Prepared remarks
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. The operator provided instructions for participants. 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 the 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 expect 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 G700. This recent award further strengthens Magna's market position in high-voltage eDrives. 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 won some initial projects 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 these 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 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 walk, 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 in Graz, 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. Three of our four 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, sales 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 in Graz. Turning to EBIT, our Vision, Seating 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 a 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.
Questions and answers
Operator provided instructions for the Q&A session. 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 one-time items — 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 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. As we look at the tariffs and the commercial recoveries, Phil can add a little bit, but I think net-net, compared to last year, this was actually negative. And those are the key things. As we sit here this year, I think we are further along than last year in getting recoveries. So that helped us de-risk the second half of the year. So those are the real key drivers for the performance. I don't think there is any one-time performance other than the tax issue that, Phil, you can elaborate a bit.
Sure, James. Great questions. 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. 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 70 basis points year-over-year margin improvement. So it was really operational excellence, as Swamy mentioned. 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-up 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, regionally 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?
At a high level, 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. It was helped by higher equity income and lower net tariffs as Phil mentioned. But overall, it still had some mix and commercial items and commodity costs. Despite that, the Power & Vision segment continued to perform. I see the same dynamics for the full year and expect a continued good trajectory in this segment.
Yes. And on the divestitures, James, we are closing on those sooner than we anticipated. That would be another $50 million of sales coming out because of the sooner-than-expected closing. So about just over $400 million of revenue coming out of Power & Vision in the second half year-over-year because of the divestitures. In May, we were talking more about $350 million. So it's about $50 million higher than we previously thought.
And launches — there's a whole bunch, obviously, in those programs. German-based OEM launches are helping us, some business with Subaru, and some Chinese OEM launches 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 does Magna's portfolio imply for growth over market next year?
It's a little early to talk about next year, Jack, but for the full year we are expecting solid growth over market for 2026 as we discussed. Global light vehicle production will be down for the full year even with the revised estimates. On a Magna-weighted basis for the full year, we think global light vehicle production will be down about 2%, about 3% in total. Yet for the full year, our sales are 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 less than 1% organically. So growth over market is our 0% to 2% positive growth over market for the full year. If you exclude Complete Vehicles, it will be in that 1% to 3% positive growth over market. We did a little better than that in the first half, so it will be a little bit less in the second half, but it will be positive in both halves. Regionally, we did increase our estimates for North America and Europe, where we're well exposed, and we reduced China by 800,000 units. China is more sensitive to mix for us. Overall, we are comfortable with the second half sales guide and the projection for growth over market for both the second half and the full year.
I'd point out that some of the volume change in our outlook is already behind us. 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 steeper seasonal step down in 3Q and a 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 step-up in the fourth-quarter margin? I just want to clarify that, and I have a quick follow-up.
Yes, Rajat. You're right, we are expecting lower revenue in the third quarter. As we think about third and fourth quarter cadence, we expect a little more pressure in the third quarter, driven mainly by foreign currency being a little negative and divestitures, although the divestitures will impact the fourth quarter a bit more. Organically, for the second half at the midpoint, we'd be down a little over 1% organic, and most of that is in the third quarter driven by model changeovers, normal seasonality, launch cadence and end of production — programs like Ford Escape, Toyota Supra, BMW Z4. The fourth quarter should be flatter organically with a step-up from the third, and overall it nets to positive growth over market for the second half. The midpoint implies second half adjusted EPS of $3.76, and we expect a roughly 40-60 split between Q3 and Q4 as the fourth quarter benefits from higher sales and margins. We do expect margins to be up year-over-year in both quarters and the year-over-year improvement should be fairly similar across both periods.
Phil, it might be worth mentioning the slope of the curve is actually flatter this year compared to last year when we looked at the back half versus the first half.
Good point. When you think about tariffs and recoveries, it's typical to be back-half weighted, but we've been doing a better job getting recoveries earlier. For example, tariffs tend to be a little more skewed to the fourth quarter, which would explain part of the EPS split and margin emergence. But overall, we expect margins to be up year-over-year in both quarters.
Understood. And just a question on the latest situation around memory and DRAM. How do you feel about your position in terms of locking in supply, obviously for the second half but more for '27? How are the discussions going on pricing and recoveries?
We are monitoring DRAM closely. The business group most impacted for us is electronics. We've been in discussions with customers and suppliers, and we have had no issues with disruption so far. We worked with OEMs and suppliers this quarter and feel our first priority is to mitigate any disruption, and we feel pretty good about that. If there is a modest unrecovered cost headwind in the second half, we have included that in our outlook. It's a continuing playbook that we have to go through, but nothing we see today that would be disruptive.
Your next question comes from the line of Dan Levy with Barclays.
I wanted to go to the first-half to second-half margin bridge because when we look at Power & Vision and Body Exteriors & Structures, there's a significant margin step-up even though revenue is declining and we know revenue is going to be declining on some of the key programs. Maybe you can talk through that first-half to second-half step-up in margin? And then a short point on tariff — you mentioned tariffs are neutral or slight positive, what's the assumption within tariffs on IEEPA refunds?
Sure, Dan. The first-half to second-half improvement is driven primarily by continued operational excellence initiatives which accelerate and were a big driver in the quarter. Recoveries are also more second-half weighted. Power & Vision gets a little more tariff recovery with customers, and some of that is back-half weighted. In P&V we had a big equity income item in Q1 which influences the bridge. Overall, operational excellence, recoveries and good mix performance more than outweigh the negatives. Regarding IEEPA, last year we paid just over $100 million in IEEPA tariffs and we've received about half of that back, with most refunds coming in Q2. As we get refunds back, we're accruing pass-backs to customers and expect customers to receive 80% to 90% of what they funded. So it's a pretty small net impact to the company overall. For '25 to '26, tariffs are roughly neutral in dollars and margins, maybe slightly positive, but not expected to be a negative year-over-year.
Great. As a follow-up, Swamy, I appreciated your commentary that you're looking at other end markets outside of automotive. Given Magna's large revenue base, is there confidence these efforts can add up to material growth, or will they remain smaller on the margin?
Great question. We have proof points where our capabilities translate beyond traditional light vehicles — examples include Steyr's long-running non-civil G-Wagen production and engineering work that touches aerospace and other areas. Cosma has done cabin products for heavy trucks. The strategy is selective: we look only at areas where we have a credible right to win, meet returns criteria, fit capabilities and don't distract from the core business. This may include recreational vehicles and other industrial applications. We've already been awarded some projects. We'll provide the roadmap and sizing at Investor Day in November, but done well, adjacent markets can add incremental growth and modest diversification without changing Magna's identity or operating model.
Your next question comes from the line of Joe Spak with UBS.
Phil, maybe just a clarification point on your last comments. 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 realize this if you're still going to pass it on to your customers? Could you clarify?
Yes, Joe. We had a 25 basis point benefit from tariffs in the quarter, roughly $25 million, which is included in that figure. As we recover the $50 million, we're accruing a give-back to the customer of roughly 80% to 90% of what they funded on tariffs. So there is a slight net benefit to us. Another piece is that we're getting recoveries sooner than last year. Last year, we had costs with virtually no recoveries in Q2. This year we have costs with some recoveries because we are inking deals more in real time. A portion of the IEEPA is also kept because some tariffs were not ultimately funded by customers. In the first half, we had about a 15 basis point headwind in Q1 related to tariffs and a 25 basis point tailwind in Q2, so roughly a 10 basis point tailwind in the first half. For the rest of the year, timing differences mean it could flip a little negative, but net-net on margin we'd expect neutral for the full year or perhaps a little better.
Got it. Okay. Maybe just a clarification on the outlook. The lighting sale is closing earlier. Was there any change in what you're assuming in guidance for the revenue line because it is closing earlier? And can you remind us how much of this year's free cash flow is related to OEM recoveries or IEEPA cash that you're receiving?
On lighting, it's just over $400 million, and at the midpoint of the sales guide we took it down about $400 million — that change is mainly FX and about $50 million related to earlier divestiture timing. We closed European lighting at the very end of Q2, and the rest are closing a bit earlier than we expected. On free cash flow, we raised the full year midpoint by around $100 million reflecting increases in underlying earnings and better working capital performance in Q2 that we believe is sustainable. CapEx is relatively unchanged. In Q1 we had a larger balance sheet recovery — around $475 million — that helped. We expect some additional recoveries in the second half but nowhere near that Q1 amount. On IEEPA, we do expect to get the repayments, but most of that gets passed back, so the net working capital contribution is smaller.
Your next question comes from the line of Ty Collin with CIBC.
Some of your larger European customers are struggling with competition from Chinese OEMs in China and Europe. Given Magna's broad customer reach, have those shifting market share dynamics been negative for Magna, or is it neutral based on your relationships with Chinese automakers?
If you look at China, over the last 10 to 15 years we've moved from predominantly supporting Western OEMs to a mix where today around 65% of our China revenue is with Chinese OEMs. As some Western OEMs lose share, there can be an impact on our China sales in the short term, but we've been diversifying and adding business with Chinese OEMs. A proof point is the Chery win. As we continue to increase presence with Chinese OEMs in China, that helps mitigate the effect of shifting market share.
Okay. And on the proposed 50% U.S. content rule that was recently put forward, do you expect that to materialize in one form or another, and how would it impact your business and the industry?
We monitor trade policy closely but avoid commenting on national policy specifics. Any such change would impact the automotive industry broadly. We are focused on being agile and adaptable. We have a footprint across North America, Europe and Asia and have experience managing tariff and trade changes over the last 1.5 years. We'll respond based on OEM strategies and their program footprints.
Your next question comes from the line of Tom Narayan with RBC.
On the slide about the 2028 backlog with over 90% already booked, can you comment on the margin profile of that backlog and what the Chinese OEM exposure looks like there?
We won't talk about margin profiles by customer or future specific numbers today. The point about having over 90% of 2028 booked is to show we continue to grow our business despite discussions on recoveries and tariffs. Two years out is normal cadence and gives us certainty in planning. We'll provide more color on long-term profiles at Investor Day when we walk through the business plan.
To add on '27, we have some new contracts and programs that should improve economics. We expect help in 2026 and 2027 from programs that improve pricing and set labor rates at start of production. For example, there's a German OEM program in North America that will help the seating business and new programs with one of the Detroit 3. We expect better economics from those programs.
We're excited about traction on our operational excellence initiatives, such as material flow optimization, advanced technologies and digital standard work. We've discussed 35 to 40 basis points of margin expansion; from 2023 to 2026 we added about 200 basis points and I believe we're in the early innings. We plan to scale these initiatives further into 2027, 2028 and beyond.
On Chinese OEMs producing in Europe, given the complexity and infrastructure needed for components like hinges and large structures, is your argument that Chinese OEMs would need to build extensive infrastructure in Europe and that your existing footprint gives you an advantage? Are some segments more protected than others?
Visiting plants shows the complexity. Our strategy in China has been platform-focused, deploying building blocks at scale and leveraging manufacturing DNA and integration expertise as a moat. Structural businesses with large castings, stampings and complex assemblies with various joining technologies are also moats. Our seating business has developed technology supporting automation and structure. These capabilities enabled us to supply in China for China, and we have similar capabilities in Europe to support OEMs manufacturing there. Our existing footprint and homologation expertise should help our competitiveness in Europe as Chinese OEMs localize.
Another point is speed. Magna's global capabilities give us the ability to meet customers' speed demands as they move around the world, which is another advantage.
The existing footprint and capabilities help returns and profitability as customers localize production.
Got it. Understood. Looking forward to the Investor Day.
Your next question comes from the line of Jonathan Goldman with Scotiabank.
Phil, a couple on margins. Is it possible to tease out the basis point impact of operational excellence and the higher commodity costs in the quarter?
If you look at the 75 basis points in the margin bridge, a majority — close to a majority — was operational excellence, and the rest was pull-through on sales. Commodity inflation in Q2 was relatively modest given the lags; we did anticipate a bit more but saw less in Q2. We did include modest incremental commodity headwinds in the guide for the back half. Operational excellence was the majority contributor, in line with Swamy's comments about sustained improvement.
Okay. And for the full year guide, you raised the margin guidance by 20 basis points at the midpoint. Could you bucket how much of that incremental upside is from operational excellence versus lower commodity inflation or other items?
In terms of guide-to-guide, the increase was primarily operational excellence with some adjustments for inflation. The sales revision was mainly FX and divestitures, with little bottom-line margin impact. We layered in continued operational improvements and a bit more for inflation into the updated guide.
Your next question comes from the line of Emmanuel Rosner with Wolfe Research.
You raised the free cash flow outlook to a strong number for this year. Phil, you mentioned confidence that even though this year's free cash flow includes material OEM recoveries that are more one-time in nature, the overall ballpark of free cash flow is sustainable. Is that the right way to think about it? If so, what are some of the puts and takes that would enable free cash flow to stay at these levels even without a $0.5 billion-plus recovery?
Yes, Emmanuel. The current midpoint of $1.8 billion includes some recoveries but also strong underlying free cash flow. Looking ahead, we expect to convert a similar proportion of earnings to free cash flow through disciplined working capital management, inventory turns, and controlled CapEx within historical ranges. Operational excellence initiatives that hit earnings also improve working capital performance. The combination of earnings growth, good working capital management and prudent CapEx should generate strong free cash flow into the future, enabling investment and significant capital returns. This year, $1.8 billion allows us to raise the dividend and continue buybacks while maintaining balance sheet strength.
Your next question comes from the line of Colin Langan with Wells Fargo.
Over the last couple of years, we've seen a big jump in margins from first half to second half. Is that due to inflation and recoveries, or is that going to be the new cadence going forward? How should we think about this on a go-forward basis?
Last year, we were developing the framework for tariff recoveries and some EV-related commercial recoveries were second-half weighted, so the cadence was heavier in H2. Coming into this year we expected similar back-half weighting, but we've been able to accelerate some recoveries into Q2 which softened the slope. Going forward, with commercial recoveries and inflation dynamics, some back-half skew may remain, but we're seeing moderation. We'll give more color next year.
We thought coming into the year we'd be even more back-half weighted, so accelerating some items into Q2 was positive. Ultimately, we'd like a more even cadence, but commercial recoveries and inflation tend to create back-half weighting. We're seeing that moderate versus prior years.
The guide midpoint implies about 85 basis points of margin expansion. You called out roughly $50 million in JV income that was recovery driven. How should we think about what in that increase might not be repeatable next year? Could recoveries be a drag into next year?
We did have a recovery at one of our JVs in Q1. Across Magna consolidated, recoveries are expected to be roughly neutral year-over-year for the full year, so I wouldn't call it a major repeatability issue for margin expansion. Recoveries can bounce around, but with operational excellence momentum and the other initiatives we're executing, we don't see recoveries as a margin drag heading into next year.
We do see recoveries in equity income this year because of the win in the first quarter, but the consolidated business is relatively neutral on recoveries.
As we continue our initiatives and new programs with improved economics, those factors should continue to help the margin momentum we are discussing.
Your next question comes from the line of Mark Delaney with Goldman Sachs.
First, on revenue: recognizing the change to the full year guide was driven by FX and divestitures, I'd like to understand the 1H to 2H trajectory in terms of growth over market. You had strong starts in both Q1 and Q2, but the full year guide implies slower growth over market in 2H. Can you help with the mechanics behind that?
Yes. It is higher in the first half than the second half but positive in both. In the second half, a few significant programs drive lower volumes year-over-year for Magna which mutes growth over market — these include full-size trucks at a large North American customer and a German OEM program in North America, along with end-of-life models like Toyota Supra and Ford Escape. These discrete items mute second-half growth but set us up for reacceleration into 2027.
To clarify on the year-to-date growth over market, when you look at the quarterly restatements and the Q2 results, the year-to-date growth over market is more like 1.5% to 2%, not the full 3% you might extrapolate from Q2 alone.
Understood. On non-automotive opportunities, you mentioned winning some work already. Can you give more detail on the degree of bookings you've achieved so far?
I'd rather not talk about small programs piecemeal. We prefer to present the overall strategy and roadmap at Investor Day. The wins are meaningful, and we will discuss scale and how we intend to pursue adjacent markets there.
Okay. Understood. Look forward to hearing more in November.
Your next question comes from the line of Michael Glen with Raymond James.
On capacity utilization in North America and the U.S., can you give an indication where capacity utilization is right now and where you might have some excess capacity?
We manage capacity closely and flex by bringing in work we might otherwise outsource. We aim not to build excess capacity that sits idle. Where programs are delayed or canceled, we may have temporary capacity, and we manage that through restructuring or resizing. We've taken actions across more than 40 plants historically to optimize capacity, and we continue to manage it proactively.
On working capital, the seasonal cadence this year has been different than past years. Should we still expect the large Q4 working capital inflow this year, or is the cadence different?
This year is more first-half weighted on working capital because of the balance sheet recoveries and our strong Q2 performance. Looking at the full year guide, the second half will be more fourth-quarter weighted than third, as you typically release working capital at year-end. So you should expect some Q4 inflow, but the first-half gains make the seasonality a bit different this year.
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.