Magna International Inc (MGA) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Magna International third quarter results conference call.

During the presentation all participants will be in a listen-only mode and afterwards we will conduct a question-and-answer session.

At that time, if you have a question, please press the one followed by the four on your telephone.

As a reminder, this conference is being recorded Thursday, November 7th, 2002.

And now I'd like to turn the conference over to Vincent Galifi, Executive Vice President Finance and Chief Financial Officer, Magna International.

Please proceed, sir.

Thank you.

Good afternoon and welcome to our third quarter conference call.

My name is Vince Galifi and I am the Executive Vice President-Finance and CFO of Magna.

With me today is Belinda Stronach, Magna's President and Chief Executive Officer;

Dave Carroll, Executive Vice President-Marketing and Corporate Planning; and Louis Tonelli, Director of Investor Relations.

A short time ago, our board of directors met and approved our financial results for the third quarter, ended September 30th, 2002.

Our board also declared a quarterly dividend of 34 cents per share, payable on December 16th, 2002, to shareholders of record on November 29th, 2002.

We just issued a press release this afternoon for the third quarter, ended September 30th, 2002.

Both the press release and today's conference call are on our website.

We have also included a slide presentation on our website to go along with our call today.

Our address is www.magna.com.

This afternoon Belinda will comment on our record Q3 results and will discuss a couple of important recent events pertaining to Magna.

Dave will discuss the overall industry environment and our outlook for vehicle volumes for the remainder of 2002.

Louis will then provide a specific discussion of our Q3 financial performance and I will end with a discussion of our financial outlook for the balance of 2002.

Upon completion of our formal remarks we will be pleased to answer questions from any interested analysts or shareholders.

I would now like to turn the call over to Belinda.

Thank you, Vince, and good afternoon, everyone.

I am very pleased with our financial performance in the first nine months and third quarter of 2002.

I'm also very pleased with the value of new business awards in the quarter in both North America and Europe and the success we have had in strengthening our Magna Steyr and mirror groups.

First to the results.

We've achieved record nine months and third quarter levels of sales, net income from operations and diluted earnings per share from operations.

For the third quarter, consolidated sales were $3 billion, up 20 percent.

Net income from operations was $117 million, up 14 percent, and diluted EPS from operations were $1.24, up 13 percent.

I would now like to comment on our activities at Magna Steyr during the third quarter.

In July Magna Steyr completed the acquisition of the Eurostar facility from DaimlerChrysler.

As a result, capital expenditures for the BMW X3 project have been reduced by about 25 percent by utilizing the Eurostar assets for the assembly of the X3.

In addition, Magna Steyr has increased flexibility to accommodate potential higher volumes for the BMW X3 or perhaps additional assembly business in the future.

And Magna Steyr obtained the contract to assemble the Chrysler Voyager for Europe.

In early July, just prior to Magna Steyr's acquisition of the facility, the last Chrysler Voyager was built at Eurostar.

In only eight weeks, Magna Steyr was able to move assemble of the minivan to its Graz facility, adjacent to Eurostar and in early September the first Chrysler minivan rolled off the new assembly line.

Meeting the challenges of moving such a complex business in a short period of time is a testament to the expertise and dedication of both Magna Steyr's work force and the former DaimlerChrysler employees now working for Magna Steyr.

Also in September, Magna Steyr announced the award by DaimlerChrysler of the replacement business for the assembly of the Jeep Grand Cherokee, beginning in 2005 through 2009.

The management team at Magna Steyr has also been strengthened with the addition of Dr. Herbert Demel, who left the Volkswagen group to join Magna Steyr as president and CEO.

Dr. Demel brings tremendous industry experience to Magna Steyr and will oversee the critical launches of the new E-Class 4Matic, the Saab 93 convertible and the BMW X3 sport activity vehicle over the next 12 months.

On October 1st, Magna completed the previously announced acquisition of Donnelly Corporation, creating Magna Donnelly.

The combination of Magna's mirror group with Donnelly will create the leading global supplier of exterior mirrors.

The interior mirror capabilities of Magna create a more diversified customer base, enhance our geographic diversification and allow us to realize numerous opportunities for synergies as we Magna-tize the Donnelly organization.

Most importantly, Donnelly's vehicle electronics capabilities strengthen Magna's existing product base and create the platform to expand our interior electronics capability.

I would now like to turn the call over to Dave Carroll.

Thank you, Belinda, and good afternoon, everyone.

I would first like to comment on our vehicle volume expectations for 2002.

Our outlook for light vehicle production, excluding medium and heavy trucks, is unchanged at 16.3 million units for North America and 16.2 million units for Europe.

Vehicle incentives continue to drive the North America market.

Year-over-year, incentives per vehicle have increased by 11 percent.

The average incentive per vehicle in September was $1775 and of the volume producers, Chrysler led the pack with an average incentive per vehicle of $2246.

GM and Ford increased incentive spending per unit to $2232 and $2114, respectively.

North American inventories remained in line with a days supply of 57 days in September compared with 61 days in September of 2001 and the five-year historical average for September of 57 days.

These factors provide some confidence in the recently published Q4 OEM production schedules.

However, inventories are forecasted to be 79 days in October, which is 32 percent above the five-year historical average of 60 days.

This and other factors keep us cautious on North American production for the remainder of the quarter and into 2003.

September and October auto sales, on a [FAR] basis of 16.2 million and 15.3 million units, were much weaker than July and August.

These results are troubling in light of the record incentives, as previously discussed.

We have also seen a continuing deterioration in used vehicle prices, which provides risk to new vehicle sales and, ultimately, production.

Additionally, recent consumer confidence data from the Conference Board for October showed a decline to levels not seen in almost 10 years.

In Q4 we have already experienced assembly plant shutdowns at DaimlerChrysler that affected the LH Sedan, the minivan and the full-size van.

At Ford, the shutdowns at Oakville, Edison and St. Thomas will negatively affect our production sales for Q4 on the Windstar minivan, the Ranger truck, Crown Victoria and Mercury Marquis.

These shutdowns have been factored into our outlook that Vince will discuss later.

In summary, continued weak economic data coupled with declining consumer confidence is causing Magna to maintain its cautious view for Q4 and 2003 vehicle production.

In Europe, year-to-date vehicle production and sales have declined by 2 and 4 percent, respectively.

We remain cautious about European sales and production based on the weakness of the markets in Italy, which is down 11 percent;

Spain, down 8 percent; and France, down 5 percent -- all on a year-to-date basis -- and the inevitable cooling of the U.K. market.

We are pleased to see that September vehicle sales in Germany increased 3.5 percent.

However, weak economic forecasts highlight that it is still too early to predict that the German market is firmly on the road to recovery.

Turning now to vehicle production in North America, vehicle production in Q3 increased by 11 percent while Magna's top 10 vehicles exceeded this growth on a production volume and revenue basis.

The following key North American platforms outperformed the market: the DaimlerChrysler minivan, up 16 percent;

DaimlerChrysler LH Sedan, up 22 percent; the Ram pickup truck, up 49 percent; the Ford Taurus, up 26 percent; and the Ford F-series pickup truck, up 18 percent.

These were offset by the following platforms that underperformed the market: the GM T-800 pickup and sport utilities, up 6 percent; the Ford Escape, up 4 percent; the Ford Explorer, up 4 percent; and the Ford F-series 250 and 350 full-body pickup truck, up 8 percent.

Production and revenue of Magna's top 10 vehicles in North America helped to support Magna's North American sales growth of 14 percent.

In Europe, as mentioned earlier, Q3 vehicle production increased 2 percent, while Magna's top 10 vehicles were down approximately 2 percent.

The key European platforms that outperformed the market were the G wagon, up 79 percent; the BMW Mini, up 70 percent; the E-Class sedan, up 19 percent; the DaimlerChrysler SmartCar, up 34 percent and the Jeep Grand Cherokee, up 23 percent.

Magna's underperforming key vehicle platforms, as compared to the market, were the BMW 3 Series Sedan, down 9 percent; the Ford Transit Van, down 16 percent; the Renault Scenic, down 4 percent; the Mercedes A-Class, down 13 percent; and the Mercedes C-Class, down 11 percent.

On a revenue basis, driven by strong Mercedes E and G-Class production, Magna's top 10 European platform sales increased by 35 percent.

Once again, it is important that we all understand that E and G-Class sales reflect a large percentage of purchased components, which impact margins, as Louis will highlight.

As Belinda mentioned, Q3 was a good quarter for new business awards.

While we do not specifically comment on new orders, we were very pleased that Magna was awarded key programs from Ford, DaimlerChrysler and the new domestics.

The return to sourcing of new business by both Ford and DaimlerChrysler is a welcome signal and reinforces our belief in these companies future product cycle plans.

I'll now turn the call over to Louis Tonelli.

Thanks, Dave.

Good afternoon, everyone.

I would like to begin with a specific review of our financial results for the third quarter, ended September 30th, 2002.

All figures are in U.S. dollars.

I would first like to mention that the September 30th, 2001, comparable figures that I will discuss have been restated to reflection the adoption of new Canadian accounting standards for foreign currency translation and goodwill.

These accounting changes, which are consistent with U.S. practice, resulted in a net increase in net income and diluted earnings per share of $4 million and 6 cents, respectively, in the third quarter of 2001.

Consolidated sales increased 20 percent to $3 billion in the third quarter of 2002.

Automotive sales were $2.96 billion for the quarter, an increase of 21 percent over the comparable period.

I would now like to take you through the specifics.

As Dave mentioned, North American vehicle production increased 11 percent to approximately 3.8 million units in the third quarter.

Our North American production sales grew by 14 percent over the comparable period as a result of increased production volumes and North American content growth.

North American content grew to $428 for the quarter due primarily to the launch of new programs during and subsequent to the third quarter of 2001, including the Ram pickup, the Cadillac CTS, the Saturn VUE, the Ford Expedition and the Lincoln Navigator.

Also increasing North American content was higher production on several programs, including the Chrysler minivan, the Pontiac Aztec and the Buick Rendezvous.

These increases in content were partially offset by the impact of certain high-content programs, including the GM T-800 truck series, the Ford Escape [inaudible] and the PT Cruiser programs, where production volumes declined or did not grow at the same rate as the growth of the overall level of North American production volumes.

A decrease in U.S. dollar reported sales due to the strengthening of the U.S. dollar against the Canadian dollar also negatively impacted North American content.

In Europe, production volumes increased approximately 2 percent to 3.6 million units for the quarter.

Our European content per vehicle increased by $54 or 28 percent over the comparable period to $247.

Twenty-six dollars of this increase related to the strengthening of the euro and British pound, each against the U.S. dollar.

The additional increase in average content reflects increased assembly sales at Magna Steyr, of which increased assembly sales for the Mercedes E and G-Class account for $19 of content growth.

Average content was also benefited by increased content for the Mercedes C-Class program, increased production of the Mini-Cooper, the SmartCar and the [Volvo Vauxhall Vectra].

This resulted in European production sales for the third quarter of $887 million versus $676 million a year ago, an increase of 31 percent.

In summary, consolidated production sales increased $410 million over the comparable quarter with organic growth contributing $321 million to sales, net acquisitions contributing $19 million to sales and a net increase of $70 million in production sales related to foreign exchange, primarily as a result of the strengthening of the euro and British pound against the U.S. dollar.

Tools and other sales were $431 million for the quarter, representing an increase of $101 million from the comparable period, including the BMW X3 program at Magna Steyr and the company's continued involvement in new production and assembly programs.

During the quarter, our gross margin was 16.4 percent compared to 17.4 percent for the comparable quarter.

Gross margin, as expected, was negatively affected by increased integration and assembly sales, in particular the increased Mercedes E and G-Class sales, which cost us a half a point since such sales are accounted for on a full-cost basis with a substantial portion of the sales price being comprised of purchased components.

Gross margin as a percentage of sales is lower in Europe compared to North America due to vehicle assembly sales and lower operating margins.

As a result of the strengthening of the euro and British pound, each against the U.S. dollar, the translation of euro-denominated gross margin into U.S. dollars resulted in a higher proportion of margin being earned in Europe.

This had the effect of decreasing Magna's overall gross margin percentage.

Gross margin was also negatively affected by increased tooling and other automotive sales where gross margins are lower than on production programs, ramp-up costs for new programs, launch and operational inefficiencies at a certain division and OEM price concessions.

Partially offsetting these declines in gross margin percentage was the positive impact of higher vehicle production in North America and improved performance at a number of divisions.

SG&A costs were 6.3 percent for the third quarter compared to 6.6 percent for the comparable quarter.

Net income from operations for the third quarter was $117 million, a record third quarter from operations, compared to $103 million, restated for goodwill, in Q3 2001, an increase of 14 percent.

Diluted EPS from operations was $1.24, once again a third quarter record, versus EPS from operations, restated for goodwill, of $1.10 in the third quarter of 2001, representing an increase of 13 percent.

I would like to spend a few minutes on a review of our cash balances, working capital and investment activities.

We continue to turn strong sales and earnings from operations into record cash flow.

We generated $257 million in cash from operations prior to changes in working capital and used $147 million for working capital in the third quarter.

The increase in non-cash working capital was primarily attributable to an increase in accounts receivable as the normal quarter-end cutoff came before the typical timing of receipts from a large customer.

For the quarter, we invested $344 million, comprised of $319 million of fixed assets, including $101 million related to the purchase of Eurostar, which, from an accounting perspective, we are classifying as a fixed asset purchase and $25 million in other assets.

Our cash balance at September 30th, 2002, was approximately $1.2 billion and our cash, net of debt, before debenture interest obligations, was approximately $626 million.

Our debt-to-total-capitalization ratio, excluding cash, was approximately 9 percent under Canadian GAAP.

I will now turn the call over to Vince Galifi.

Thanks, Louis.

I would like to comment on our expectations for the full year and fourth quarter of 2002.

You should note that we have reflected the acquisition of Donnelly in our full-year outlook, effective the beginning of the fourth quarter of 2002.

Our assumptions for production volumes in '02, which are implicit in our earnings outlook, are unchanged from our August outlook and are as follows.

We forecast 2002 North American light vehicle production levels to be 6 percent above 2001 volumes to approximately 16.3 million units.

We expect European auto production for 2002 to be 2 percent lower than 2001 volumes to approximately 16.2 million units.

In terms of full-year 2002, our revised expectations are as follows.

North American content per vehicle is expected to be in the $435 to $440 range.

European content per vehicle is expected to be in the $225 to $230 range.

In summary, automotive production sales are expected to exceed 2001 levels.

This is a result of our expected growth in content in North America and Europe and production volume increases in North America, offset in part by a decrease in European production volumes.

In addition, we continue to be involved in new program launches and expect our tooling and other automotive sales to be in the $1.3 billion to $1.4 billion range.

Gross margin is expected to be in the range of low to mid 17 percent, reflecting, among other things, the ongoing impact of increased E and G-Class business during 2002 versus 2001.

SG&A as a percentage of automotive sales is expected to be in the low to mid 6 percent range.

Depreciation and amortization is expected to be approximately $415 to $420 million.

Our tax rate is expected to be slightly below 35 percent.

Given the above assumptions, our expectations for diluted EPS from operations is expected to be in the $6 to $6.20 range for 2002.

Please note that the bottom end of our range has been increased by 10 cents compared to our previous outlook.

Given this range, we will exceed the record diluted EPS from operations recorded in 2001.

Automotive capital expenditures are expected to be approximately $750 million, including $101 million for Eurostar.

In other words, excluding Eurostar, automotive capital spending is expected to be approximately $650 million, which is at the low end of the $650 to $700 million range we have provided throughout 2002, even including Donnelly's cap ex in the fourth quarter.

With respect to the fourth quarter of 2002, our expectations are as follows.

Light vehicle production volumes are assumed to be 3.9 million units in North American and 4 million units in Europe.

We expect content per vehicle to be in the $475 to $490 range in North America and $230 to $250 range in Europe.

Although the timing of tooling sales are more difficult to forecast, tooling and other automotive sales are expected to be in the $350 to $400 million range.

Gross margin as a percentage of automotive sales is expected to be in the high 16 percent to low 17 percent range.

SG&A as a percentage of automotive sales is expected to be in the low to mid 6 percent range.

Depreciation and amortization is expected to be between $110 to $115 million.

Our tax rate is expected to be slightly below 35 percent.

Diluted EPS from operations, based upon the above assumptions, is expected to be in the $1.30 to $1.50 range.

As I noted earlier, the preceding ranges incorporate the acquisition of Donnelly as of October 1st.

The Donnelly impacts on the key line items for the fourth quarter are as follows: increased North American content per vehicle, approximately $40; additional European content per vehicle of approximately $18; and more depreciation and amortization of approximately $10 million.

In addition, Belinda commented on synergies to be realized from Magna's acquisition of Donnelly.

As a first step, we recently announced the closure of Magna Mirror facility, the business of which will be consolidated into existing Magna Donnelly facilities.

We expect the closure cost and integration of Donnelly to negatively impact EPS by 5 to 10 cents for the fourth quarter of 2002.

We are currently in the process of finalizing our 2003 business plan for presentation to our board of directors in early January.

As in prior years, we plan on communicating our outlook for 2003 after that time.

I would like to point out that we continue to have perhaps the strongest balance sheet in the industry.

Our debt-to-total-capitalization at September 30th stood at 9 percent and our cash balance was $1.2 billion.

Just as a reminder, the discussion today contains 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 future results and performance to be materially different from those expressed or implied in these statements.

These risks, assumptions and uncertainties include, but are not limited to, global economic conditions causing decreases in production volumes, price reduction pressures, pressures to absorb certain fixed costs, increased warranty, recall and product liability risks, dependence on outsourcing by automobile manufacturers, rapid technological and regulatory change, crude oil and energy prices, dependence on certain vehicle product lines, fluctuations in relative currency values, unionization activity, threat of work stoppages, the competitive nature of the auto parts supply market, program cancellations, delays in launching new programs and delays in constructing new facilities, changes in governmental regulations, the impact of environmental regulations and other factors, as set out in the company's Form 40-S for its financial year, ended December 31st, 2001, and subsequent SEC filings.

The company disclaims any intention and undertakes no obligation to update or revise any forward-looking statements to reflect subsequent information, events or circumstances or otherwise.

Thank you for your attention this afternoon.

We will now open the call to questions.

Ladies and gentlemen, if you'd like to register a question, please press the one followed by the four.

If your question has been answered and you'd like to withdraw your registration, please press the one followed by the three.

We ask that if you're using a speaker phone to please pick up your handset before registering your question.

Our first question is from Wendy Needham of Credit Suisse First Boston.

Please proceed.

Oh, good afternoon.

Good afternoon, Wendy.

The 5 to 10 cent hit from Donnelly, is that included in your guidance for the quarter?

Yes, it is.

It's included in the guidance for the quarter as well as the full-year guidance.

The $1.30 to $1.50 for the fourth quarter already includes the 5 to 10 cents impact for Donnelly and the closure costs.

OK.

And you alluded to this a little bit, but you seem-- do you think you're getting more nervous about the outlook here recently?

Besides the DaimlerChrysler plant shutdowns, temporary plant shutdowns do you think there's more in the offing?

I'm going to have Dave comment on the production and I'll comment on the financial outlook.

Wendy, I guess the biggest thing that's got us concerned is the continuing bad consumer confidence data that we've seen.

I think it pretty much locks schedules in for the remainder of Q4, but we're a little bit uncertain at how that'll affect production going forward into 2003 and we'll express that update, as Vince said, when we share our business plan with the board in early January.

Wendy, to the extent that we're aware of plant shutdowns -- and Dave alluded to that during his formal part of the presentation -- we have already factored that in to our outlook that I talked about earlier.

OK.

And then one final question on Magna Steyr.

It did move into a loss situation in the quarter and, Belinda, you did talk about a lot of things you were doing there.

Should that get back into the black in the fourth quarter or will margins stay in the red for a bit there?

Wendy, it's Vince.

Not to really want to talk about any particular segment and forecast segments on a quarterly basis, but what I can tell you about Magna Steyr, in particular, for the third quarter a couple things happened in the third quarter.

As you know, the third quarter is sort of summer shutdown, typically, in Europe.

So that's-- and, as well, North America.

So that's going to have an impact but we've been impacted by some costs.

In the quarter we completed the acquisition of the Eurostar facility.

Belinda talked about starting up the Voyager program at Magna Steyr and there were some cost associated with that which, we believe, are one-time costs and will be non-recurring.

We continue to incur costs, pre-operating costs, for the startup of production of a number of new programs at Magna Steyr.

The two programs that we've talked about over and over are the Saab cabriolet, which will start production in 2003, and the BMW X3, which will really ramp up in 2004.

And continuing to impact Magna Steyr's results in the third quarter and there was an impact as well in the second quarter -- I talked about that during the second quarter conference call -- is low production volumes for the GM Aztec and Rendezvous where Magna Steyr is power-training it, produces the all-wheel-drive system for that vehicle.

So low volumes there are impacting our overall performance at the power train unit of Magna Steyr.

So when you look at all those factors, that resulted in Magna Steyr going negative in the quarter.

OK.

Thank you.

Our next question is from David Tyerman of Scotia Capital Markets.

Please go ahead.

Yes, a couple questions.

One, I was wondering if you could comment on whether OEM pricing is likely to negatively margins over the next year or so?

One of your subs, Decoma, went so far as to say that it would in their case.

I'm wondering if the overall Magna will be impacted that way?

Yeah, David, it's Dave Carroll.

There's no question we've seen an acceleration of our customers wanting to deal with 2003 productivity issues earlier this year.

Again, you know, we've been in difficult discussions for the last 10 years.

These discussions have moved up from a time-frame perspective and they're always difficult.

Again, we don't specifically comment on the margin effect that they will have, but, again, we continue to work with these customers to try to solve their objectives but also to meet our objectives, as well.

Again, the other problem is-- the other focus that we're really putting on it is really strengthening our VAVE activity.

So what we can do is go to the customer with technical cost savings, which are basically margin neutral to ourselves.

So is it getting worse or is it--?

I'm kind of confused as to whether this will make any difference one way or the other.

David, these discussions are never easy, so it's hard to quantify whether it's worse.

I mean, they're always difficult discussions when you're talking about it.

So I don't know that you can really classify it as getting worse or getting better.

OK, fair enough.

One other question.

I know, Vince, you don't want to talk about the segments, but the numbers are down again in Cosma and other and is there anything in particular there and what's the trend and will it eventually pick it up again?

I think -- I don't have the numbers right in front of me.

Louis is trying to drag them out, but when you look at our Cosma and other segment the one thing that's impacted us in the third quarter is, again, pre-operating costs for our [MoTech] facility in Ontario.

We're in the process there of launching a couple of new programs and we're incurring some costs and with any investment that we make, you know, you invest today the capital, you then ramp-- you ramp up and you invest money until reach the good production volumes.

At the [MoTech] facility we will have two programs that we'll be starting up.

There's the Delta engine cradle as well as the hydroform frame for the [HP] car, that's the Durango SUV for DaimlerChrysler.

So that's sort of the big item in my mind that sticks out when I look at that one segment there.

And what's the timing on those reaching reasonable profitability levels, roughly?

Well, we won't talk about profitability levels, but we can talk about launch.

OK.

The Delta is launched now but at very low volumes, just for the Saturn Ion and it really starts to hit volume in 2004 when it gets installed on the Cavalier.

The Dodge Durango starts production next year.

The ramp curve on that's pretty quickly, David.

And when is the Durango launched?

I think it's-- sort of, you know, next summer to next fall time frame.

OK, great.

Thanks very much.

The following question is from J.P.

Benson of CIBC.

Please proceed.

Good afternoon.

I've got one for Vince and one for Dave.

First off, Vince, I guess you were locked out for most of the quarter in terms of being able to act on the buy-back, but I'm curious how much, if any, stock you did buy back and now that you're not locked up and the shares are-- look fairly depressed, what are your plans for the fourth quarter?

Well, J.P., you're right.

We were locked up for a big part of the quarter as a result of the Donnelly transaction, but we did get into the market.

We did spend about $2 million in buying back stock.

We bought back just under 34,000 shares.

We've got up to a year to get into the market and continue to buy stock.

We continue to assess where our stock price is.

We also take into account the economic conditions that we face and Dave talked a little bit about consumer confidence and how cautious our outlook-- how cautious we are with respect to the fourth quarter.

So we continue to assess that.

We still have some time under our normal course issuer bid to buy some stock and we'll monitor that as the time goes on.

OK.

Thanks, Vince.

And just one for Dave.

I guess in the opening remarks Belinda made some mention of it sounds like you're starting to make more headway with the transplants.

Decoma had said something similar yesterday.

What's the key here?

I mean, I realize it's a lot of hard work.

Is it that they're now building enough vehicles in North America that it makes sense to start switching their sourcing to more local players like yourself?

Or if you had to-- if you had to attribute it to two or three things, what's going on here to make you more successful?

I think there's a couple of reasons, J.P.

The first, I think we're starting to see some benefits of those strategic relationships we have with Japanese suppliers.

Particularly some of the awards at Cosma this quarter were a direct relationships with a metal stamping supplier we have in Japan where we shared some technology with them.

They engineered the product.

They'll manufacture it in Japan; we'll manufacture it in North America.

Number two, we've got a strong internal focus that's gone from Belinda on down to the presidents, down to the various vice presidents of marketing and sales at each of our groups where we have a full-court press to try to really try to drag home more new domestic business.

I would also say, you know, even though we've got some awards we're not real happy with the progress, but I'd say the amount of dollars that we've been awarded from the new domestics as a percentage of our total business awarded is probably higher this year than we've seen in the last five years.

Can you give us any sense of what it might be as a percent of your total awards, Dave?

No.

We usually don't share that type of information, J.P.

OK, fair enough.

Thanks very much, guys.

The next question is from Steve Girsky of Morgan Stanley.

Please proceed.

Hi.

Can you guys hear me?

Yes, we can, Steve.

Good evening, everybody.

Vince, I missed the answer to Wendy's question.

That 5 to 10, is that in the fourth quarter guidance or not?

It's included in the guidance already, Steve.

OK.

Was currency positive?

I got the currency on sales.

What was the currency on earnings?

The currency on earnings would have been-- When you look at overall our European segment it was negative.

So that would have been negative overall on our bottom line as a result of translating losses at a higher exchange rate.

But you don't have a number on it?

No, I don't.

OK and you just-- the Donnelly costs, you've got these integration costs, but do you have a number on what kind of synergies you could take out of this Donnelly-- pull out of this Donnelly merger?

We've-- It's Belinda here.

We've identified a number, you know, pre-merger number that we've budgeted to achieve and we're tracking that closely and-- but that's not a number that we've released.

But I'm quite pleased with how the integration of the two-- the two companies is going and the management teams are working very closely together and as we mentioned, you know, we're-- we've indicated we're closing one facility, transferring that business into some of our existing facilities, again taking care of the employees that are there.

But I'm very happy with how it's going to date.

OK.

Can I ask you, Belinda, then, the 5 to 10 cents, is that related to the closing of a facility or what is that related to?

Steve, it actually relates to a couple things.

First of all, it relates to the closing of the facility.

The second thing it relates to is the fact that we have more shares outstanding and we're including in our income Donnelly's results or expected results for the fourth quarter.

By the time we move into 2003 -- and we have our integration teams focusing on achieving the synergies, you know, in a whole number of areas -- we're expecting in 2003 that this transaction will be neutral for 2003 on an EPS perspective.

OK, I guess what I'm getting at, is there going to be integration costs in a number of other quarters?

Are you going to take more restructuring or integration actions here or no?

Steve, overall, when we look at 2003 in terms of trying to streamline our operations there may be some other costs that we're going to incur that are one-time, but even reflecting those one-time costs our anticipation at this point in time for 2003 this transaction is going to be overall neutral to us from an EPS perspective.

And, again, we've identified an experienced Magna manager to lead the integration.

We've got an experienced financial team, as well, and they're working very well with the Donnelly team that's there.

OK.

All right.

Thank you.

The following question is from Rod Lache of Deutsche Banc.

Please go ahead.

Good afternoon, everybody.

Good afternoon, Rod.

I've got a couple of questions.

First of all, can you talk a little bit about what your expectations are for internal growth in 2003, excluding Donnelly?

Are you thinking that the next few quarters could be similar to what we've been seeing?

You know, kind of low-single-digits CPV growth in North America?

We have not yet talked about 2003 at all other than the impact that Donnelly's going to have on an earnings per share perspective for '03.

As we mentioned earlier, we are in the process of finalizing our business plan, but we have talked publicly about content per vehicle growth 'til the period 2004 and our expectations are that content per vehicle is going to grow, on average, between 11 to 16 percent between 2001 and 2004.

That's as much guidance as we're comfortable giving at this point in time.

We'll give you quite detailed guidance in January, once we have our business plan approved by our board of directors.

OK, but that 11 to 16 is-- that includes acquisition, right?

The 11 to 16 percent is based on book business, not acquisitions.

So excluding things like Donnelly it would be in that order of magnitude?

That's correct.

OK.

And, you know, I understand you're not giving guidance for next year but can you give us any kind of qualitative information on capital spending?

Is the X3 ramp up going to entail a significant increase?

No, Rod, once again -- it's Louis here -- we're going to hold off until early 2003 before we give detailed guidance on all those lines.

The only thing I want you to keep in mind, Rod, and Belinda talked about this in her comments, we had previously discussed what we thought our capital spending was going to be on the X3 program and that was about $150 million.

As a result of the acquisition of the Eurostar facility, when you look at our X3 spending, you know, we're expecting an overall reduction in capital of about 25 percent on the $150.

OK.

And the X3 spending will start or has started in 2002, but the bulk of that will take place in 2003.

Right.

OK but you're not going to quantify or give us any kind of broad guidance on that now?

No.

I guess the last question is, as you pointed out, you've got the strongest balance sheet in the industry but you're being pretty cautious, at least in terms of your statements and your use of cash.

Can you just update us on what are your priorities for cash at this point?

Are you looking at some acquisitions?

Are there-- you know, is there a priority at this point to, I guess, holding on to the cash as much as possible?

Well, you know, we are in a cyclical business and there is some economic uncertainty that lies ahead.

So in times of economic uncertainty a strong balance sheet is an asset.

However, we are-- you know, we continue to look at acquisitions and-- that could complement our existing businesses and also with respect to new programs, so we are mainly looking at acquisitions that will complement our existing businesses.

And we continue to see, you know, more opportunities but haven't publicly identified any.

OK.

All right.

Thank you.

The following question is from David Bradley of J.P. Morgan.

Please proceed.

Good afternoon.

Hi, David.

You know, we had this CPV growth in North America in the high teens, I guess, through about six or seven quarters.

Now we're back in the-- now we're in the low single digits.

Can you talk about what made it so high and why it's come down so much and, you know, what were the programs and where we might-- where that might go?

I mean, long term should we take the average of what we're seeing now and the average of what we saw a year ago and think about that as the average?

What accounted for that big swing?

David, you know, looking back over the last two years there's been some pretty big launches that we have been involved in in a big way.

If we look at last year, the T-800 sort of stretching out full volumes, the Ford Escape coming online, you know, the Chrysler minivan ramping up.

Those are big programs where we have big incremental content or new content in the case of new vehicles.

We've talked about all year long that 2002 is just going to be quiet year in terms of our traditional customers and the high-line, high-volume platforms that are launching.

You know, we've got great content on some of them, like the CTS that are out there, the Saturn VUE, but there just isn't a lot of, you know, big platforms out there beyond that.

So, I mean, I don't think you look at an average because, you know, looking forward there's some big platforms that are going to launch in the next few years and we've got some content on some of them.

So I don't know whether using an average is going to give you anything meaningful.

And, David, we're really excited with the number of new programs that were awarded to Magna companies in the third quarter.

When I look at the good opportunities that we have on our plate right now, I see a good future in terms of content per vehicle growth for North America.

OK.

And then a couple technical questions.

The-- why was the tooling expense-- that was the highest number we've seen for a long time, maybe ever.

I don't know.

Is that-- is that Eurostar related?

What programs is that associated with and is that going to stay at those kind of levels?

You said tooling expense?

It's tooling revenue.

Tooling revenue.

Sorry, tooling revenue, yeah.

Well, I think just tying in some tooling with BMW is probably the biggest single item included in tooling this quarter.

So that's a--

We always talk about the fact that tooling is difficult to sort of forecast and it can be-- it tends to be lumpy and it just was, you know, pulled forward from, you know, next year.

So that is the Eurostar and then X3 pretty much?

Sorry?

A lot of that is Eurostar for the X3?

Yes.

OK and then the other-- the other small question, this minority interest going from, you know, $20 million down to $12, should we think about $12 as a run rate or $20 as a run rate?

No, I think you always have to look at the seasonality, especially at Magna-- of Magna Entertainment.

You know, we had a big loss in Q3.

It's a quiet quarter for them and, you know, the minority interest on that always drags down the third quarter.

I think if you look, you know, except for the impact of some of the share issuances by our subsidiaries, you can look at the seasonal-- the seasonality every year.

It's been pretty consistent.

Q3's been one of those quarters.

So I think you just-- you follow the trend you've seen the last couple of years for the adjustment of minority interest.

Is most of that minority interest MEC, then?

Most of the change would be MEC.

OK.

Thank you.

The following question is from Peter Sklar of Nesbitt Burns.

Please go ahead.

Vince, that number that you talked about, I believe it was the 34,000 shares you bought back on the normal course issuer bid, what was the time frame?

Is that Q3?

That was Q3, yes.

It was prior to the blackout for the Donnelly acquisition.

That's correct, beginning of Q3.

OK.

Your total revenues came in about $100 million higher than the high end of the guidance range you provided at the end of Q2.

Was that-- the higher tooling sales or was there higher assembly revenues out of Steyr?

What was-- what was behind that?

Well, Peter, it's Louis.

Tooling was obviously a big chunk over the forecast level that we had provided.

Foreign exchange had a big impact, as well.

The euro increased substantially in the quarter and that had impact.

OK.

The-- I believe that the Lincoln Blackwood, which was a program that was hurting you previously wound down during the quarter.

Is that true and did that have a positive benefit?

The plant was closed on September the 30th and we're still in cost-recovery negotiations with Ford on that program.

Peter, I think if you look at sort of second to third quarter the impact on out bottom, there wasn't a substantial change second to third quarter.

I think when you look at the fourth quarter, as Belinda mentioned, with the shutdown of the plant at the end of September you will see some improvement in the fourth quarter.

OK.

That's all I have.

Thank you.

Our next question is from Gary Lapidus of Goldman Sachs.

Please go ahead.

Good night, I mean, good afternoon, everybody.

How you doing, Gary?

Sorry to keep you up, Gary.

I thought I'd sneak that one in.

What is Canada on a different time zone or how does-- how does that work?

[inaudible]

We're just getting started.

It's morning there.

OK.

I'll have to look on a map.

The working capital, it's kind of impressive.

I mean, if I just look at the way the working capital is trending down and even though the size of the business is trending up, one of you did -- Vince, I think it was you -- you mentioned maybe there was something that was unusual in this quarter.

Would we, therefore, expect some of these working capital ratios to start to normalize or is this something that's going to persist and even continue to get better?

Well, working capital actually was-- we had a use of working capital in the quarter and it related to our cutoff.

Well, sequentially but not year-over-year.

Gary, just a couple things that are impacting working capital.

There wasn't any positive items in the quarter.

There's a couple things that have impacted our working capital management.

First of all, across the company we've had a big push on working capital management, whether that's receivables or whether that's inventory, whether that's payables.

And some of the effort that's been taking place in the company is now starting to show some positive results and you saw positive results, as well, in the second quarter.

The other thing that's taking place is when you think about these assembly sales and we keep on talking about the impact that assembly sales have on our margins because we purchase a lot of components, the other thing we're able to do with these large purchases is we're able to manage working capital and manage it effectively.

I think if you look at Magna Steyr, in most situations we're running at negative working capital.

Yeah, OK.

Becoming like the car business, I guess, running with negative working capital.

So we could expect, then, the working capital ratios, particularly the payables to start looking better on a continuing basis?

As our-- if our trend continues and our assembly business continues to grow, I would expect that to be the case, Gary.

OK.

Well, since you guys are so cautious on the outlook and we appreciate that since we tend not to hear much of that coming from the companies, the-- you know, could help us think through how we should be thinking about profit contribution on carry-over business, you know, versus profit contribution from new business?

You know, without giving away state secrets, but, is it fair to say that, you know, replacing a $1 of revenue from CPV growth is not the same thing as losing a dollar of revenue from lower production on carry-over volume?

And to the extent that's true, could you maybe help us understand if the difference is a nickel or, you know, 50 cents or 75 cents?

Gary, we're going to have to schedule this call earlier so you don't have as much time to think about these questions.

I think your question, generally, is do we generate more profit on a carry-over program or a replacement program versus a brand new program, I think.

Is that--

Yeah, particularly, sort of on a variable contribution.

You know, because the big controversy here is, you know, gee, how sensitive is the-- are the earnings to, you know, swings in production and, you know, in our simplistic models, you know, it's sort of CPV times production making some sort of contribution to a fixed cost bucket.

You know?

And so, you know, the question becomes, well, but it is fair to compare, you know, the contribution from incremental CPV to, you know, adding to revenue as, you know, versus the decline in revenue from lower production.

Gary, it's really hard to generalize.

I'll tell you why.

You know, in our various groups the businesses are so different just in terms of the amount of purchased components that they buy.

So we could have a replacement program in a group where margins are higher because they don't purchase a lot of components.

And then we'd have another group where it's a brand-new business and we purchase components.

It's very hard for me to generalize across the company what the impact is going to be.

A lot of it depends on mix.

A lot of it depends on what type of contract it is.

A lot of it depends on whether--

Sure.

Well, but if you look--

--there's a lot of technology in what we're selling and our margins reflect that.

It's so hard to generalize.

Yeah.

Well, then, if we sort of zeroed in on next year, would you, you know, would you think that whatever-- you know, whatever happens to revenue because of production, up or down, well down, is offset by whatever you're able to do?

Without getting into the forecast, but just generally speaking, would you expect that CPV growth would-- you know, would generally be able to offset whatever declines in production took place, recognizing that it depends how much production declines?

Well, you know, traditionally, Gary, we've been able to offset declines in production volumes through increased content per vehicle and our margins, you know, depending on the situation, depending what programs we're launching, it has gone up.

In some cases it's gone down.

It's really specific on what's taking place in that year and I'd be very happy to talk a little bit more detail when we get our business plan together.

You know, our business plan-- we spend a lot of time preparing our business plan.

It's prepared at each division, bottom-up.

So it's pretty detailed and, you know, once you put it all together, then we've got a good view on what the various mix of product does to us, what replacement programs do to us, what incremental business does to us on a sales line and a gross margin line.

I just don't have that information right now.

Yeah.

OK.

That's fair.

Thanks.

Good night.

Good night, Gary.

We're going to take one more call.

We do have some other things that we need to attend to before we all head home tonight.

Not a problem.

The following question is from John Novak, TD Securities.

Please go ahead.

Vince, what is the maintenance level of cap ex running at right now?

I always talk about maintenance cap running, you know, plus or minus two thirds of depreciation.

OK and, Vince, what was the reason why the tax rate fell below sort of your current run rate of just slightly below 35 percent in the quarter?

I think the main reason for that is the-- MEC had some-- in the third quarter, and you know it's a cyclical business.

It incurred losses.

Their effective tax rate is over 40 percent so when you take that reduction against your overall automotive income it has the result of reducing your overall effective rate, if you run through the math.

OK.

And what's the current outlook for a potential IPO of Steyr these days?

The outlook hasn't changed at all, John, from our perspective.

We believe in the strategy.

We think it's the right thing.

We believe it's a way to create value.

Yeah, we're continuing to prepare Magna Steyr to take it public when the market conditions are more appropriate.

OK.

And lastly, there was some discussion about looking at acquisitions and keeping the powder dry by accumulating the cash at this point in time.

In your various divisions, what are the priorities for acquisitions?

Where would you like to improve your critical mass?

John, it's Dave.

I think the most glaring one and we've talked about it a couple times is if we could find some good metal stamping assets in Europe that would be interesting to us.

If you look at Magna in general, you know that our sales in Europe are about 35 percent of our total revenue.

On our stamping business, John, it's around 7 percent.

So if we could do something there, I think it would be great.

You know, I think we're set now in mirrors.

We don't have any critical issues there.

So if I had to prioritize it, that's where I'd go.

Great.

Thank you very much.

Have a good evening.

Well, thanks for listening in to our call.

Sorry we started so late but our board meeting started late this morning and ended in early afternoon.

Thanks for listening.

Good night.

Ladies and gentlemen, this does conclude the conference call for today.

We thank you for your participation and we ask that you please disconnect your line.

Thank you.

Have a good evening.