Greetings and welcome to the Third Quarter 2021 results. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, November 5th, 2021. Now, I would like to turn the call over to Louis Tonelli, VP of Investor Relations. Please go right ahead.

Hello, everyone, and welcome to our third quarter of '21 results conference call. Joining me today are Swamy Kotagiri and Vince Galifi. Yesterday, our board of directors met and approved our results for the third quarter. 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. As we review financial information today, please note that all figures discussed are in U.S. dollars. We've included in the appendix a reconciliation of certain key financial statement lines for Q3 '21 and Q3 2020 between reported results and results excluding unusual items. The quarterly earnings discussion today excludes the impact of the unusual items. Please note that when we used the term organic in the context of sales movements, we mean excluding the impact of foreign exchange, acquisitions, and divestitures. With that, I'll pass it over to Swamy.

Thanks Louis, and good morning, everyone. We are happy to be here to provide you with a general update on Magna, and also our Q3 results. The industry pressures we have been experiencing through 2021 intensified in Q3, leaving to a very volatile operating environment. All things considered, we had a solid operating performance in the quarter. Production for the quarter was much lower than we had anticipated back in August, particularly in Europe. As a result, our sales came in well below our expectations, and this together with a number of additional factors, negatively impacted our Q3 earnings. The industry challenges are expected to continue this quarter, although to a lesser degree. We remain focused on managing our costs through this volatile production period. This includes ongoing activities to enhance operational excellence as well as well as fully realizing savings from restructuring initiatives announced last year. We're also not losing sight of investing for our future. Longer-term, our portfolio positions us to continue driving sales growth over market, as well as strong free cash flow generation. I will highlight a few awards in key technologies that will contribute to future growth and we remain excited at what Magna's future, particularly given our systems and complete vehicle know-how and approach. The key market dynamics that are affecting our industry currently are relatively well-known. The ongoing global semiconductor chip shortage remains the most significant headwind to global industry production. There have been some signs of improvement recently. However it remains to be seen when the industry will return to a more stable rate of production. As a result of the chip shortages, our customer's production schedules are unpredictable, causing labor and other operational inefficiencies at our facilities. On top of these factors, we have experienced inflationary cost increases in production inputs,…

Thank you, Swamy, and good morning, everyone. I'll start with a detailed review of the quarter. As Swamy indicated earlier, the third quarter was a very challenging one for Magna's operations. However, I would echo Swami's sentiment that we are proud of, how our business managed in the face of such adversity in the quarter. Global light vehicle production declined 12% in the third quarter, driven by year-over-year reductions of 19%, 20% and 12% in North America, Europe and China, respectively. On a Magna weighted basis, production declined 18% in the third quarter of 2021. Our consolidated sales were $7.9 billion compared to $9.1 billion in the third quarter of 2020. Organic sales slightly outperformed weighted production in the quarter. As a result of the lower year-over-year sales, adjusted EBIT and EPS each declined from the third quarter of 2020. As of last quarter, a more informative comparison is reviewing sequential results. Comparing Q3 '21 to the 2nd quarter of this year, global light vehicle production was down 6% driven principally by Europe, and substantially due to the semiconductor shortage. This, together with negative program mix in North America and Europe, foreign currency translation, and the disposition of three loss-making exteriors facilities led to our sales being down 12% sequentially. Each of our segments experienced sequential declines in sales, with some segments impacted more than others Our adjusted EBIT declined from $557 million in the second quarter of 2021 to $229 million in Q3, and EBIT margin fell from 6.2% in Q2 to 2.9% in Q3 of 2021, reflecting a higher than typical decremental margin. The adjusted EBIT decline reflected a number of factors. Reduced earnings on the $1.1 billion in lower sales production inefficiencies driven by the unpredictable production schedules of our customers, increased inflationary costs for production inputs,…

Thank you very much. [Operator Instructions] One moment, please, for our first question. We'll proceed with our first question on the line of John Murphy of Bank of America Securities. Go right ahead.

First off guys, congratulations Vince, Pat, and Anton on the promotions. We're looking forward to continuing to work with you guys. congrats on that. First question here Vince. As we think about 2022, I know it's very early days to gauge what's going on. But you made one interesting comment about the sequential deterioration in mix for you from second quarter to third quarter. There's positives and negatives to thinking about mix going forward, but as you think forward to the next 12 months as production ramps up, maybe a little bit next year, how do you think about the major factors outside of volume, including mix, raws and other input costs that hopefully become more normal?

John, thanks for your comments. As we think about what's happening in Q2 and Q3 and even in Q4, it has been challenging. We expect it to continue to be a little bit rough in Q4. My own deal is that I think we're kind of at the bottom in Q3 and things should start to stabilize and get a little better as we move into '22, and as we get to the mid to end of '22, I think we should get back to kind of a normal type production environment. So as I look at our overall cost structure, I think some of the inefficiencies that we've been having with the start-stop of production, some of the inventory buildup, that should all normalize, so that should all go away. In terms of some of the inflationary impact on some of our production costs, you look at materials or you look at labor in particular energy. I got to believe that labors is going to be there. We'll deal with that going forward. I don't see that being a significant issue for us, and commodity cost have bounce around, and with some of our resale programs, we should be able to manage through that, and energy are just being an additional cost, which we will have to again, deal with through some of our productivity improvements. But I'm confident that as we're moving forward, we should continue on the track of expanding margins. On the mix side, John, it's hard to tell, we had some positive mixes earlier in the year. It's a little bit negative this year. We have experienced some growth over market. We did expect going into '21, that growth over market, there was going to be some, but it wasn't going to be a significant. But as we move on into '22 and '23, we expect to accelerate their growth over market. Mix will have positive or negative impact. It's too early to tell, John, right now, given our previous expectations, we haven't actually talked about '22 in the past. But then, whether we're plus or minus that certainly I think things are going to get better than compared to where they were in Q3 of this year.

Yeah. Just looking at mix in sequentially GM had a tough quarter compared to when we were in Q2, and the Germans in Europe, which make up a good chunk of our business, underperformed the overall change. So that's kind of what we're talking about when we talk about mix stuff.

Got it. Okay. That's very helpful. But just a second question around acquisitions, divestitures, and the portfolio rebalance. I mean, Veoneer is gone, but yet you stepped up on the LG, JV and took them out. I'm just curious, you know Vince as you look at the opportunity set and this is for Swamy too as well. You're going to have some room to make acquisitions over time, whether it'd be small or larger. What is the continued focus there? What should we think about it as targets, as far as size, region, customer or product sets?

John, I can turn it over to Swamy after. I just wanted to kind of point out that our overall strategy on capital allocation has been consistent and it continues to be intact, and that is, obviously, we want to generate good profits and the most amount of cash that we can from our operations, and what we want to do with that is the number one priority invest in the business organically and inorganically. Pay dividend that grows over time, and to the extent that we are in our target leverage range is, and we have excess capital return that to shareholders. That's completely intact, and from an investment standpoint, inorganically, we've always talked about transactions that add or complement to our technology base, whether that's in one region of the world or another region of the world. One test for another customer. I think we're not really worried about where it is, as long as it advances our overall positioning. Swamy, if you wanted to add something to that?

No, I think you covered it well, Vince. I think we're not focused on the size. We are just strategically looking at augmenting either our footprint, or supporting our customer base, or augmenting our product portfolio. That has always been the rationale for looking at investments, either internal or external, John, and I think that will continue as a normal process of business for us.

Okay, and then just lastly, real quick on Fisker and the contract manufacturing. Just curious from your side, how is that progressing? How much more since becoming more of a Magna car over time as you get closer to SLP, and at the end of next year, are you winning content there? And what does that program mean? You maybe financially or also from a banner you can actually do this and help other startups, are you getting other interest coming in from start-ups or even developed or existing customers?

So John, I think their program is progressing well as we see from our side, obviously the details have to be left out for fiscal to comment on just like any other customer. I would say definitely it would be an example to show both from a component and a system perspective, as well as full weekly engineering and manufacturing. But just like we've said in the past is continuing discussion with various customers, whether it'd be [Indiscernible] or new models and so on, based on Magna's portfolio and capability, and we continue to have that conversations as we had in the past. I think from our perspective, it's progressing pretty well.

Great. Thank you very much, guys.

Thank you. We'll get to our next question on the line from the line of Peter Sklar with BMO Capital Markets. Go right ahead.

Good morning. First, I wanted to ask you about just to go back and review your comments about vehicle electrification and the anticipated revenue stream for Magna, I think you said $2 billion of revenues by 2023 and $4 billion by 2027. I just wanted to ask if you could review the major product areas that are going to comprise that revenue?

Good morning, Peter. I think as we have said in the past, when we talk about electrification, we're talking about the eDrive systems, obviously. But we also look at some of the products that are helping the transition. So our hybrid DCTs and products related to hybridization are a part of it, and I think you've got the numbers, right. We're looking towards the 2 billion mark by 2023, and getting to a 4 billion mark in 2027, and as you've heard today, the HDT portfolio continues to gain traction, and we have talked about eDrive systems going into production in the past. We continue to have traction and interesting discussions on eBeam, as well as more eDrive programs.

Peter, I would just add that's on a managed basis, so it's going to include items that we equity account for like LG for instance, and it will also include HASCO.

Okay, and I'm trying to recall how many eDrive awards have you announced so far? I think, is it 3 programs you've announced so far?

We've talked about the VW business that we have in a HASCO. We have another global, we end that launches in a couple of years, also in HASCO. We haven't disclosed additional business that we have. We do have additional program, primary and secondary, but we haven't named a customer on that yet.

Okay, and then just a couple of other detailed questions. On the $45 million reserve for Evergrande, does that mean the receivable is fully reserved or is it possible that there could be further reserves down the road?

Yeah, Peter. We fully provided for our exposure, so there shouldn't be anything down the road.

Okay, and then lastly, the $41 million of funding that you provide d to the purchaser of the exterior plants. Like is that a loan? Does Magna anticipate recovery of that $41 million?

Peter, the $41 million, as you look at the cash outflows in that business is part of the assets that we contributed into the three facilities before they were sold. So that money has been written off and forms part of the $75 million charge we took on disposal of these operations that we considered an unusual item.

Okay.

Just when you start, Peter, just one thing as you get through the MD&A, at some point you'll find out that there's another funding obligation of $6 million down the road, and we actually did provide for that already in the $75 million charge. But obviously we haven't funded that yet so it hasn't hit cash flow yet.

Okay, and if I may just ask one more question. You've highlighted on the seating, the FreeForm technology. I'm not quite familiar with that technology. I'm wondering if you could just elaborate a little bit what the technology is?

I think, Peter, FreeForm gives the selling flexibility, if you just look at the seat with the FreeForm that way you have it. It doesn't have what I would call the seams that you would normally see in a seat with the complexity. That just gives the OEM the ability to get the form and the design aspects we need in there, and it just helps from even the consumer maintenance perspective, how easily they can keep it clean and be able to work through it. That's fundamentally at a very base level. Obviously, there is a lot that goes from into the process of making it, and it seems to be lot of interest given the design flexibility it's providing.

Okay. Thank you.

Thanks very much. We go to our next question on the lines from Mark Neville with Scotia Capital. Go right ahead.

Great. Thanks. Good morning. First off, congratulations, Vince and Pat and Anton [Indiscernible] congrats as well. Maybe just first on inflationary pressures. Is my thinking correct that you're covered on your materials, maybe ex resins, maybe just curious on freight?

Hey, Mark, it's Vince. Can you just repeat that? I didn't hear all that.

Sure. Just on the inflationary pressures, is my thinking correct? You're largely covered on your materials, ex resin, and then I'm just curious with freight costs, if you need to absorb that if there's recourse.

Just in terms of input cost. As you look at steel, were on customer resell programs that covers probably the 75% of our overall buy. So that's essentially a flow-through. But we do have some commodity exposure on the balance. On the resin side, which probably our second largest commodity that we purchased, we're probably a bit 25% to 30% on resale and we're seeing more resin going on resale. With some of the other [Indiscernible] like aluminum, for example, just pricing mechanism in there where we have periodic adjustments to price. But remember, as we're looking at some of these inflationary pressures, and we have discussions with the customers on price reductions each and every year, some of that's taking into account. So you might not see a kind of a direct offset, but indirectly it does impact. Indirectly, it's weighted, negates some of the commodity cost pressure we're feeling. The other area that we are seeing some increases in Q3 is on the semiconductor side. The shortages there and we're doing everything we can to make sure that we keep our customers up and running. But we're looking at ways to recover some or all of that through our customers, and with the supply disruptions is generally across the industry. We're seeing some temporary surcharges in some of the components were buying expect that's going. Go away as things start to normalize. But that's certainly is impacting us in Q3 and expect to be some impact as well in Q4.

Okay. Just in terms of labor, just curious how you're managing it now? I presume there's not a lot of flex you can do, with that in terms of these inefficiency costs caused by changes in production schedules, is there any recourse there that you could take to your customer?

Hi, Mark. Obviously, like you said, the inefficiencies and the unpredictable changes are causing us to not be able to flex or in a planned way, that is the reason for it. We will continue to have discussions with the customers and we are having those conversations on some of the materials, costs, and the inefficiencies cost because of the stocks drop. But it's part of the normal commercial discussions that we would have.

Great, maybe just one last question, just on the NCIB to see if you renewed it. Presume in the near term, don't play to be to active, but maybe I'm wrong, but just thoughts on NCIB in this environment?

Yeah, Mark, I guess our old NCIB is expiring November the 14th. We are generating cash, we expect to continue to generate cash and to the extent that in our view, we have excess liquidity, within our leverage ratios. We'll be active in the market, when and how and how much. We'll move on and you will see our actions. Don't want to commit to something, but certainly you've seen our strategy over the last 10 years, and it's pretty consistent what we want to do in '22.

Thanks a lot for the time, guys. Appreciate it.

Thank you very much. We'll get to our next question on the line from Dan Levy with Credit Suisse. Go right ahead.

Hi. Good morning, team, and congratulations there, Vince and Pat and Anton on the new responsibility. Wanted to start just on incremental margins, and I know there's some moving pieces on cost and mix, but maybe you can just remind us more simply just on a volume piece alone, what type of contribution margin or incremental margin should we expect on higher sales next year? Because I think we're really wondering how does sense a tie your earnings if we get any form of production recovery next year?

Good morning, Dan. Thanks for your comments. Let me just start with kind of where we were this year, and maybe I'll reference some of the comments that we made during COVID, where we just talk about what we would typically expect during that period. Decrementals, you could back us some unusual items that are impacting us. We're high in Q3, higher than Q2, and we expect some improvement as we move into Q4. But certainly, when we look at the start and stops, that's been the biggest impact to larger decrementals than we are accustomed to. What we talked about last year in Q2 during the COVID shutdown and probably a good sort of benchmark thinking about our organization. What we said was with our BES segment, that you should be thinking about decrementals. We talked about decrementals at that time of above or greater than 20% for our BES group, as well as our Power & Vision group, Seating around 20% and contract vehicle manufacturing less than 10%, and when you kind of combined it back in Q2, that was about 22% for Magna. There's just a lot of moving things in Q2 and lot of moving things in Q3. As I mentioned earlier in our comments, and Swamy's comments as well, Q4 should get better, but it's not going to be where we want it to be. I think you got to move into '22 when you start to see normal decrementals and incremental margins in our business.

Just to be clear, those figures, that's an all-in number or that's just purely on volume and price?

It's all, it's just is volume and price that deals with back then in Q2. Would've the dealt with whatever there would have been somebody inflationary standpoint, and it would have excluded if we would've had a one-time warranty charge or recovery, or a value-added tax recovery. That would've been excluded. This is operational decrementals that I'm referring to, backing off some of the noise.

Got it. Thank you. My second question is on what was your bid for being here. So first, I think we know some of the nominal live hardware components are going to be put up for sale. Can those pass that 's be of any use to you, and then maybe we could just revisit the initial Veoneer rationale. What exactly was it that you are seeking? Was it just the core radar or was it really the software capability? And I guess what I'm getting at is, what are the things that you still try to seek now to make the business better? Would you say that the current Active Safety business is subscale or was this acquisition really something that was meant to enhance it, but without it, it's still a fine business?

Good morning, Dan. Maybe I'll start off by saying the ADAS business that we have is really a good business and we continue to win business, like I talked about today in one of the programs, and we see a good pipeline and traction with various customers and other programs. Now, getting to the first part of your question, I think the rationale when we looked at it was a couple of things. One, from augmenting some capability, we have a digital Radar in place. We have at program that would have reset, like, how do we get scale. Just generally across different areas. When you look at the talent, as you know, not just in our industry but across augmenting talent along with experience always is a plus. That we continue to do that on an everyday basis and we will continue doing, going forward. We have, as I said, all the building blocks that are necessary, in a sensor suite, whether it's front camera, rear camera, surround view, the digital radar that I just talked about. We launched the LiDAR with a partner. We have the ability to do the fusion in the features. So this was really an augmenting what we had even further, and like I said, we will continue to invest and we are starting to see the results of our investment in core platform technologies as we win programs, and we continue to do that both internally as well as anything that we believe will add the right value to what we have. But again, to reassert that we have really good business and we'll continue progressing.

Do you think you have ample software capabilities?

That a really good question, Dan. It's the software is such a important asset going forward. When we look at software, it is not only restricted to ADAS, we're looking at it from Powertrain, from Mechatronics, and various other aspects that have software implications. So we have about 3,000 software engineers, roughly, and that kind of flexes back and forth, and we continue to add in different areas of Magna.

Great. Thank you very much. Appreciate the color.

Thank you. We'll get to our next question on the line, from the line of Mark Delaney with Goldman Sachs. Go right ahead.

Good morning and thanks very much for taking the questions, and also let me add my congratulations for everyone on their new responsibilities. I was hoping to start on the JV with LG. Can you talk a bit more now that that has been completed around the improved capabilities it's going to give Magna and what kind of feedback you're hearing from your customers?

Good morning. I think the feedback from the customers has been very positive. Like you said, the important rationale was to do what's the integration and have the manufacturing capabilities for the eMotors and the inverters, in addition to what we had. We have the system knowledge and the integration of the feature software capabilities. Adding this will further augment at a system level what we needed to have in this business. But not only that, as some of the OEMS consider manufacturing and doing systems on their own, there is the eMotors, inverters or subsets of various things that we can participate in. It might start that way today. As this market evolves and get to system outsourcing when it gets to a larger take rates, we would already be at the table, and we are seeing those discussions happening, so it's very positive and we are excited about it.

That's helpful, and my second question was on supply chain and you gave some comments already around your expectations there, and called out semiconductors. But we're hearing more on a aluminum, particularly in Europe, and it was mentioned in your press release as well. So maybe you could talk a bit more in detail around your expectations for supply chain going into next year. If you could touch specifically on aluminum in Europe and what you're seeing them with that material, it would be helpful? Thank you.

Yeah. I think on the semis, we talked about the flexibility of the supply chain, and we're seeing a little bit of improvement as we believe by the mid next year. I think the grind of managing and going through, will continue through the next year. But I would see a sense of normalcy towards the mid next year, but again, reaffirming that we have to continue to monitor and manage this. Now on the aluminum, it's really driven by the magnesium discussion that is happening around the industry, which becomes an important variable for aluminum supply. We're aware of it. Clearly monitoring it. But at this point of time, we really don't see a short-term impact creating any stoppages or so on, but definitely it's on our radar to monitor and manage.

Thank you very much. We'll proceed then to our next question on the line, from the line of Kevin Chiang with CIBC World Markets. Go right ahead.

Thanks for taking my question, and good morning, everybody. I know there's been a lot of questions on the decremental margins, Vince, you've provided good color there. But I can maybe ask it a different way. If you look at the high level of decrementals you saw, is there a way to kind of bucket it between the production inefficiencies you saw versus just a broad based inflation, in terms of the contribution to the excess decrementals you printed in the third quarter?

Good morning, Kevin. I guess if I maybe start by looking at decrementals sequentially probably. Or do you want to sequentially? You want to year-over-year because they are a little bit different. Maybe from a sequential standpoint. When I look through kind of the decrementals, I would look at just a role on EBIT and margin percent. There's some items that are impacting as we've talked about them, there was the Evergrande provision that we took for $45 million. There was in Q2 of this year, value-added tax settlement. We called it out last quarter is about $20 million. So that's quarter-over-quarter, that's going to have a negative impact on our margins, and then there's kind of launch costs and profit sharing, and incentive comp, there's commercial settlements. Just higher commodity costs. But that all kind of really from my perspective, is a wash when you exclude those provision and that value-added tax settlement, and the rest is just what we're seeing operationally from the decremental standpoint. So we backed up commodity costs when I look at decrementals and I'm looking at some of our groups like BES for example, at decrementals, once you back out some of the noise, 45% sequentially, Power & Vision, about 40% of [Indiscernible] about 17% again significantly higher, and I attribute that really to start and stop inefficiencies, even just moving inventory around once or twice and three times that all adds to the costs. On a year-over-year basis, there's just a couple of things I would point out. We did have the benefit last year in Q3 of some COVID 19 employees support programs. We called that out last year. We said that that was a positive to margin of about 70 basis points. I guess, again, from last year, the back of the year-over-year the Evergrande provision, you back out this employee support programs. Again, there's a lot of pluses and minuses, launch costs, new facility costs. They are all kind of net to zero, but decrementals again are 40-ish percent for BES and Power & Vision, about 18% for Seating. Again, I subscribe to the start and stops that's impacting our operations.

That's helpful color. On the second question here. I appreciate the unpredictability of the current environment and I guess you mentioned, Vince in I think in your prepared remarks, maybe a line-of-sight to some normalization in the back-half of next year. I did notice you have your 2023 financial outlook in your appendix, I guess just at a high level, is that's still an achievable target for you? I guess just maybe based on some of your macro assumptions around normalization of production, is that still in your line of sight or maybe not.

Kevin, I think if you look at when we started the year and gave our outlook for 2023 was based on a certain set of volume assumptions, and I think when you look at the more recent IHS volume, essentially things are down from there. So that's going to that on its own is going to have an impact on revenue subject to new business coming on in mix and so on and exchange rates, obviously that's going to have an impact. I wanted to look at that. We don't have a lot of control on volumes, unfortunately. We just got to go after the right programs where we think the programs are going to be successful. Where we have more control on directly is what we do from an operational standpoint. I look at some of the actions we took in 2020 to right-size the organizational cost structure, and we're still seeing the benefits of that in Q3 this year, even though we've got lower volumes, and again, I don't see any reason Swamy, why as we get out to '23. That even with lower volumes is that there's not a big uptick in operating margins as we talked about in '23. I mean, maybe a little different written onto our business plan yet. I don't see any reason why we can't continue to see improvements in margins.

That's great color, and again, congratulations to you, Vince, Patrick, and Anton, and I'll leave it there. Thank you.

Thank you, Kevin.

We get our next question on the line, from the line of Rod Lache from Wolfe Research. Go right ahead.

Hey, this Shreyas Patil on for Rod. Just a couple of questions. I recall last quarter focusing on the seating business. I think initially there was an expectation that outgrowth and then margins would improve with favorable mix. Obviously, the mix environment has not been as strong. But can you maybe talk a little bit about what are some what are going to be some of the puts and takes to supporting more meaningful margin improvement and even outgrowth in that business? Is that business even into Q3 and Q4? Are there still some launch cost that are kind of weighing it down?

I would say really mix was continuing to be negative in seatings. We were expecting a little bit of improvement, and we haven't seen that and we don't expect to see it in Q4. I think the business is still performing well, it's really the programs that they are on currently, and how they're performing in the current environment. We're not going to get into next year, how that might look. But it's just certainly been a tough year for the top platforms, both in North America and in Europe for the Seating group.

Also just keep in mind, I made some comments about Magna consolidated in this Brazilian value-added tax settlement that we had in Q2 last year, sort of last quarter, receiving good benefits from part of that last quarter. Again, when you look at the numbers sequentially, I'd say that Q2 was higher than normal as a result of that settlement.

Yeah. Seating historically has been a good performer in terms of outgrowth. It's just right now, it's just a function of just the negative mix, that sort of thing.

Okay, and then I imagine most folks were not aware that you had arrangement with ever ground and I just think at a high level, I mean, there are a number of startup EV manufacturers in markets like China. How do you guys go about assessing who to work with and who to allocate resources towards as that HASCO business expands?

Good morning. I think as we look at any of the programs to bunch of variables, obviously, when we make a decisions, our presence, our asset base, the product line that we're going to look at and to supply to, obviously, there is no perfect answer to everything, but we have gone through that and we continue to do that, and depending upon the profile of the program, of the customer, of the region, we look at the risk associated with it along with all the other variables. I think it's a very exhaustive process, but you can never guarantee up to a 100% all the time. One of the miss here is there were grand, but that current have been predicted the time we started. A very elaborate process to sum it up in terms of everything we look from a market, from customer, from their product roadmap and so on, and we continue to do that on every program as a normal course of business.

Swamy, I just wanted to also add. When you look at the risks with some of the new entrants compared to our traditional customers, when we look at contractual arrangements in payment terms, they are different to take into account risk profile. We do get paid earlier, we do get paid in advance. In the case of Evergrande, we've done actually quite a lot of work for them and we have received quite a bit of money for it. This is what we believe at this point in time needs to be reserved from an accounting perspective. Obviously, we're hopeful that we'll work through all this, and at some point, we'll be happy to report that we can reverse ideally all of this back into income. But at this point in time, the assessment is we should be providing for it from a financial standpoint.

Okay, and that approach, Vince, around different payment terms and asking for payment advance, that's something that you do with startups, not just in China, but in other, if you were to expand this as you expand this into other markets, that philosophy would still be in place?

Yeah, I hope Pat carries on with my disciplined way of looking at things. I'm sure he will, I've taught him well, I hope.

Okay.

It's hard to expand to a region, right? I mean, that applies to every program, every region. So it's not only to a particular region.

Okay. Alright, thank you.

Thank you very much. We do have another question on the line, from the line of Brian Johnson from Barclays. Go right ahead.

This is Jason Stuhldreher on for Brian. I suppose I'll try to come back to the cost question, even though I know it's been sort of attacked in many different ways. But kind of I guess more simply, Vince, I understand your comments about sort of higher decrementals in the third quarter sequentially. But then, and if my math is right, as I look at the fourth quarter implied guide, the step-up, you're playing for a step-up in revenue, but then the step-up in margin sort of only implies like a low double-digits margin, like a 10% or 12% incremental margin. I mean, not a lot changes sequentially and as we see, like this pretty high decrementals from 2Q to 3Q, why shouldn't they be equally as high as we move, before assuming your revenue step-up, in 4Q?

So I guess when I look at Q3 and Q4 imply or Q3 actual decrementals and Q4 implied decrementals. Overall, Magna I'm backing out, when I look at decrementals I'm backing out for Q3 COVID, business combinations and acquisitions, Evergrande, obviously, and other warranty, for example, where the pluses or minuses and my calculation which showed Magna overall decrementals about 35%, 36%. If you look at our implied guidance at midpoint, we're at about 30%-32%, and I would attribute the improvement continued benefits of some of the initiatives we took in 2020, to take our costs down, and some, I think, better visibility to an improved sales situation in Q4. That should help reduce the decrementals that we're recording Q4. Again, we're not happy with the decrementals in Q4, that's not what we should be doing. We need to get to a more normal level type of production environment with our customers, some of these supply disruptions need to go away, and as I talked about in my comments, I think we should be able to get there by the second half of 2022. But I'd expect to see some improvements as we move past Q4 into Q1 and Q2 next year. But again, that's going to be subject to what happens on the chip slide in particular.

Okay. Understood. Just to confirm, Vince, that your comments there were around the year-over-year decrementals in 4Q? I was thinking the sequential from 3Q to 4Q.

No, I think I was looking at my Q3 was sequential and my Q4 was sequential.

Okay, Sorry.

Actually, year-over-year.

Year-over-year.

You're right. Sorry. I stand corrected, year-over-year.

Just from a high level like as we look Q3 to Q4, you're expecting a step up in revenue, but it doesn't seem like there's a need, the incremental margin on that step-up is meaningful and I would assume it'd be similar to what we saw in terms of decrementals in Q3, and I don't want to take up too much, so I apologize or we can follow-up offline, but just something I notice.

Yeah, I guess even when you look at year-over-year, I do expect some improvement, but it's never enough, I did refer to some improvement. It's modest improvement, but I think a bigger step-up in decrementals or incrementals is going to be in the second half of '22.

Okay. Thank you.

Thank you very much, and Mr. Kotagiri, we have no further questions on the line. I'll turn it back to you for any closing remarks.

Swamy, we can't hear you.

Thanks, Tommy, and thanks everyone for listening in. Tough quarter from a financial results point of view. I will re-continue to manage through diversity, focus on execution, and class containment, continue to build a new business, prepare for the industry production recovery once the supply disruption subside, and plan the right strategy to position Magna for the future. Thanks everyone. Enjoy the rest of the day.

Thank you very much, and thank you everyone. That has conclude the conference call for today. We thank you for your participation as we disconnect your lines. Have a good day everyone.