Magna International Inc (MGA) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Magna International, Inc. first quarter 2003 results conference call. During the presentation, all participants will be in the listen-only mode. 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 Friday, May 9, 2003. I would now like to turn the conference over to Belinda Stronach, President and CEO. Please go ahead.

Good morning and welcome to our first quarter conference call. With me today are Vincent Galifi, EVP and CFO, Dave Carroll, EVP Marketing and Corporate Planning, and Louis Tanoli(ph), Director of IR.

Yesterday we held our annual shareholders meeting in Toronto, which I’m sure some of you attended in person or via our webcast. We have technical difficulties on our webcast. A clear version will be on our website by 5pm today. Vince and I will be brief in our formal remarks, leaving more time for us to answer any questions.

We issued a press release yesterday during the meeting. The first quarter ended March 31, 2003. 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 the call today. Our address is www.magna.com.

In the meeting, I highlighted several reasons Magna is positioned to outperform the industry in the years ahead. I will briefly take you through these. First of all, we participate in what is a large and growing market. We expect the global market for outsource components to continue to grow reaching more than $500 billion by 2010 from less than $400 billion today. And while Magna is one of the world’s largest [inaudible] players, our share of the outsourcing market is still less than 4%.

In addition, with the broadest product capabilities in the industry and all of our product groups have unique product drivers. [Audio break]

We continue to focus on technology as a way to drive new growth, create innovative products, and remove costs for our customers. We have an entrepreneurial culture that drives innovation. Our culture and people create a company that is more flexible, productive, and responsive than our competitors and that translates into motivated employees, better managed facilities, lower costs, and increase profitability.

And lastly, with out of [inaudible] balance sheets in the industry. We continue to generate strong free cash flow. We have $1.5 billion of cash on hand at March 31st and we have little debt. This position allows us to capitalize on investment opportunity.

At our annual meeting we also highlighted our strong performance during 2002. I am very pleased that we have followed up a strong 2002 with excellent results for the first quarter of 2003. We generated new records in sales and first quarter’s net income. And posted new diluted earnings per share that matched last year’s Q1 record level of $1.65 and this is despite having issues with 5.2 million shares as a result of the acquisition of Donnelly(ph) in the fourth quarter of 2002.

I would like to take a moment to discuss our revised forecast for vehicle volumes in North America and Europe. As a result of the declining consumer confidence, excess vehicle inventory and perceived diminished effectiveness in vehicle incentives, we have revised our latest outlook for production volume. Earlier this year we issued a North American production forecast of 16 million units. We reduced that figure to approximately 15.8 million units or about 4% below last year. We also lowered our European annual production forecast from the 16.2 million units we expected in January to 16.1 units for a decline of 1% from last year. Vince will take you in detail through outlook.

I’ve mentioned previously that 2003 is the critical launch year for Magna. I am pleased that our product launches in Q1 have gone well and that we are on track for the rest of the launches that will take place over the remaining three quarters.

Lastly, I would also like to discuss the award of a couple of new programs. We announced at yesterday’s annual meeting that we’ve been awarded the Truck [inaudible] for the next generation Ford Explorers, which is a model year 2006 per program. We’ve now been awarded frame business in each of the big three further concentrating our capabilities as a world class frame producer. Remember that before 1998, we never produced a truck brain. At the time this Ford launches, we will the market-share leader in frame production worldwide.

We’ve also been awarded an EC glass-nerve (ph) contract at Magna Donnelly for a new domestic customer that we can not name. This is important business as we took it from the present supplier cause it validates our EC product technology with the Japanese OEM. I would now like to turn the call over to Vince.

Thank you, Belinda. Good morning, everyone. I would like to begin with a review of our financial results for the first quarter ended March 31st, 2003. All figures are in U.S. dollars.

Consolidated sales increased 21% to a record $3.8 billion in the first quarter of 2003. Automotive sales were $3.5 billion for the quarter an increase of 22% over the comparable period.

In Q1 2003, North American production sales grew by 16% from the comparable quarter, as a result of North American vehicle production increasing by 2% to approximately 4.2 million units and North American content growing by 13% to $480. The growth in content was attributable to our involvement in new production programs including the Chrysler Pacifica which launched in the first quarter, the Ford expedition, the BMW [inaudible], the Saturn ION and the Mazada 6, all of which launched in 2002. The acquisition of Donnelly in the fourth quarter of 2002 also contributed to content growth.

European production sales grew to $1.2 billion representing a 35% increase. This improvement in Europe was a result of a 33% increase in content per vehicle to $276 and a 1% increase in European production volume. The strengthening of the euro and the British pound against the U.S. dollar and the acquisition of Donnelly were the most significant increase during the quarter. Some of the programs that also contributed to content growth were the Chrysler mini van, the [inaudible], the Ford Land Rover Range Rover, and the BMW mini, as well as the launches of the Volkswagen Tourage and the Porsche Cayenne. Offsetting this stroke were programs that balanced out in 2002 such as Mercedes M class assembly business and the PT Cruiser as well as lower volumes on the Mercedes E Class assembled at Magna Star as we launched a new E Class four by two for Mercedes in the quarter.

In summary, consolidated production sales increased approximately $581 million in the first quarter with organic growth contributing $82 million to sales, acquisitions, net of disposal contributing approximately $248 million to sales and the movement of currencies against the U.S. dollar resulting in an increase of production sales of approximately $251 million. Tooling and other sales were $320 million for the quarter up $43 million from the comparable period. The higher tooling sales reflect the upcoming launches and the positive impact of foreign exchange offset by the completion of tooling for programs that launched in 2002, such as the Saturn VUE and ION.

Gross margin as a percentage of sales was 17.4% for the first quarter of 2003 compared to 17.8% for Q1 2002. Gross margin was affected by the following. Foreign exchange movement, the strengthening of the euro and British pound each against the U.S. dollar resulted in relatively mover Magna's consolidated gross margin being earned in Europe in the first quarter of 2003 compared to the comparable quarter. This had the effect of decreasing Magna's overall gross margin percentage as gross margin as a percentage of sales was currently lower in Europe compared to North America.

Increased launch cost related to the $3.3 billion of new and replacement business launching during 2003, the acquisition of Donnelly which operates at a margin lower than the Magna average, as well as increased tooling and other automotive sales where gross margins are lower than production programs and OEM price concessions. These were largely offset by improved performance and productivity improvements at a number of divisions and the positive impact of higher vehicle production in North America and Europe.

SG&A costs were 6.7% for the first quarter, compared to 6.3% for the comparable quarter. The increase is largely attributable to three items. First, with the rapid movement of exchange rates during the quarter, SG&A was impacted by foreign exchange items. Second, we are launching a number of new facilities this year, which require SG&A infrastructure in advance of related sales at both facilities. Third, the acquisition of Donnelly which has historically run at a higher level of SG&A as a percent of sales than the Magna average, negatively impacted Magna's consolidated SG&A level.

Net income from operations increased 6% to $162 million in the quarter, compared to $153 million in the first quarter of 2002. Diluted EPS was $1.65 per share, and was level with the record first quarter EPS recorded in the comparable quarter in 2002. This is despite having approximately 5.2 million additional shares outstanding related to the acquisition of Donnelly in the first quarter of 2002.

We expect the acquisition to be fairly neutral to 2003 and accretive beyond 2003. However we expect the impact of Donnelly on Magna's results to get progressively better throughout 2003 as synergies are realized and the Magna Donnelly integration is completed.

Now, to review our cash flows and investment activities. During the first quarter of 2003 we generated a record $330 million in cash from operation. Another $55 million was generated from prudent working capital management. For the quarter, we invested $162 million, comprised of approximately $128 million in fixed assets including $115 million in the automotive business and $13 million at NEC as well as $34 million in other assets.

Magna continues to generate strong returns on assets. Magna's automotive return on funds employed a key internal measurable remains at 22% for the 12 month period ending March 31st, 2003. I would like to comment on our revised expectations for full year 2003 as well as our expectations for the second quarter of this year.

First, our full year assumption. As Belinda noted our most recent assumptions for production volumes in 2003 which are implicit it in our earnings outlook are as follows. North American light vehicle production of approximately 15.8 million units or about 4% below 2002 levels. European production of approximately 16.1 million units down 1% from 2002.

In terms of full year 2003, our revised expectations are as follows. North American content has been revised upwards and is expected to be again $490 and $510 million range. There are a number of launches expected to contribute to our content growth including the Chrysler Pacifica, the Cadillac SRX, the Ford Freestar, the Dodge Durango and the Chevy Colorado. Of these, only the Pacifica was launching during the first quarter.

Europe content for vehicle has also been revised upwards is expected to be in the $280 to $300 range. Some of the new launches in Europe expected to be contributing to content growth are the Volkswagen Tourage, the Porsche Cayenne, the BMW 5S series, the Jaguar XJ, the Saab 93 convertible and the B -3. Only the VW Tourage and Porsche Cayenne were launched during the first quarter.

We continue to be involved in new program launches and expect tooling and other automotive sales to be in the $1.2 billion to $1.4 billion range. In summary automotive sales have been revised upward and are expected to be in the range of $13.4 to $14.3 billion exceeding 2002 levels, largely as a result of our expected growth in content.

Gross margin is expected to be in the high 16% to low 17% range. SG&A as a percentage of automotive sales is expected to be in the low 6% range. Depreciation and amortization is expected to be approximately $490 to $510 million. Our tax rate is expected to be slightly below 35%. Given the above assumptions and despite reduced production volumes in North America and Europe from our previous outlook in January we have moved up the bottom end of our EPS range.

Our expectations for diluted EPS from operation are now between $6 and $6.40 for 2003. At the midpoint of this range we would exceed our record performance of 2002. Automotive capital expenditures are expected to be approximately $750 to $800 million for 2003.

With respect to the second quarter of 2003, our expectations are as follows. Light vehicle production volumes are assumed to be 4.1 million units in North America, representing a 10% decline, and 4.2 million units in Europe, a decline of 2% in each case relative to the comparable quarter of 2002. We expect content per vehicle to be in the $495 to $510 range in North America and $265 to $280 range in Europe. Automotive sales are expected to be in the $3.4 to $3.6 billion range. Diluted EPS from operation, based upon the above assumption, is expected to be in the $1.50 to $1.70 range.

As Belinda noted, we continue to have perhaps the strongest balance sheet in the industry. Our debt to total capitalization at March 31st stood at 11% and our cash balance was over $1.5 billion. This concludes our formal remarks. 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 performance to be materially different from those expressed or implied in these statements. Please refer to yesterday's press release for a complete description of our safe harbor disclaimer. Thank you for your attention this morning. We will now open the call for questions.

Thank you. Ladies and gentlemen if you would like to register a question please press the 1 followed by the 4 on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw please press the 1 followed by the 3. If you are using a speaker phone please lift your hand set before entering your request. One moment please for the first question. Our first question comes from the line of Rod Leech(ph) of DB Alex Brown.

Good morning everyone. I have a few questions. First of all, I'm curious about what caused the upside surprise versus the guidance I guess as recently as February 24th when you reported the full year, you were guiding to a lower number in the quarter. Were there -- were launch costs lower than you guys expected this quarter, were there some other factors that played a role?

Vince, would you like to address that?

Sure, let me try to address that. In terms of the guidance we gave in February we talked about potentially EPS being at the top end or exceeding our range. And if you recall our range was $1.45. But there have been some things that have impacted us positively, since the time we gave that outlook in February.

The first being, foreign exchange. As you know, the U.S. dollar has weakened against both the Canadian dollar and the euro and the British pound. We do generate a substantial amount of our sales in Canada, Europe and the U.K. so just translation alone has impacted not only sales but profitability. We've also experienced some positive product mix in both North America and Europe which have also added to our sales and profitability.

Couple of other items that I want to refer to. If you look at gross margin, our gross margin came in higher than our guidance. And there's primarily two reasons for that. One, if I go back to January, we had lower volumes assumed in our estimate for the quarter. Volumes came in higher, which result in higher margins as we're able to spread our fixed cost over a larger seams base. And the second thing is, launch cost. You know, we have been as you know working on a number of launches for 2003, and launch cost came in a little lower that be we had anticipated. That accounts for the bulk of the difference in terms of our February guidance, and results that we announced yesterday.

Okay. As a follow-up to that, can you provide us with the bottom line impacts of currency?

The bottom -- it's very difficult to do so. When you try to look at the various business units and whether they're operating and if you sort through in terms of what foreign exchange contracts are in place it's difficult to do so. There was some bottom line impact but most of the bottom line impact wasn't due to foreign exchange.

Net, net it was meaningful though often a year over year basis on the positive side?

I would say that it was positive but not the majority of the growth in earnings per share or sorry, net income.

Okay. And then lastly, I know you're not commenting on launch costs explicitly or you haven't been in the past. But I was hoping that more broadly, you can talk about if outlook on -- the outlook for margins. You're launching on a lot of new business, some of it is lower margin than the traditional Magna businesses. So that is obviously a negative in terms of mix. But launch cost should go down. Net-net, are you thinking that margins as you look out to next year, between these various factors, could be flat or better than where you're running currently?

Well, let me comment on 2003. Our guidance for margins for the full year 2003 is high 16%, low 17%. So it's pretty well about where we are in the first quarter. We are going to continue large launches this year because we are launching an unprecedented amount of business, $3.3 billion, to be exact. With respect to 2004, certainly volumes on these programs we'll see improvements in margins as launch costs are reduced or eliminated. And revenues increase on the business that we're launching. We are going to have more sales in 2004, on full vehicle assembly.

I don't want to start to look into 2004 and provide guidance on margins but I do want to point you to another matter, and that's return on funds employed which is really our key measure. Because we do have different businesses and certain businesses purchase a lot more components than other bits and margins. Gross margin is are going to be different in each one of those businesses. What we talk about yesterday was 22% for the 12-month period ending March 31st, 2003. Expect to you know continued good growth beyond 2003.

Can you then comment on just so that we can maybe back into some of these things, capital spending for next year? Any kind of broad parameters on what we should be expecting?

Well, at this point in time, our outlook is going to focus on 2003. We've traditionally looked to the following year later on in the year, early in 2004. So I'm not going to comment specifically about 2004.

Okay, thank you.

Thank you. Next question.

Our next question comes from the line of David Bradley with J.P. Morgan.

Good morning.

Good morning David.

Congratulations.

Thank you.

Two items, one, can you just describe the mechanics of the Canadian dollar change versus U.S. dollar, how does that impact you? What percentage of your revenues are in Canadian dollars, are your contracts priced in Canadian or U.S. dollars? Is it always going to be helpful when the Canadian dollar rises in terms of U.S. dollar earnings or what's the impact there?

That's a whole number of questions. I'll try to deal with some of that David. I'm going to ask Dave maybe to deal with contracts. First of all, comment on sort of foreign exchange rates because some have raised the concern, how competitive is Magna going to be if the Canadian dollar continues to strengthen against the U.S. dollar. And I wanted to point out that the strength of the Canadian dollar has not impacted the competitiveness of our Canadian plant.

First, we've got to keep in mind that we're competing for business outside the United States against U.S. suppliers. We are competing for business on a global basis. We're very competitive because of our efficient operations. It is those efficient operations that wins us business not the Canadian dollar. A lot of our raw material purchases are denominated in U.S. dollars therefore as the Canadian dollar strengthens part of the purchase price for raw materials is offset. Also when our customers compare Canadian dollars against U.S. and other global supplies implicit is a stronger Canadian dollar than today's rate. We are all confident that even though the Canadian dollar strengthened recently, we still remain very, very competitive.

The impact of foreign exchange, when we look at the growth in content year over year, in North America, and that growth rate was 13%, I mentioned that earlier, 1% of the 13% relates to foreign exchange. So the impact in the quarter has not been substantial at all.

In Europe, the situation's a little different. And the reason for that is that the euro has shown more appreciation against the U.S. dollar. Again, when we look at overall Europe growth, Europe content grew at 33%. Of that growth, foreign exchange accounted for 26%. So there's substantial impact on European revenues when you translate those back to Canadian, actually to U.S. dollars. If the Canadian dollar strengthens be obviously as we translate Canadian dollars profits back to U.S., that will have a positive impact on our profitability.

Just to tell you David in terms of our contracts with the OEMs, particularly the big three, the majority of those are priced in Canadian dollars. There are some minor exceptions. Those exceptions typically relate to programs where there's significant amounts of U.S. dollar purchase components. So again, the vast majority of our business in Canada is denominated in Canadian dollars and sold that way to our customers.

Okay. And then so thanks for that detailed answer there. And the one other area interested in, Tower has talked about the losing of the Explorer contract, they couldn’t possibly make money at the prices Ford was asking for and so forth. Are you able to get better pricing, do you see a cost structure or strategic entry that allow to you do more business down the road or how could you make this an attractive profitable business when they couldn't?

Our philosophy is a better product at a better price. We wouldn't take it on unless we were making money on it. Dave wants to add something here.

We don't comment on other people's operations and how they run their operations. We think we are probably the best metal former in North America. I think we've proven our launch on the GMTA-800 frame and our other samplings. We don't buy business knowingly.

So basically you have a lower cost is what you're saying?

We think we run better more efficient operations.

We compete more efficiently.

Thank you.

Our next question comes from the line of Steve Girsky from Morgan Stanley.

Good morning everyone.

Good morning Steve.

Just a couple of fill-ins here. So, this new frame is that going to go into an existing facility or will you build a new facility?

In all likelihood we'll build a new facility in the U.S. Some of the stamp components will come out of existing facility but we're considering building a new fax.

That is a hydroframe right?

No, traditional frame.

You raised the content guidance and all these new models coming. We knew all these models were coming anyway. Is it mix, in North America it's not currency but what is it that's raising the content guidance here?

Certainly the Canadian dollar has been strong as of late, so we do actually have foreign exchange helping us in terms of our increased guidance for the full year.

So then --

That applies to both North America and Europe, the euro has been very strong against the U.S. dollar. So the increase in guidance is largely exchange in North America and Europe.

I'm just trying to get my arms around the capex number. Is a lot of your capex is in Canada and abroad as well. Is currency affecting that number at all or not really?

Steve, it's Vince. We remain consistent with our guidance of $750 to $800 million. It's real difficult to assess exactly what the expenditures are going to be. You've got to understand that we have over 200 facilities across the world, programs get accelerated, sometimes we get delayed a bit. So we believe the $750-$800, is a valid assumption for 2003.

Even with the weaker dollar you're not going to go north of that number?

That's our present expectation Steve, that's correct.

Thanks a lot, everyone.

Thank you.

Our next question comes from the line of Justin Wu(ph) with Grifette Smith Barney Partners(ph).

First on content, can you comment on why there's a sequential decline in your North American content from Q4?

Vince, go ahead.

Sure. There's really a couple of things that have impacted our content, fourth quarter to first quarter. Something actually that we had anticipated because if you go back to the guidance we gave for the first quarter, we had given indication to that.

There's just two factors. One is sort of product mix, we think about our mix in the fourth quarter compared to the first quarter, it's been negative to us. Some our higher dollar content vehicles on a relative basis didn't perform as well. The second relates to our arrangements with the customers. Typically on an annual basis, our pricing concessions to our OEM customers both typically the fact on January 1st, all things being equal from the fourth quarter to the first quarter, you would expect a decline in content per vehicle just a result of pricing concession.

Okay, great. Second question, at the AGM yesterday Fred alluded to a contract that you guys expect to announce within the next couple of months, he mentioned it was like three quarters of a billion dollars. I'm wondering if you could give some color the to that, one, whether it's an annual run rate that he's talking about or size of the contract over the life of it or one contract or numerous contracts?

If I can just say look first quarter we had a good award of new business. We continue to quote constantly and see many opportunities to quote on. It would be premature at this time to discuss our details, our customer would not permit us to.

Great. Just in terms of takeover opportunities out there, I was wondering if you could comment on what you guys see out there, I'm not talking about acquisitions, I'm talking about take away business from competitors. Where do you see most of those opportunities?

We can't comment on that in relation to our competitors.

Okay. That's it thank you.

Thank you.

Our next question comes from the line of Wendy Needham of Credit Suisse First Boston.

Good morning.

Good morning Wendy.

Do you have exposure to the GMT 370s, the Oklahoma City plant of General, motors? That is the extended wheel base Trailblazer?

Not significant exposure. It is not one of our high content vehicles.

I guess that's down now, not clear how long it's going to be down. On the SG&A expense you did allude to Donnelly's contribution there being higher. Is that something that you can work out over the next several quarters, and get your SG&A back down to a more normal Magna run rate?

Wendy, as I talked about with Donnelly, we are in the process of integrating Donnelly with Magna systems and realizing our synergies. Clearly we're expecting that SG&A for Donnelly will fall bottom line. What impacted us in an unusual matter first quarter in SG&A line was rapid movement on exchange rates and it had negative impact overall on SG&A.

I notice a couple of times now you've said rapid movement. So am I to -- why are you emphasizing the rapid movement there? Is it just that you can make adjustments but you couldn't do it, is that what you're implying?

Gradual movement in exchange rates, we have programs in place that protect us from some transaction exposures. But when the exchange rates move as fast as they did, from a client perspective makes it more difficult to completely protect yourselves from those movements.

On Donnelly I'm very happy with Carlos's leadership. We have two head offices, we have ideas to consolidate some of the operations and that takes some time. But I think Carlos is doing a fantastic job.

I just want to be clear, when you said this new EC glass contract, that's with a transplant or Japanese manufacturer in the U.S.?

That's correct.

Okay, thank you.

Next question, please.

Our next question comes from the line of David Leiker of Robert W. Baird.

$248 million in acquisitions. Could you break that out between North America and Europe for us, please?

Yes, just give us a moment here. It's about $160 in -- sorry. It's $160 North America, the balance is Europe.

160?

160, yeah.

And the -- can you quantify at all the size of the new business awards?

Now, Dave, it's Dave Carroll. Again, Belinda talked about again, last year we got $2.9 billion. This quarter she talked about $1.4 billion. But we won't break it down by customer by program just because our customers preclude us from doing so.

I misspoke. I was talking about the two new different awards, the Explorer and the, Mir program.

We won't talk about the dollar volumes on either of those programs.

Okay. Can you put some color on the [inaudible] interior. We've got a real good insight into those performances, the balance of that is Cosma, Magna Steyr and Donnelly, can you give us commentary on the year over year performance of the pieces?

With respect to the Magna Steyr which is disclosed in our press release, just turning to it right now on page 9, Magna Steyr's operating income on a year over year basis declined by about $6 million. And the reason for that is launch cost for a number of new programs that are coming on line. They did launch the Mercedes 4 by 2 in the first quarter that went off extremely well but obviously there is cost associated with that. There is the BMWX 3, Saab 9-3 and Mercedes on the S, E and C platforms. In terms of the other operations --

Comment year over year--

Cause or mirrors just in total those other operations, operating income increased from -- increased to $109 million for the three months ended 2003, to $96 million in the comparable period.

All right. And then lastly, did you -- have you repurchased any shares yet under your program?

Could you repeat that?

Your share authorization program, have you repurchased any shares?

The share buy-back program, we have -- you know, we announced back in August of 2002, the share buy-back program. And since that time we've purchased about 33,000 shares. But we have until August of this year to purchase more shares, and it's still on our plate and still a potential use of our cash.

Okay, great, thank you very much.

Thank you. Next question.

Our next question comes from the line of Fadi Chamon of UBS Warburg.

Most of my questions were answered but the last one, can you give us the assumption you are using in terms of FX for your guidance going forward?

In terms of FX rates, what we are using is really the quarter end rates on March 31st. And those quarter-end rates were approximately 68 cents for the Canadian dollar, and I believe it was $1.08 for the euro, yes, $1.08 for the euro and 68 cents for the Canadian dollar.

Great, thank you.

Thank you.

Our next question comes from the line of J. P. Benson of CIBC.

Two questions, good quarter, first of all. Year over year decline at Steyr, the operating profit was up versus Q4. Is this all seasonality, or you know, is there some internal improvement starting to kick in as we work our way through these launches?

Let me talk from an operations standpoint. You know, Dr. Herbert Demmel joined us in the fall and a couple of other key executives. Siegfried Wolf has been working with the team. Again, I’m very happy with the team and the progress they’re making. We have had great successes with the launches to date. But maybe Vince you would comment on the financial.

J. P., just in terms of financial performance, there's really two main groups of Magna Steyr, the power train group and vehicle assembly and engineering. Power train, we've talked consistently about the some of the inefficiencies and volume deficiencies in North America related to GM products. We are happy with the progress in power train and we have seen quarter over quarter improvements in the operations of power train. With respect to the assembly and engineering business, dissect that business and look at ongoing assembly business, they're consistent quarter over quarter but what's impacting us certainly in the first quarter as I mentioned earlier were the launch costs for those programs, the BMWX 3, the Saab, as well as the launch of the 4 by 2 Mercedes E Class in the quarter.

You are doing better on the E Class presumably than you were in the fourth quarter but the launch costs would be building right now on the 93 and the X 3 I suppose is that sort of the way to look at it?

In those programs in the fourth quarter last year we were still producing the old version of the 4 by 2. We just kicked off the new version of the 4 by 2. Expect the second quarter the launch will be smaller than it was the first quarter.

That's helpful. The whole China thing, your customers are leaning on you harder than ever. Obviously one of the things you can do is change your sourcing. How practical is it for you guys to source more of sort of commodity components, you by from Asia as a way of you know meeting your customers' cost reduction targets? I imagine it's a priority, but can things be done or can you change sourcing?

As our customers look to reduce cost we are looking at China as a potential, you know, area to purchase lower-cost components. So we're working together with the groups and to evaluate all of our purchasing needs, and seeing if we can purchase some components cheaper in China.

J.P. Benson Is this going to take --

Particularly in Magna Donnelly which already has facilities in China. There are $50 million in sales and about 1300 employees. We leverage off that knowledge and we're bringing all of our groups together and in a group office so we coordinate our entry into China and we learn from each other and we look at -- and we're starting out certainly with looking at purchasing components.

Okay. That's all for --

We're setting up a purchasing office to start and in the meantime evaluating which customer down the road we would like to, you know, make a further investment with. And in particular, particularly leveraging off our strong European base.

Okay, that's all for me, thank you very much.

Thank you. Next question.

Our next question comes from the line of Nick Morton with RBC securities.

Good morning.

Good morning.

Yesterday you mentioned content numbers for 2004 for North America and Europe. And I just wondered what impact the production, increased production at Magna Steyr might have in those numbers.

Well, actually Belinda in her presentation talked about content per vehicle beyond 2003. And what her chart shows was in North America for 2005, we're expecting content to be similar to $580 to $620 and in Europe somewhere in the range of $370 to $410, which represents if you look at North America, from '02 to '05, compound growth rate of 10% to 12%. So that would be all organic growth. And in Europe again all organic growth. Compound growth rate in the same period of 17% to 21%. I really don't want to get into the specifics of how much of that is going to be from Magna Steyr or Decoma or Tesma.

Thanks very much.

Next question comes from the line of David Tyerman of Scotia Capital Markets.

You exceeded the top of your guidance range by 20 cents. In the last call, you said that you might do that, but still you did by 20. You haven't really changed your guidance range much. It sounds like you've almost decreased your guidance for the remainder of the year. I was wondering if you could comment on that.

Sure, I can comment on that David. If you look at the balance of the year and you exclude Q1, you know, you could interpret that we have potentially reduced our guidance. But keep in mind that it's meant to reduce volumes in North America and Europe, so it really goes hand in hand. What we're going to have to monitor and what we're cautious about is launch cost. And if we perform better in that area, then that will have corresponding impact on an overall earnings.

So you concur that you effectively have done that, and the reason you're citing is North American and European volumes?

Yes.

Fair enough. On the Explorer contract, do you bid this thing to normal Magna or Cosma returns?

We have certain hurdle rates that we have to pass. We don't make the investment unless it is highly strategic yes.

Magna Steyr Spinco, anything further on that?

I'd be happy to. We continue to prepare perhaps later this year and if market conditions are appropriate and we have a good management team there now so it's on track, again, should the market conditions be suitable.

Okay. So is it ready to go with the conditions are suitable at this point?

From an overall timing perspective, if you look at typically if you spin off summer is not a good time to do it. Our expectation if it does take place in 2004 is going to be later on in the year.

Right, no I'm more saying from the standpoint are all the mechanics in place like the legals and whatever else have you to do?

Everything -- things are on track.

Fair enough. Last question, acquisitions, any thoughts on that at this point?

Again you know, we continue to see many different acquisitions. We evaluate each opportunity at each -- you know as it impacts each group and we're still looking at acquisitions but we can't comment on any specifically.

Okay, thank you.

Thank you.

Our next question comes from the line of Peter Sklar are Nesbitt Burns.

I believe you commented that you've been awarded the there transfer case for the M Class, is that true?

We didn't say that.

It was Ziggy’s chart?

The X five. The BMW X 5.

And when would you be supplying that and where would you be supplying it from?

The majority of it gets supplied out of Europe but there is some work here in North America as well.

And when does that commence?

I'd have to get back to you on the exact date.

Okay. And just --

We think it's this summer but we'll confirm on the date.

And the assembly that you would be doing in North America, would that be in your Mexican facility or --

We'll get back to you on all the details.

Okay, thanks very much.

Thanks.

Our next question comes from the line of Ron Tadross(ph) of Banc of America Securities.

Good morning, everyone. On content per vehicle you're saying midpoint now is about $500 North America, $290 Europe. Do you know what that changed from, what your previous estimates were?

Yes, something about $10.

$10 each?

Yes. You're looking at the midpoint.

Okay, that's fine. And then you said that product mix helped your margins, one factor. What is that, is that just products where you have more content, or is it something to do with like you know more leather or something?

Well, products that generally we have a little bit more profit in. Typically would help our earnings per share in net income.

All right, so it is where you have more profit, not necessarily more content?

Right.

All right. And then last question, this -- I don't know if I got this right but you said you booked a $1.4 billion in the first quarter versus $2.9 last year full year, right?

Yes.

And is this -- are those apples to apples numbers and what I'm getting at you know are they over a similar number of years, and maybe similar margins, like can we compare those two numbers?

You can't -- I won't comment on the margins. But we count the amount of business in terms of new and replacement business that we've been awarded the same year over year.

So that business is over the life of the contract, right, though, the $1.4 billion?

Annual volumes when the program reaches production.

Okay. So if you want a $1.4 billion, then you would actually --

Most of it launches between 2005 and 2006.

Right but over the life of the contract the number is much bigger, right?

We don't give life of contract, just annual volumes.

When would that start the $1.4 billion?

Roughly most of it starts in 2005 and 2006. We won't break it down any more.

Good job, thank you.

Thank you, next question.

Next question comes from the line of Jason Cuttler with Goldman Sachs.

Good morning.

Good morning.

Question on the Explorer contract. What sort of initial capital spending would you expect to be associated with that? Should we be thinking about sort of Cosma's asset turnover rates now or something more analogous to GM program when that was first --

We can't comments on that specifically.

Okay. If I could ask another question then. On the BMW the X 3 launch over in Europe at Steyr. Have you given any volume assumptions or sort of what's your capacity for production of those vehicles starting in '04?

I'll take that one. BMW strictly prohibits us from talking about capacity or talking about volumes on that program.

I'm 0 for 2 I guess.

We would refer you to them on that.

Hope they're listening.

I'll make sure I --

We're very sensitive about this Jason. We're not trying to be cute here. It's a very sensitive issue with our customer so we won't comment on it.

Okay. Finally, wondering on the mirror business, how is the Donnelly integration going? I mean it's sort of been an ongoing thing where eventually you guys are going to be ramping up and hopefully taking some conquest business and growing that business. Are you at the growth phase of this or administrative integration phase?

We're in both. As I mentioned earlier, Carlos joined us in the fall. He's doing an outstanding job of consolidating. We've closed a facility, we've reduced employment in other facilities and consolidated some of the programs in other facilities. So that continues. And at the same time, you know, we're working on quality issues and those are improving. And I should mention too, our European performance is excellent and we're also winning some new business with the new domestics, which I think is a great sign.

Great, thank you very much.

One more question.

Our next question comes from the line of John Novak with TD securities.

Good morning. When we look at the content per vehicle in Europe the current guidance versus the prior guidance, we have seen an increase in the currency but have we seen a decrease of content per vehicle in those forecast?

John, I'll answer that. We don't have the content per vehicle in local currency. But I can tell you that it's -- through our current outlook we have not seen a decline in content per vehicle in local currency. The move up is strictly as Louis mentioned earlier is foreign exchange.

What I'm saying is when we strip out the foreign exchange, does that guidance, does that guidance hold a decrease?

No, it doesn't.

All right, thank you.

Okay. Well, that wraps up our conference call for this morning. I'd like to thank everyone for participating. We look forward to keeping you up to date on our progress, and enjoy the rest of your day. Thank you.

Ladies and gentlemen, that does conclude our Magna International Inc. first quarter 2003 results conference call. We thank you for your participation and ask that you please disconnect your line.