger earnings and a lower share count. Free cash flow improved by nearly $400 million.

Looking ahead, we are raising our full year outlook, including higher sales supported by improved light vehicle production and continued launch execution. An increase in the low end and midpoint of our adjusted EBIT margin range reflecting strong pull-through on higher sales and benefits from cost savings initiatives. Higher adjusted net income, primarily driven by increased adjusted EBIT and a lower effective tax rate. We remain focused on generating robust free cash flow and maintaining a disciplined approach to capital allocation.

You can see this in our reduced capital spending outlook, now approximately $1.5 billion or 3.6% of sales, below our prior range and well below our initial outlook of $1.8 billion. With higher earnings and lower capital spend, we have increased our full year free cash flow outlook by $200 million. This positions us to reduce our leverage ratio to below 1.7 by year-end. We also continue working with customers to mitigate tariff impacts. During the quarter, we reached agreements with additional OEMs for recovery of 2025 net tariff exposures. Negotiations with remaining customers are ongoing, and we expect to substantially complete this by year-end.

Our outlook assumes less than a 10 basis point impact to 2025 adjusted EBIT margin from tariffs. Overall, these results reinforce our confidence in the strategy and our ability to deliver sustainable value for shareholders. I would like to take a moment to highlight some recent business awards and technology program launches.

First, we were awarded complete vehicle assembly business with a Chinese-based OEM, XPENG. This is a significant milestone, it marks the first time a Chinese automaker has chosen Magna's complete vehicle operations in Austria to serve the European market. Serial production began this past quarter on 2 electric vehicle models for this customer. In addition, we launched production in the third quarter on a vehicle program for a second China-based OEM with another program for that customer scheduled to start next year. These wins reinforce Magna's strong position in vehicle manufacturing and demonstrate the value of our flexible state-of-the-art production process, which enable fast-to-market high-quality vehicles for the European market.

As we have for decades, we continue to launch innovative technologies that support our customers. This past quarter, we began launching a dedicated hybrid drive with a leading China-based OEM. Our 800-volt solution delivers a winning combination of efficiency, versatility and comfort for consumers. Our driveline portfolio spans all powertrain configurations from ICE and mild hybrids to high-voltage hybrids and full battery electric vehicles. This success underscores the strength of our building block strategy in powertrain. And in advanced safety, our mirror integrated driver and occupant monitoring system is meeting growing global demand for DMS technologies.

As you may recall, this product earned a 2024 Automotive News PACE Award for its innovation and safety impact. We are launching this system with multiple customers worldwide and volumes are expected to reach several million units annually.

Next, let me cover our improved outlook. While the current environment makes forecasting more challenging than usual, we remain focused on what we can control and continue to adapt to evolving conditions. Compared to our previous outlook, we have increased our North American production forecast to 15 million units, up about 300,000 units. Roughly 2/3 of this increase reflects expected outperformance in the second half with the remainder tied to adjustments to first half estimates. We are holding Europe production relatively unchanged.

For China, we have raised our estimate to 31.5 million units. About half of this increase reflects second half outperformance and the other half relates to adjustments to first half estimates. We have also updated our foreign exchange assumptions to reflect recent rates, now expecting a slightly stronger euro, Canadian dollar and Chinese RMB for 2025 compared to our prior outlook. We have increased our sales estimate range largely as a result of the expected higher light vehicle production, particularly in North America. We also raised the low end and midpoint of our adjusted EBIT margin range and now expect margins between 5.4% and 5.6%, reflecting our solid Q3 results supported by continued execution in the fourth quarter.

Looking sequentially, we expect fourth quarter margins to improve from the third quarter, driven primarily by commercial and net tariff recoveries from customers. And as of today, we are on track to achieve those. We updated our interest outlook due to some expense booked in the third quarter related to a discrete prior year tax settlement. We lowered our assumptions for taxes to approximately 24% from 25%, mainly due to better utilization of tax attributes and a favorable change in equity income.

Factoring all that in, we increased adjusted net income to a range of $1.45 billion to $1.55 billion, largely reflecting increases in adjusted EBIT and the lower effective tax rate. We are reducing our capital spending outlook to approximately $1.5 billion, reflecting our continued efforts to optimize investment without compromising growth. As a result of higher earnings and lower capital spending, we have raised our free cash flow range by about $200 million to $1.0 billion to $1.2 billion representing more than 70% of adjusted net income at the midpoint.

To summarize, we remain confident in our fourth quarter outlook supported by strong year-to-date execution and ongoing operational discipline despite industry challenges. We are on track to deliver the full year outlook we shared in February. A testament to the resilience of our business and the capability of our global team.

Before I turn the call over, I would like to welcome Phil Fracassa, who joined Magna as our new CFO in September. He brings extensive public company CFO, automotive and industrial sector experience as well as a proven track record of driving profitable growth and shareholder value creation through disciplined capital allocation. Phil succeeds Pat McCann, who stepped down from the CFO role and is serving in an advisory capacity until his retirement in February 2026. I would like to thank Pat for his many contributions to Magna over his distinguished 26-year career. With that, I'll pass the call over to Phil.

Thanks, Swamy, and good morning, everyone. I'm pleased to be with you today. Magna is a company that I've admired for a long time. For its history of innovation, unmatched capabilities and deep relationships with customers. In my initial time here, I've seen our guiding principles in action and I'm energized by the ownership mentality that our entire team brings to all that we do. We operate in a sector of the economy where the only constant these days has changed, but this creates opportunities and Magna is well positioned to capitalize on them. So I'm excited to partner with Swamy and the team as we work to drive durable shareholder value.

Now on to our results. As Swamy indicated, we delivered a strong third quarter, up year-over-year and ahead of our expectations, almost across the board. Comparing our third quarter to the same period last year, Consolidated sales were $10.5 billion, up 2%. This compares to a 3% increase in global light vehicle production. Adjusted EBIT was up 3% to $613 million. Our margin was 5.9%, up 10 basis points from last year, and that's despite the continued headwind from tariffs. Adjusted EPS came in at $1.33, up 4% and free cash flow in the quarter was $572 million, up $398 million from last year and well ahead of our expectations.

Now I'll take you through some of the details. Let's start with sales. Looking at the market, North American, European and Chinese light vehicle production were all higher in the quarter, and overall global production increased 3% compared to the third quarter of last year. On a sales-weighted basis for Magna, light vehicle production increased an estimated 5%. Our third quarter sales were up 2% from last year. Excluding currency, organic sales were up modestly, but lagged the market in the quarter as we had expected. The increase in our total sales largely reflects the launch of new programs, including VW, Skoda Elroq, the Ford Expedition, Lincoln Navigator and Cadillac Vistiq, the favorable impact of foreign currency translation and higher global light vehicle production. These were partially offset by lower production on certain programs, including end of production on the Chevy Malibu. The expected decline in complete vehicle assembly volumes including end of production on the Jaguar E and I-PACE in Austria and normal course customer price concessions.

Moving next to EBIT. Third quarter adjusted EBIT was $613 million. which was up $19 million or 3% from last year. Adjusted EBIT margin was 5.9%, up 10 basis points. In the quarter, our EBIT margin was impacted positively by 65 basis points from net operational performance improvements. This reflects strong execution on our operational excellence and other cost savings initiatives, partially offset by higher labor and other input costs as well as new facility costs and 30 basis points related to higher equity income as several of our equity method JVs, including China JVs delivered strong performance in the quarter with higher sales and favorable mix, net favorable commercial items and other productivity and cost improvements. These were partially offset by negative 50 basis points from discrete items.

This is comprised mainly of lower net favorable commercial items compared to last year and 35 basis points for tariff costs incurred but not yet recovered. This is mainly timing as we continue to pursue recovery from our customers, and we remain on track for tariffs to be only a modest headwind to margins for the full year, less than 10 basis points, as we said before. Note that volume and other items were essentially flat in the quarter as earnings on higher sales and foreign currency gains were substantially offset by the impact of higher compensation expense.

Looking below the EBIT line, interest was $11 million higher than last year due mainly to some discrete interest expense in the quarter for the settlement of a prior year tax audit. Our third quarter adjusted tax rate was 26.5%, lower than last year, primarily due to the favorable year-over-year impact of currency adjustments recognized for U.S. GAAP. This was partially offset by an unfavorable change in our jurisdictional mix of earnings, increases in our reserves for uncertain tax positions and a slight decrease in tax benefits related to R&D.

Net income was $375 million, $6 million or about 2% higher than last year. mainly reflecting the higher EBIT, partially offset by the higher interest expense. And third quarter adjusted earnings per share was $1.33, up 4% from last year, reflecting the higher net income as well as 2% fewer diluted shares outstanding resulting from share buybacks over the past 12 months.

Let's take a brief look at our segment performance for the quarter, which you can see summarized on this slide. Three of our 4 operating segments posted increased sales year-over-year with a notable 10% increase in seating. Exception was complete vehicles, which was down 6%. This was largely expected and reflects the end of production of the Jaguar E and I-PACE at the end of 2024. But as Swamy mentioned earlier, we're excited about our recent new business wins with China-based OEMs, which is a new growth market for our complete vehicle business.

In 3 of our 4 segments also posted improved adjusted EBIT margin year-over-year with notable margin expansion and strong incremental margins in body exteriors and structures. The exception was Power & Vision, where margins were down on a tough comp last year. In the quarter, P&V was impacted by lower sales on a local currency basis. Lower net favorable commercial items and higher tariff costs as P&V has relatively more exposure to tariffs than other Magna segments. These were partially offset by continued productivity and efficiency improvements, higher equity income and lower launch costs.

Despite being down year-on-year, P&V margins were slightly ahead of our expectations for the quarter, and we have held the low end of our EBIT margin range and our updated outlook for P&V. Our Power & Vision segment has differentiated technologies and a strong market position, and we're confident in the long-term margin outlook for this segment.

Turning to a review of our cash flow. In the third quarter, we generated $787 million in cash from operations, for changes in working capital, along with $125 million from favorable working capital movements. Investment activities in the quarter included $267 million for fixed assets and a $100 million increase in investments, other assets and intangibles. Overall, we generated free cash flow of $572 million in the third quarter, higher than we were forecasting and $398 million better than the same period a year ago. The increase was driven mainly by lower capital spending and favorable working capital performance, and we continue to return capital to shareholders, paying dividends of $136 million in the quarter.

Our balance sheet and capital structure remained strong with low single A investment-grade ratings from the major credit rating agencies. At the end of September, we had $4.7 billion in total liquidity, including $1.3 billion of cash on hand, which provides ongoing financial flexibility. During the quarter, we repaid $650 million of near-term maturing senior notes. Our refinancing is now complete, and we have no senior note maturities until 2027. Currently, our adjusted debt-to-EBITDA ratio is at 1.88x, a little better than we anticipated coming into the quarter. We have been executing well on delevering throughout 2025. And as Swamy said earlier, we expect to end the year below 1.7x.

And lastly, subject to the approval by the Toronto Stock Exchange. Our Board yesterday approved a new normal course issuer bid, or NCIB, authorizing the company to repurchase up to 10% of our public flow or around 25 million shares. We expect the NCIB to be effective in early November and remain in effect for a period of 1 year. Since the initiation of the NCIB approved last year, Magna has repurchased 5.8 million shares or roughly 2% of shares outstanding. This allowed us to return $253 million in cash to shareholders while still reducing leverage and navigating a challenging environment. Our new NCIB reinforces our commitment to share buybacks as a key component of our disciplined capital allocation strategy as we look ahead to 2026.

So in summary, we delivered strong financial performance in the third quarter, which exceeded our expectations and showed both top and bottom line improvements versus last year despite the unfavorable impact of tariffs and commercial items in the quarter. We're benefiting from operational excellence initiatives across the company, and we expect these efforts to drive further margin upside over time. We've also increased our outlook to reflect our third quarter performance and expectations for a solid finish to the year. We're planning for higher sales, supported by an increased and expected light vehicle production, particularly in North America, and that's net of the expected fourth quarter impact of potential supply chain disruption.

We've raised the low end and midpoint of our adjusted EBIT margin range, and we increased our outlook for adjusted net income, largely due to the higher expected EBIT. We'll continue to focus on free cash flow generation and capital discipline as evidenced by a further reduction in our capital spending outlook. As a result of this and expected higher earnings, we have raised our 2025 free cash flow outlook by about $200 million. And lastly, we continue to mitigate the impact of tariffs. We settled with additional OEMs in the third quarter and we're on track to complete substantially all remaining customer negotiations by year-end.

Let me close where I started and reiterate how thrilled I am to be part of the talented and dedicated Magna team. This past quarter was a testament to the resilience of our business and the effectiveness of our strategy, and we're excited about the opportunities that lie ahead.

With that, we'd be happy to take your questions. Operator?

[Operator Instructions] Your first question comes from the line of Etienne Ricard of BMO Capital Markets.

Thank you, and good morning. As we think about 2026, can you remind us what improvements to operating margins we should see from efficiency gains and across which segments do you still have lots of potential to expand margins?

Good morning, Etienne. I think the best way to look at this is a little bit going back into the previous calls, where we talked about margin improvement from '23, '24 we said we were going to do about 115 basis points, which was done. We talked about an additional 75 basis points split between '25 and '26. I can say the '25 we are well on our way and on track. And we have good visibility for the 35 to 40 basis points going into '26.

So if you look at the 5.5%, which is the midpoint of the range we are talking about finishing '25 and add the operational improvements of the 35 to 40 basis points it should give you a good foundation of how we are going into '26. On top of that, there are some programs which we have talked about, which are coming in like launching now into '26 with new economics, compared to what we had from the inflation impacted time frame of '23 to '25.

So take all of that in, if you assume volumes to be flattish going from '25 to '26. We see the margins building on top of the exit of the 5.5% in '25. The second part of the question, I think it's a little bit difficult to talk segment by segment. But I can tell you the operational activities are across the company, and that's what is giving us traction, and we are very optimistic about it.

Okay. I appreciate the details. And I also want to cover the lower pace of capital expenditures. So this is good for free cash flow over the near term. But could you please remind us why this is not expected to materially affect growth prospects in future years?

So Etienne, I think we have always said our long-term average ratio -- CapEx to sales ratio is, I would say, the low to mid 4s. And if you have looked at the CapEx spend in the past years going into '22, '23, '24, we had a higher CapEx spend cycle, and that depends very much on the cycle that the OEMs go through in giving out programs, right? Then we went through a big cycle of EV releases at that point in time.

Now with that investment behind us, we have been constantly talking about looking at different -- as part of our continuous improvement in operational activities, looking at efficiencies, looking at consolidations and closing of facilities, looking at optimizing footprint. All of that has given us the opportunity to optimize. But I can very clearly tell you that the team is very focused on not curtailing CapEx at the expense of growth. we are very much focused on organic growth with right profitability.

Your next question comes from the line of Dan Levy of Barclays.

First, maybe you could just talk through what you've embedded in your guidance and what you're seeing as it relates to some of these production disruptions out in the market between Ford, Novelis, JLR and Nexperia, just what's the impact to you? And what's embedded in the guidance and how you're planning around those.

Dan, I think the Novelis and the Nexperia situation are still a little bit fluid, but we have taken into account based on the releases that we have and there is visibility. Obviously, there is more color as we have conversations with the customers. We have taken all of that in the Q4. But there is a little bit of indirect impact too, right, because this situation is impacting OEMs and other suppliers. So if that has an impact on the overall production, obviously, that could have an indirect impact. But we have taken to the best of our knowledge, the information that's been provided already in the outlook that we have given.

Yes. Dan, if I could maybe just add, this is Phil. So the 15 million unit assumption that we have in for the full year for North America would reflect our estimate of lost production. So if you compare that number to maybe some of the external forecasted it is a little bit lower, and that's where we would have embedded our assumption.

Okay. And Nexperia, and I know it's a wide range of potential outcomes, but we are a month in and you do have a large electronics business. What's the -- is there any sort of range of outcomes that you might be gauging within the results?

Yes, I think it impacts largely the electronics group, but it's not only for the electronics group, Dan, you can imagine there is associated systems in powertrain and other parts of Magna. We have a task force activity that's obviously very active in looking at the supply chain analysis, the runout dates. We have identified and released alternative parts, obviously in conversation with the customers. We're tracking the EMS suppliers. Wherever possible, purchase through brokers. So there's a very constant communication with customers and suppliers. I don't know if we can get into every segment by segment, but I can say we have taken the impact to the extent we have seen, again, just not from the outside forecasters, but also program-by-program customer discussions.

Okay. Got it. And then maybe as a follow-up, if you could just walk through the large implied step-up into margins in the fourth quarter that are within your guide. I mean, pretty much all of the segments have a large step-up in margins. Perhaps you could just talk to the underlying strength in those?

So a couple of points, Dan. I think as we look through, obviously, one is the traction of the operational activities that we've been talking about. The second part is we have mentioned the second half of the year being heavy in tariff and commercial recoveries. And obviously, it's heavy ended into the fourth quarter. But we have substantially negotiated with the customers. There is some ongoing discussions, but we feel pretty good with the frameworks that are in place, and we believe the roughly 10 basis points impact due to tariff for the year. I think we feel comfortable at this point in time.

I would say those are the key points. And if you remember last time, we talked about, I don't know, 35 basis points of the full year EBIT coming in fourth quarter. That was very relevant, and we are trying to give cadence going from Q3 to Q4. It's been a little bit of a stronger Q3. Now if you look at the math of the midpoint of the sales and the midpoint of the EBIT. I would still say we are in the low 30s as a percent of EBIT for the full year. So all in all, it's on track and looking good.

Your next question comes from the line of James Picariello of BNP Paribas.

I wanted to first ask about the latest Ford recalls that happened over the last few months, regarding a rear facing -- the rear-facing camera, which I believe is Magna's. And correct me on the number, but it's well north of 1 million vehicles, I think. I'm just curious what -- how that maybe translates or not to future warranty spend for you guys? Yes. That's my first question.

James, yes. We'll disclose the warranty expenses in our quarterly and annual reports, as you know. We are working constructively with our customers to reach resolution. For the more recent announcement, James, I would say the information is still coming through, need a little bit better understanding of the scope of the issue. As you can imagine, there is complexities in the system with various interfaces. We have to assess the overall. It's a little bit early from that standpoint. And as we gain more information, we will definitely be in a better position to come back and give you more granularity.

Got it. Understood. And then my follow-up, just can you speak to the new nameplates that are at Magna Steyr and what that could translate to in terms of future volumes, run rate production? And then just latest thoughts on capital allocation with respect to share buybacks?

Yes, James, again. I think one of the key things is the flexibility that we have in our Magna Steyr facility to be able to do multiple propulsion systems or multiple models to the same line. So I don't think you'll see a significant -- given the capability and the way it is set up and the business model that we have working with the customers there, we don't expect to see an uptick in capital because of those programs in Steyr.

Now with respect to the programs, as I mentioned in my remarks, XPENG, we are doing SKD of 2 models. And there is another Chinese OEM we are working with, which is due to launch a third model in there. So all in all, we are excited about that. If you remember, we have capacity of roughly 150,000 units, I would say. But if you look averaged out over years, long period of time, I would say we do well with about 100,000 to 120,000 units. Typically, that's what has been average. So we are continuing to work launching these programs, but there is additional discussions ongoing to further optimize the facility there.

Yes. And maybe to the point on share buybacks. So obviously, share buybacks remain an essential part of our capital allocation strategy at the company. As you know, we've kind of paused this year just given all of the uncertainty that was -- that's been out there. We've shifted and focused instead on delevering, and that's gone very well. It's absolutely trending ahead of schedule. And we did announce, as you saw the new NCIB, which would allow the company to purchase up to 10% of our shares over the next 12 months. So I think that the leverage coming down quicker than we anticipated, the strong free cash flow, which we expect to continue, I think, sets us up really well to lean into buybacks as we're looking ahead to 2026. And I think that it will continue to factor in.

Your next question comes from the line of Joe Spak of UBS.

Just was wondering if you could help me a little bit here. Like if I track the impact all year long on tariffs and in your comment of less than 10 basis points impact for the year. It seems like you're counting on, I don't know, at least $40 million, maybe a little bit more recoveries in the fourth quarter. Is that math right? I know you said that was one of the drivers of the margin inflection in the fourth quarter. I just want to make sure we're properly calibrated there.

And then I know you said you're making progress on negotiations, but is there any risk, do you think, to receiving them given some of the distractions at the customers?

Joe, I think if you look at the overall in our last calls, we mentioned roughly an annualized impact of about $200 million. But, as you know, the tariff situation started, Louis, I would say April, March, April time frame. So you can take the $200 million annualized and get the number for the year. I think in the fourth quarter, there's more than $40 million, I would say. But there is frameworks in place, Joe, which gives me the comfort to say we are working through. The framework is there, discussions have been collaborative, which gives me comfort. Is there a risk? Obviously, there could be just as you know, in this industry.

But looking at the past history, looking at the status of where we are today, I feel comfortable. And as we talk about 10 basis points, right, which is roughly in the $30 million range that we believe would be the tariff impact for 2025 that's unrecovered or unmitigated

That's helpful. And then I know you're going to be pretty limited today in sort of talking about next year. But just again, so we think about this now, it does seem right, like maybe you have this positive in the fourth quarter, you're fairly neutral for the year. So if we think about maybe for '26 is -- are things -- are recoveries and headwind sort of better aligned. So the margin variation quarter-to-quarter related to this should be much reduced. So we don't have this like big 1 half, 2 half inflection like you did in '25. Is that a good baseline to think about for next year that it's a little bit more balanced?

I think that will be the focus, Joe. But tariffs was a new thing this year, as you know, and we had to come up with the framework. I would say there is good groundwork and framework in place. This being the first year and as we are coming towards the end, that should help going into 2026, if you have to deal with it. I think there is still going to be some amount of cadence topics going from one quarter to the other, just based on continuous improvements, the programs finishing and the new programs coming and so on and so forth.

But we are in the process of the business planning now. I think by the time we come to February, we'll get a much better picture to at least give you somewhat of a sense of is there more lumpiness or it's getting back to normalcy.

Your next question comes from the line of Tom Narayan of RBC Capital Markets.

Best wishes to Pat. My first question is on the Seating margins just guided for Q4. and I know a lot of the segments are seeing this, but it's especially magnified in Seating, it seems. I know this segment was -- had some challenges in the past due to just some program-specific things. Just curious if you could help us understand how much of the sequential improvement is coming from the tariff and commercial recoveries? And then how much is just underlying kind of business improvement? I know you also called out engineering coming down. I'm not sure if that impacts Q4 as well. But just curious on your thoughts on Seating in Q4 and how we should think about that going forward.

Yes. Maybe I'll start Tom. So on Seating, obviously, a really strong third quarter with revenue up and good margin performance. But to your question, the margin improvement Q3 to Q4, the big contributors would be recoveries for tariffs because Seating does have pretty large tariff exposure. So there are the recoveries we've got to get. But there's also continued operational excellence initiatives there, too. But if we had to point to the primary drivers of the margin because we do expect the implied guidance would say volumes would be down a little bit year-on-year and even down a little bit sequentially. So we've got the volume headwind in there, too, but overcoming it with the recoveries, commercial tariffs, and also continued focus on operational excellence.

And there's a little bit of engineering that's coming down. It should be a bit of a tailwind for us.

And that's for the fourth quarter in general. I think, Tom, just maybe stepping back, I want to say Seating is a good business. In our past couple of years, there was pressure on margins due to program-specific issues like end of production of Ford Edge, there was a cancellation of BV Explorer and Chevy Equinox moved from Ontario. And as you mentioned rightly, I've been talking about a European OEM program in North America which had issues, and that's going to be behind us.

The newer version with the right, call it, financial metrics, launches in '26 into '27, and you'll see that additional impact going forward in '27. So I would say structurally, it's a really good business. It's got a strong position in China with China-based OEMs. So all in all, it's -- the team has done -- the Seating team has done a great job taking costs out as part of the operational excellence. So I think we'll continue to see the margin improve going forward.

Great. And my follow-up has to do with the Steyr and the Chinese OEM wins. Does this create like a flywheel to sell other Magna products from other segments? And then just curious if there were any kind of frictions from your European OEM customers, legacy ones, given the encroachment of Chinese OEMs into Europe is a very hot topic. And I know some of the OEMs are kind of concerned about it.

I think, Tom, we would like to look at each of the business that needs to stand on itself, right? Obviously, if there are opportunities for other parts, other systems of Magna to be there, yes, but we are not going to make one dependent on the other, right? So it's standing on its own merit, that's how we're going to look at it. obviously, there could be opportunities, but we have to look at it.

To be honest, no, we have not seen any discussions with other OEMs. This is part of a business for Magna, and we have worked with various OEMs in the past, right, as you know. Then we are following the same business model, same principles. So we have not heard anything. And we are very close to the customers as [indiscernible].

Your next question comes from the line of Emmanuel Rosner of Wolfe Research.

So I appreciate your early thoughts on some of the operational performance that could continue into 2026. Another angle I was hoping to get an update on is you've in the past pointed to a large amount of new business that would launch and ramp up into 2026, boosting revenue pretty materially and obviously coming with some operating leverage and helping margins further into next year. So can you maybe talk to us about how those launches are progressing, whether the magnitude of the revenue uptake into next year from those is still broadly similar to what you mentioned in the past? And any other consideration on that launches and revenue uptake, please?

Emmanuel, I think for 2025 going into '26, when we talked about launches, we talked about it in the context of new economics, right? The terms of setting labor back, labor rates and labor discussions at the start of production, not when we won the program as an example, and so on. We have specifically always talked about winning programs based on returns. If you just look at all of those, that was the step up, I would say, or inflection in the profitability going with these new programs.

As far as the launches and the cadence goes, looking at our team, they're doing very good. We look at it very periodically, right, at high amount of detail. I can say there is nothing that stands out today. All the launches are moving pretty good.

Yes. We got to look at what the volumes are going to be on all the programs. It's something we're going to go through as part of our business planning process, what are the revised volume expectations for all the key programs. What does that do to our sales growth, et cetera. So that's still part of our plan process that's coming.

Yes. I think we can say we're doing a good job of controlling the controllables in our hand, but the externalities of volumes and so on, we still are going to go through and understand better in the business plan process.

Yes, so more to come in February on that.

Yes. Now, looking forward to that. Just a quick follow-up on this and then I wanted to ask you also about the fourth quarter drivers. But just a quick follow-up on this top line thing. Are we still talking about launches of decent magnitude? So I understand the volume themselves would fluctuate. But we're not -- are you experiencing cancellations or major pushouts or anything like this?

I wouldn't say, Emmanuel, anything of significance. We already talked in the past about the big EV programs that everybody knows about. Other than that, we haven't seen anything substantial beyond.

Okay. And then I guess my second question was, so when -- you've spoken earlier in the year about this big step-up in margin between the first half and the second half, which you're reiterating today. I mean some of this was commercial recoveries. There were some engineering recoveries. There were some tariff recovery in there. All that stuff seems to be on track. I think there was also a piece of the uptick that was supposed to be tied to warranty costs. Is that still also on track and helping towards the fourth quarter?

Yes. In terms of looking at my comments from the last time to where we are, you are right, we need to keep our focus on obviously executing operationally. Yes, you mentioned commercial and tariff that is still continuing, as I mentioned in my remarks. Nothing specific about warranty, I think if you're talking about there was one topic on Seating in the first quarter. I would say we are in a good place with respect to that. Nothing -- no surprise there.

Yes. I mean, yes, I would agree. I think when you think of the fourth quarter, you've got -- it's really continued execution on the operational excellence initiatives is in there, the recoveries, commercial tariffs. I would say there's nothing material related to warranty baked into the fourth quarter, if you will. It's really mainly volumes holding up, executing well and then continuing to focus on cost controls.

And just maybe year-over-year, the warranty in '25 has been higher. So the outlook that we are talking about in performance is despite that increase in warranty.

Your next question comes from the line of Colin Langan of Wells Fargo.

Early, you mentioned sort of you have the 5.5% base for 2025, you have about 35 to 40 basis points of continued sort of performance help that gets you to like 5.9%. And then I think you mentioned some of the launches are coming in at more profits and maybe you could go a bit higher. I believe the last update, I think from Q4 was 6.5 to 7.2 it seems still like a big jump for you kind of walking. Is that just kind of sale at this point? Or should we still think of that as a relevant target as we think about '26?

Colin, I think let us finish the business plan process. I think, as you know, one of the big variables is going to be volumes in the market, right? When I talk to you about the 35 to 40 basis points, obviously, that's again controlling what we have in our hands in terms of operations and executing. We feel pretty good about that. Some of it will obviously depend on the volumes. Given all the activities that we have done in setting up the right cost structure and we -- it's a journey. We're not stopping there. We'll continue to look at it with the discipline we have had in capital. We see a good path going into '26. And as volumes come, you'll see, obviously, the flow through to the bottom line to be much better.

Yes. And to Swamy's point, if you look at where we said we thought North American volumes would be in February for '26, it was like 15.4%. If you look at where it sits today, it's 14.7%. So maybe by the time we get there, it's higher than that. But I mean, that delta has to be is going to have an [ impact ].

Got it. And then any update on how the ADAS business is performing? Because if I look at Power & Vision sales seem actually fairly flat. I thought there was supposed to be some ADAS growth driving there. Is that still up? And if it is, what is offsetting some of that weakness in there?

As we go through there, that segment has a lot of dynamic factors. As you can imagine, powertrain, EVs and hybrids and ICE mix and program changes. From an ADAS perspective, Colin, I would say there is some, again, industry dynamics there. The OEMs are continuing to still evaluate the architecture. Some decisions have been pushed out from a China strategy in terms of looking at chips and their own perception strategy. And the Western OEMs continue to take a path. So we've been a little bit cautious.

I would say the growth that we would have assumed maybe 3 or 4 years ago to what we are looking is a little bit dampened. And the only reason is that we want to be cautious of how many platforms we want to work, right? We have to be focused on picking a platform so that we can engineer once and deploy multiple times. So there is a little bit of more work to do on the ADAS side, again, based on the industry and OEMs and architectures and trends.

Your next question comes from the line of Mark Delaney of Goldman Sachs.

I'd like to thank Pat for all his help and wish him the best going forward. And Phil, looking forward to working with you going forward. I had a question on the complete vehicles business. And Swamy, you mentioned earlier in the call that 100,000 to 120,000 is a more comfortable level to be operating. I do want to clarify with the award and momentum you've been seeing in that business with some of the Chinese-based OEM programs, do you already have line of sight into volumes, getting the complete vehicle business to that kind of level in Austria? Or do you need to win additional business to get there?

And the second part of the question, if you get to those sort of volumes, what should we think about in terms of more normalized EBIT margin within the complete vehicle business? Because you think of time in the past, it was kind of 3%, 4% and I'm wondering if it can get back to at least those sort of levels, if not maybe even higher as you ramp some of this new business.

Mark, I think a couple of points to mention. The 100,000 120,000 I mentioned was more a context of what the business has run typically in the past, right? We've been talking over the last 1.5 years where we restructured or the team has done a great job restructuring to the current volumes and the current visibility. So even with the lower volumes running there, they've been able to maintain the margin. So that's one thing to note.

The second one, as you know, this business or this segment runs on a different business model. It's a little bit on capacity utilization. So the risk exposure is a little different or lower. And when you talk about margins, as you know, besides complete vehicle assembly, in that segment, we also have engineering revenue, right? Which has a little bit of ups and downs depending upon the seasonality. So that changes the EBIT percentage, depending on how much of what mix, right? We feel pretty comfortable that we have the right cost structure or we have optimized. We are not keeping the cost structure hoping new business will come. We'll continue to look for the right opportunities there. And the engineering continues, it's a good strength of ours, and we'll look at it. So I feel to expect somewhere in the mid-2s to 3% range would be normal.

Okay. That's helpful on the margin. I guess just in terms of the volumes, maybe it's not quite at those sorts of volumes as it was historically, but the business has operated to be profitable at lower levels. Is that the right understanding?

Exactly.

Okay. And then the other point -- the other question I had was also on the complete vehicle business. And with some of the AV upfitting work that Magna is doing. I wanted to talk, is that reported within complete vehicles or another part of the business? I realize that the volume of AVs are still small, but I imagine that might be an opportunity for some engineering collaboration and just want to understand how impactful some of the AV announcements where Magna's doing AV upfitting? Just kind of how big that might be for your business today?

Yes, Mark, you're right. The operating of the full autonomous vehicles is in this segment. It's an interesting one, but continue to look at it, look at the business model and work with them. We are very -- we are at the table is the best way to put it, and we have an advantage of being at the table. But we're also looking what's the value that we can bring and we do, I think from an engineering perspective and the expertise of integrating vehicles. So there is a possible opportunity there, but too early to quantify.

The next question comes from the line of Jonathan Goldman of Scotiabank.

Maybe we can circle back to 2026, and I respect you're still in the planning stages. But Swamy, you alluded to maybe flat next year in terms of volumes and rather than put a fine point on any number, what's your expectation in terms of production being aligned with sales?

Good question, Jonathan. And I think you're asking me to look at the crystal ball a little bit. I think our assumption has been always to look at bottoms-up what we get from our customers, the releases and our own information that's available at Magna and then triangulate with the external forecasters, right. If the tariffs and the price continues the way it is versus being passed on to the consumers. There might be a pressure on the sales side of things, don't know. That is something we have to see. At this point of time, and this is just me personally looking at it, and we are looking -- it could be flattish. But like Louis mentioned a few minutes ago, in the next few months, we'll get a little bit more visibility on that.

And I mean, inventory levels in North America in particular, are pretty healthy levels. [indiscernible] reason to believe that they're going to bring those numbers -- that they're going to work off inventory. I don't think that's an issue, whether they decide to build more than they sell, that's -- yes, it's really up to the OEMs, we can't really determine that.

Yes, that's a fair comment. And I guess my second question then is on CapEx, thinking about it maybe going forward. I think you've cut CapEx guidance 4 times in a row, just pretty impressive. I think this year, you're going to be at the mid-3s. Should that be the appropriate rate going forward if we're thinking about modeling CapEx in '26 and beyond? .

No, Jonathan. Like I said, I would look at the 4 to 4.5 or low 4s to mid 4s being the long-term average. That's kind of how we look at business. Like I said, it's important for us, the organic growth, free cash flow, it's a good balance. Given we had 2 or 3 years of high CapEx, we have been super focused on looking at everything which programs and how there is enough uncertainty in the market, too. So that discipline will stay on. But I think the best way to look at it is over a longer period of time to be averaged the 4 to 4.5. But with that said, going into '26, I would look at the low 4s as a good way to start, which doesn't mean we are not going to stop further optimizing it, but I would say that's a good starting point.

Your next question comes from the line of Michael Glen of Raymond James.

Swamy, can you provide an update in terms of how your customers are viewing the cross-border supply chains in North America right now? Is the approach to auto parts moving to the U.S. to become more U.S.-centric, something you're hearing more about and how Magna is positioned in the U.S. right now from a capacity perspective?

Michael, I think the customers are, I would say, taking a very calm approach of figuring out, as you know, our industry is a long cycle. What we are producing today has been decided 3 or 4 years ago. I think the big topic has been how to mitigate what we have in our control, like increasing the USMCA content, looking at the supply base, looking at vertical integration and so on and so forth. That's where the focus is. I haven't seen any substantive changes that will impact right away. But are they looking at scenarios 2 or 3 years down the road as they contemplate new models and new vehicles? Yes.

The good thing is, as Magna, we have a footprint in U.S. and we'll look at how we can optimize working with the customers. So -- but this is a long-term thinking process rather than a reaction to what's happening now and today.

Okay. And just a follow-up on that. Are you able to give some thoughts into the pluses and minus to Magna redomiciling into the U.S.

That's not on the table and we have not considered it. Magna is a Canadian company, has been headquartered there. We are a global company. We have a great footprint and a great employee base. Like I said, our focus is right now on grinding through and being as flexible as possible.

So thanks, everyone, for listening in today. We continue to execute, and we remain focused on the initiatives that are driving value for our customers and shareholders, including operational excellence is a big focus, new launches, capital discipline and free cash flow generation. We plan to both get back within our target leverage ratio and are committed to our capital allocation strategy, including share buybacks. And we remain highly confident in Magna's future. Thank you for listening, and have a great day.

Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect.