Magna International Inc (MGA) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Magna International third quarter 2003 results conference call.

During the presentation all participants will be in a listen-only mode.

Afterwards we will conduct a question-and-answer session.

At that time, if you have a question, please press the 1 followed by the 4 on your telephone.

As a reminder, this conference is being recorded Thursday, November 6th, 2003.

I would now like to turn the conference over to Belinda Stronach some President and Chief Executive Officer, Magna International.

Please go ahead ma'am.

Good morning and welcome to our third quarter conference call.

With me today are Vince Galifi, Executive Vice President and Chief Financial Officer, and Lewis Tonelli, Vice President, Investor Relations.

Yesterday our board of directors met and approved our financial results for the third quarter ended September 30th, 2003.

Our board also declared a quarterly dividend of 34 cents per share, payable on December 15th, 2003, to shareholders of record on November 28, 2003.

We issued a press release yesterday for the quarter.

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.

Our performance in the third quarter of 2003 was strong once again.

We posted excellent results despite a reduction in production volumes in North America, and the heavy program launch activity during the quarter.

By the time we complete 2003 we will have launched $3.3 billion on an annual basis of new and replacement business.

I would like to first comment on our recently completed distribution of all of the shares of MID to Magna shareholders.

On August 19th, shareholders overwhelmingly approved the distribution of MID on September the 2nd, to shareholders of record on August 29th, 2003.

We have been extremely pleased with the positive feedback we have received from our shareholders relating to the distribution.

And we have generated a tremendous amount of additional interest in the Magna story from new and potential shareholders as well.

One of the benefits that we believed would come from the distribution of MID was an increase in our trading multiples relative to our closes pierce.

And peers.

While there is room for further expansion Magna’s multiple has increased since the MID announcement and we have narrowed the gap relative to our peers.

So far this year we have been awarded a significant amount of new contracts including business with new domestic OEMs.

And while we are pleased with the new business awards from the new domestics I want to reiterate that a key priority for us is to accelerate new business awards with the Asian based OEMs.

I spent the past two weeks in Asia beginning with the Tokyo motor show in late October and concluding in China.

We held constructive meetings with government officials and with members of top purchasing executives of a number of Asian OEMs and I'm very pleased with their heightened interest in Magna and its products.

We now stream with Tokyo motor show, the opening of a new customer center in Tokyo.

The customer support center will further support our customers in Japan by providing engineering and program management expertise and will initially employ up to 40 engineers program managers and sales reps.

Earlier in the new year Magna will host another Japanese OEM in order to demonstrate the full compliment of our global capabilities to this very important customer.

Let me take a moment to discuss our forecast for vehicle volumes in North America and Europe.

In North America, third quarter production ended up in line with our forecast, and our fourth quarter outlook is in line with OEM production schedule.

So while somewhat weaker sales and above-average inventory levels for October causes some concern, we are holding our product outlook unchanged in North America for 2003 at 15.9 million units or about 3% below 2002.

We have also left our European annual production forecast unchanged at 16 million units, a decline of 2% from last year.

This is despite European production running slightly ahead of 2002 during the first nine months of 2003.

High inventory levels in Europe at the end of September leave us somewhat cautious about fourth quarter European production heading into a Christmas shut down in December.

Lewis will take you through the details of our outlook.

Finally, we have mentioned throughout the year the importance of launches in 2003 for Magna.

We are pleased that our product launches in the first nine months of the year have generally gone very well and that we are on track with the remaining launches that will take place during the fourth quarter.

Key launches in the first six months in North America include the new Chrysler Pacifica on which we have approximately $2100 in contents and the Mitsubishi Endeavor.

Key third quarter launches include the Ford Freestar, and content moved up to over $2,000.

The Dodge Durango, supporting our high perform truck frame and the Cadillac SRX.

The Chevy Colorado also launches in the fourth quarter.

In Europe we were involved in the launches of the Porsche Cayenne the Nissan Micra and the Toyota Evensis in the first six months.

In the third quarter, Magna Steyr launched the Saab 9 3 convertible at our [Gras] facility and the BMW 6series in which we have significant content including the complete exterior including seats launched at the tail end of the quarter.

This quarter, Magna Steyr launches much anticipated BMW X 3.

Both the X 3 and the 6 series received tremendous positive response from their introduction during the Frankfurt auto show in September giving us confidence that these important programs will be highly successful.

I would like to turn the call over to Vince.

Thanks Belinda.

Good morning everyone.

I would like to apologize for the complexity of our financial statements in the quarter arising as a result of the MID distribution to Magna shareholders.

In order to provide comparable results for Magna going forward, we included in our press release issued yesterday an appendix that provides on a pro forma basis by quarter for 2002 and 2003 what the income statement would look like, assuming the MID distribution had been completed on December 31, 2001.

In other words, we are disclosing what our earnings would have been in the automotive business for those periods.

I would now like to review our financial results for the third quarter ended September 30th, 2003.

Let me remind that you all figures are in U.S. dollars.

In accordance with Canadian GAAP we began to reflect the disclosure of MEC as discontinued operations until August 29th, the date of the distribution of the shares of MID to Magna shareholders.

However, because Magna continues to occupy facilities under long term leases with MID, the operations of the real estate business of MID cannot be reflected as discontinued under Canadian GAAP.

So the results of the MID real estate business are disclosed in continuing operations in our financials until August 29th.

In order to keep the accounting for the income statement consistent with how we believe the investment community has modeled Magna for 2003, we have reported on the press release net income and diluted epts from operations which include the results of both MEC and MID for the period up to August 29th.

My comments that follow related to the income statement will be on this basis.

Automotive sales were $3.6 billion for the quarter an increase of 20% over the comparable quarter.

In Q3 2003, North American production sales grew by 16% from the comparable quarter.

This is despite the 5% decline of North American vehicle production to approximately 3.7 million units.

North American content grew 22% to $522 in the third quarter.

The key drivers to the growth in content were the launch of new programs, the strengthening of the Canadian dollar against the U.S. dollar and the acquisition of Donnelly in the fourth quarter of 2002.

Some of the new launches that contributed to content growth were Chrysler Pacifica, Ford Freestar, Mercury Monterey, Cadillac SRX, Chevrolet Malibu and Mitsubishi Endeavor, all of which has launched in 2003 and the Lincoln Aviator, the BMW [inaudible] the Saturn Ion, the GMT 800 based H2 [inaudible], and the Mazda 6 all of which launched in 2002.

Mix on our top platforms was slightly negative in the quarter.

With lower production on the Chrysler mini van and Ford Explorer, partially offset by strong production of the GMT 800 program and the Ford Escape.

The inner production for Chrysler Intrepid, Concorde, 300M and the Dodge Ram van in 2003, and the Lincoln [inaudible] and the Chevrolet Camaro and Pontiac Firebird in 2002 also reduced content quarter over quarter.

European production sales content grew to $1.3 billion dollars representing a 44% increase.

This improvement in Europe was a result of a 42% increase in content per vehicle to $351, and a 2% increase in European production volumes.

The launch of new programs, the strengthening of the euro and British pound against the U.S. dollar, and the acquisition of Donnelly were the most significant factors to this increase during the quarter.

Some of the new launches that contributed to content growth were the Saab 9-3 convertible assembled at Magna Steyr, the Nissan - the Toyota Evensis, the Volkswagen Touareg and the Porsche Cayenne.

Strong program volume under Mini by BMW and the Mercedes E class also contributed to content growth.

Offsetting this program were programs that balanced those subsequent to the third quarter of 2002 including the Mercedes M class, assembly business at Magna Steyr and the PT Cruiser, as well as lower volumes Mercedes G Class assembled at Magna Steyr and lower Mercedes G Class volumes.

In summary, consulting and production sales increased approximately $658 million in the third quarter with acquisitions the movement of currencies against the U.S. dollar and growth in global content contributing to sales, partially offset by decline in sales, largely related to the 5% decline in North American volumes.

Tooling, engineering and other sales were $377 million for the quarter.

Down 64 million from the comparable period.

The decline in tooling sales reflects the completion of a number of major tooling contracts, including the BMW X3, partially offset by the positive impact of foreign change of exchange and tooling sales associated with upcoming launches.

Despite North American vehicle production being down 5% and increased launch cost related to the $3.3 billion of new and replacement business launching during 2003, we were pleased with the strong gross margin as a percentage of sales posted in the quarter.

Gross margin as a percentage of sales was 16.4% for the quarter level with the third quarter of 2002.

Gross margin was also affected by the following.

Foreign exchange movements.

The strengthening of the euro and the British pound each against the U.S. dollar resulted in relatively more of Magna's consolidated gross margin being earned in Europe in the third quarter of 2003, compared to the comparable quarter.

This has an effect of decreasing Magna's overall gross margin percentage as gross margin as a percentage of sales is currently lower in Europe compared to North America.

Operational inefficiencies of certain underperforming divisions also negatively impacted the gross margin.

The acquisition of Donnelly which currently operates at a margin lower than Magna average also had a negative impact on margins and OEM pricing concessions impacted margins as well.

However, these were fully offset by improved performance and productivity improvements at a number of divisions, improving results in facilities that have launched new business in the past year as well as a lower level of low margin tooling and other sales.

SG&A costs were 6.8% for the third quarter compared to 6.3% for the comparable quarter.

The increase is largely attributable to the launch of a number of new facilities and programs this year, which requires SG&A infrastructure in advance of related sales at both facilities and the acquisition of Donnelly which has historically run at a higher level of SG&A as a percent of sales than the Magna average.

Net income from operations increased 4% to 122 million in the quarter from 117 million in the comparable quarter of 2002.

The increase in net income from operations is primarily the result of increased gross margin on higher sales, and although it is difficult to quantify, net income also benefited from the strengthening of currencies against the U.S. dollar, our reporting currency.

I will now roll net income from operations to net income.

We reported net income of $48 million which includes MID and MEC for two months, compared to net income from operations of 122 million.

The difference relates entirely to the impairment losses associated with the MID distribution.

That is 68 million related to our former investment in MEC and 6 million related to MID.

These impairment charges are non cash items.

Diluted EPS from operations was $1.22 per share in the third quarter compared to $1.24 for the third quarter of 2002, primarily as a result of having approximately 5.2 million additional shares outstanding related to the acquisition of Donnelly in the fourth quarter of 2002.

The impact of Donnelly on Magna's results is expected to get progressively better for the remainder of 2003 and into 2004.

Now, to a review of our cash flows and investment activities.

During the third quarter of 2003, we generated 310 million in cash from operations prior to changes in working capital.

We invested 391 million in working capital.

Increased working capital in our automotive is primarily attributable to the launch of new programs and the delayed timing of monthly cash receipts at the beginning of the fourth quarter.

For the third quarter, investment activities amounted to $249 million comprised of approximately 188 million in fixed assets, 53 million in other assets, as well as 8 million to purchase subsidiaries.

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

Thanks Vince.

Good morning everyone.

I would like to comment on our expectations for the fourth quarter as well as our revised expectations for the full year 2003.

First, our fourth quarter assumptions.

Light vehicle production volumes are assumed to be 3.9 million units in North America, in lined with published OEM production schedules and 3.7 million units in Europe representing an increase of 1% and decline of 12% respectively from the comparable quarter in 2002.

We expect content per vehicle to be in the $560 to $575 range in North America representing an increase of 12 to 15% over Q4 2002.

Content of the vehicles in Europe is expected to be in the range of $390 to $410 an increase of 53 to 61% over the fourth quarter of 2002.

Automotive sales are expected to be in the four to $4.2 billion range.

Diluted earnings per share from operations based on the above assumptions are expected to be in the $1.50 to $1.70 range.

This exceeds the pro forma diluted earnings per share from operations excluding impairment charges from the fourth quarter of 2002 of $1.43.

In terms of full year 2003, our revised expectations are as follows.

As Belinda noted, our assumptions for production volumes in 2003 which are implicit in our earnings outlook are unchanged in 15.9 million units in North America and 16 million units in Europe.

With three quarters completed we have revised upwards our North American content per vehicle expectation to between $515 and $520.

This represents an increase in content over 2002 of 17 to 18%.

European content per vehicle is expected to be in the $320 to $325 range representing an increase of 39 to 41% over 2002.

We continue to be involved in new program launches and expect our tooling engineering and other sales to be in the $1.3 billion to $1.4 billion range.

In summary, automotive sales have been revised upwards for 2003, and are expected to be in the range of $14.6 to $14.9 billion, exceeding 2002 levels largely as a result of our growth in content.

Gross margin is expected to be in the high 16 to 17% range.

Note that rent payments to MID which were previously eliminated on consolidation when MID was wholly owned by Magna now impact our financial results following the distribution of MID.

Most of the rent expenses included in cost of sales which negatively impacts our consolidated gross margin by approximately half a point each quarter or approximately .2% for 2003, reflecting the four-month impact of the MID distribution.

We continue to expect SG&A as a percentage of automotive sales to be in the mid 6% range.

Depreciation and amortization is approximately 495 to 505 million.

This is lower than our previous outlook as a result of the distribution of real estate assets in MID.

Our tax rate is expected to be in the mid 34% range.

Based on the above assumptions our expectations for diluted EPS from operations are now between $6.12 and $6.32 for 2003.

Given this range we expect diluted EPS from operations to exceed our record performance of 2002 despite lower production volumes in both North America and Europe substantial launch costs and the impact of distribution of MID on our earnings.

I would like to rule our full year outlook of diluted EPS from operations from our previous outlook disclosed at the end of the second quarter in August to our current expectations.

We disclosed in our quarterly press release in August a range of $6.20 to $6.55 are for diluted EPS from operations excluding the impact of the distribution of MID.

At that time, we had not yet received the required shareholder approval to distribute MID so the MID impact was not formally built into the outlook.

We disclosed with the announcement of MID in July that the impact on Magna's diluted EPS from operations for 2003 was expected to be approximately 15 cents.

Subtracting 15 cents from the $6.20 to $6.55 range, results in a revised outlook range of $6.05 to $6.40.

With our current outlook at $6.12 to $6.32 we have tightened the range.

We have moved up the bottom end up 7 cents and moved the top end down 8 cents.

Automotive capital expenditures are expected to be approximately 800 million for 2003.

We continue to have perhaps the strongest balance sheet in the industry.

Our debt to total capitalization at September 30th sits at 11% and our cash balance with approximately $1.1 billion.

We have the financial resources to pursue our growth strategy.

This concludes our formal remarks.

This is a reminder, this discussion today contains forward-looking statements within the meaning of applicable securities legislation.

Such statements include certain risks, assumptions and uncertainties which may cause the company's actual or future results and performance to be materially different from those expressed or implied in these statements.

Please refer to 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.

Should you wish to withdraw your registration please press the 1 followed by the 3.

If you're using a speaker phone please lift your hand set before entering your request.

And our first question comes from the line of David Bradley at J.P. Morgan.

Please proceed with your question.

Good morning.

Good morning.

You've given is a lot of factors that are influencing the content per vehicle growth and the margin year over year.

I wonder if you could, though, you gave us a long list without quantifying I guess the impacts of each one.

I wonder if you just getting to a bottom line what would be the organic growth rate taking out currency, taking out Donnelly and content per vehicle, and would in be -- what would be the or organic margin change if we were to strip that out if you've done that analysis?

David, it's Vince.

Good morning.

I can give you some sort of directional information on sort of content growth and foreign exchange.

But you know as we have been commenting for some time, when you look at sort of our Canadian operations and try to determine the impact that those operations have on sales and operating income, it's really difficult to get an exact number.

Because we do have a number of hedging contracts in place to protect our overall margins when we enter into this contract.

But sort of directionally speaking, when I look at it, organic growth, that's probably contributed somewhere in the range of 15 to 18, 19%.

That's excluding acquisitions also?

That excludes acquisitions.

That's just organic growth.

And foreign exchange, again, it's a difficult number to quantify.

But I would say somewhere in the range of possibly 13, 14%, maybe up to as high as 18%.

And then Donnelly which is a little more easier to quantify, that added year over year about $ 20 of content growth.

Or about 8% of growth in the quarter, related to the acquisition of Donnelly in North America.

Okay.

All right.

And then a second question.

The --

David, let me just correct what I just told you.

I was just describing for you our European content.

Let me go back to North American content.

I apologize for that.

Okay.

In North America, our content growth, organic content growth I would say somewhere in the range of maybe four to 7%.

The growth in content relating to foreign exchange is probably somewhere in the range of 5 to 8%.

And the acquisitions of Donnelly and a small acquisition by Decoma lighting systems operation in Ontario, those two operations in total added about 10% to our content growth in North America.

I apologize for confusing there at the beginning.

That's helpful.

One technical question.

You give four different EPS numbers and four different earnings numbers which is helpful seeing them broken out different ways.

As I take each of those earnings numbers and divide by the 96.5 million shares I don't get the EPS number you show.

It's off 3 to 5 cents.

Can you explain the technical issue there?

Are you referring to the 122 from operations?

Right.

I guess just conceptually what we've done there, we started with the consolidated EPS of 44 cents.

And what we've added back to that is -- are the impairment charges which total 74 million as it relates to MID and 68 million as it relates to MEC.

Those impairment charges are not tax affect.

So that accounts for the difference between 44 cents and the 1.22.

I refer you to our press release.

If you go to the appendix on page 23, there's actually some pro forma information there.

But if you look at the third quarter of 2003 it actually rolls that for you, starts with the 44 cents and adds back other income and impairment charges.

The number on that statement is actually $1.21, but it's $1.22.

If you roll each quarter you come to the 4.62 of EPS from operations that we disclose on the press release.

Any number we get from the net basis if we divide by 96.5 million shares I don't get down to the EPS number so --

David maybe we can go through the mechanics of that calculations a little bit on the income line we normally have that might be the difference.

Can we do that offline afterwards?

Yes, maybe you could send something out so people could follow through that okay, thank you.

Next question comes from the line of J. P. Benson at CIBC.

Please proceed with your question.

Good morning, I've got two questions.

The first is can you help us Vince with how much of your -- you're talking 800 million capex number for automotive operations in '03.

How much of that is land and buildings?

Sure, I can help you with that.

And maybe while you're looking maybe I'll just ask the second question.

Has the -- I realize on a lot of your existing programs, in Canada, you're largely hedged out on the currency.

But has a stronger Canadian dollar been a factor in any of your Canadian plants that you're aware of, not winning business in the last six months?

Your question is about the competitiveness of our current plants?

J. P., I'll answer your second question first.

You know, when you look at the competitiveness of our Canadian plant, it's been some time when we've been submitting quotes in Canadian dollars for our customers that they haven't used current exchange rates to translate those quotes to equivalent U.S. dollars.

They've used exchange rates equivalent to 72 or 74 cents.

It is today close to 75 cents.

At this level over here our competitiveness is not at all impacted.

Yeah, I guess I was thinking more -- you've got a certain proportion of your costs that are Canadian dollar based on a go-forward program.

I was wondering, labor taxes locally those sorts of things whether it was meeting your -- pushing up your bid price and cause you not to win business but that doesn't look like that's happening.

That's not the case whatsoever.

Belinda noted in her comments that we were really pleased with the amount of awards we received on a year-to-date basis.

It doesn't appear at all that movement in the Canadian dollars have impacted our ability to obtain contracts.

Okay.

I'm still looking up that information for you on MID.

Look at for the entire eight months that we consulted MID, the real estate additions on our consultative base are $64 billion.

So the $800 million that we talked about for capital, about 60 million of that relates to MID spending.

That's helpful.

Thanks Vince.

Our next question comes from the line of John Novak with Westwind Partner.

Vince can you give us a sense of what the FX impact at the operating income line?

John, I'll give you a sense.

In my comments, it says the foreign exchange movements have certainly been positive to both sales and operating income.

But in terms of what the exact number is, it's difficult for us to get an exact number due to the complexity of our operations and how we protect ourselves against foreign exchange movement through foreign exchange forward contracts.

So I don't have an exact number for you.

But I do believe that the number -- that the impact has been positive.

Okay.

And when you talked about the impact from MID on gross margins going forward, it's .5% on the gross margin?

That's correct, John.

And it will be offset basically by below the line at the depreciation level?

Well, John, overall we will see some reductions in depreciation because we're not depreciating the real estate assets.

And there will be a little bit of savings on the SG &A line.

But remember when you look at –from a P & L prospective, not consolidating MID will have a negative impact on earnings because that might as profitable.

And what we've talked about for the balance of 2003, for four months in 2003, by spinning out MID and MEC, we believe that's going to negatively impact earnings per share by about 15 cents.

And that's been reflected in our revised outlook today that the 6.12 to 6.32 doesn't have the MID and MEC results for the four-month period commencing September 1st.

Okay, thanks for the clarification.

And can you just give us a sense thousand X3 launch is going at this point and where you're at on that launch?

If I can comment on that the X 3 launch is going extremely well.

The customer is extremely pleased with the launch and have said that it's the best launch of a vehicle ever.

The BMW.

Where are you into that launch Belinda, how far in temps volumes, how much longer does it ramp up?

John, when you look at a ramp up it's going to be an extended ramp up.

We're not going to get to full volumes until the second half of next year.

All right, thank you very much.

Our next question comes from the line of Fadi Chamoun at Warburg.

Please proceed with your question.

Good morning everyone.

Good morning.

Quick question.

Very focused on the Asian OEMs here from your side.

Can you share with us a percentage of the backlog of new business that you have with the new domestic compared to what your existing business is now with the new OEMs?

We have about 3% of our business with the Japanese OEMs.

And we've set a target of within by 2010 to have between ten and 15% of our business to be with the Japanese customer.

Fadi when you look at the backlog of business with the domestics, we are happy that we are getting awards, we're happy that that backlog is growing.

But the focus of our team here is to accelerate that growth with the new domestics to get to the numbers that Belinda talked about.

It's really my top priority as a CEO that I, you know, go over every quarter to visit our Japanese customer and we work together.

And the Magna and family of companies continue to win more business with our Japanese customers.

Okay.

And is there a particular part of the business that is having more success than the other in terms of quoting on new business?

Particularly Cosma stamping side, have you seen more activities in North America with the new OEMs, with the new Japanese OEMs?

I think when you look at sort of the opportunities of the new domestic OEM and success, you know we've had success across the board.

If I think of sort of three areas that probably are a little hedged than the others, and that is really a nature of the way the new domestics are structured here in North America, I think really Intier, Magna Donnelly and Cosma are making a little more progress than the others.

With respect to Cosma, when they set up an assembly operation, they normally set up a body shop and class A stampings on their own.

Cosma is to bring new technology, innovative ideas to the new domestics in a way to get some work from them.

If I could just add to I could just add to that, after recently completed discussions with our customers in Japan, we've invested heavily in research and development and development of new technology and the new product they find that attractive.

As well the expertise in manufacturing in the European market, they try to penetrate that European market, they see our expertise as being attractive.

Okay.

That's helpful.

One quick -- you are right now in advanced negotiation with Daimler Chrysler with respect to taking a controlling interest in new venture key, that has been reported in the media and by the labor union as well.

Can you share with us how far advanced are you in this negotiation and maybe some -- some details on how you think near venture could fit within the entire power train operation and your North American power train business as well?

It's not our practice to comment on pending or -- acquisitions.

So we are unable to comment on that.

Okay.

The last question I have is, Intier had some problems with the Free Star launch, were these isolated to Intier or have there been impact on Cosma and the other subsidiaries as well and if there is could you quantify those a little bit for us?

With respect to Intier, those were largely software issues and those issues have now been overcome and Intier is green with the customer.

Great thank you.

Our next question comes from the line of Ron Tadross, Bank of America.

Please proceed with your question.

Thanks a lot.

Good morning everyone.

Good morning Ron.

Just a appeal here, it would be great if you could e-mail the slides ahead next time, next time, I don't know, maybe it's me, I'm not good at multi tasking versus being on the Web.

But on the margins can you just go through roughly North American versus European margins on the gross line how they're looking there, how this plays out over the next few quarters, as you get deeper into the launch of the X3?

I'll comment on third quarter margins.

When I look at year over year, North America versus Europe, European margins are -- have actually improved year over year basis.

And that reflects a number of things.

One, in some of the launches that are taking place in Europe are now starting to contribute some good profits.

As well, our continue to focus on underperforming divisions is paying off and we see some improvements there.

North American basis on a year-over-year basis margins were a little bit down, and that substantially relates to overall launch cost associated with the new and replacement business is being launched in North America.

With respect to margins going forward, Ron, I don't really want to discuss it at this point.

We'll have a conference call in the next little while to talk about our outlook and we'd be happy to review margins and sort of what directions they're taking and why they're taking that direction.

Okay.

So when you say launch cost in North America, does that mean -- does that mean -- I mean, does that mean basically that this stuff can go away, or are you -- do you expect the launch cost to go away over the next year or so or your launch volumes, your launch volumes seem like they're going to be steady going forward.

I think when you look at 2003, compared to prior years, there was a real ramp up of launches in 2003, whether that was are North America or Europe.

And that's had an impact on a comparable basis on margins.

You know, next year we're still going to have launches.

We have launches every year.

But the magnitude of the launches will not be as significant as it is this year.

And keep in mind that as we talked about the $3.3 billion of sales that we're launching will generate some profits next year so that will help margins.

On this currency thing you kind of alluded to the fact that it's hard to get your arms around the benefit.

Is it fair to say it is not in the guidance or it is not in the guidance the earnings guidance for the quarter, were you surprised by the positive effect of it this quarter?

No, not at all.

Ron, let's go back to the quarter when we talked about guidance for the third quarter.

Ant the assumptions we had used in our guidance for the third quarter an the full year were based on exchange rates around the end of the second quarter, if you look at exchange rates at that time, and the average exchange rates for the third quarter, they haven't moved at all, I mean, they've moved a little bit, substantially they're the same.

And the guidance for the balance of the year is based on current exchange rates.

So no, I have not at all been surprised by foreign exchange rates movements in the third quarter.

Thanks a lot Vince.

Next question comes from the line of Peter Sklar at Nesbitt Burns.

Please proceed with your question.

Vince I just want to make sure I understand the accounting in the $1.22 you reported, does the $1.22, I think what you’re saying it includes two months of MEC?

That's correct.

Let me just for clarification, the $1.22 includes three months of automotive operations, two months of MID, income from operations, and two months of MEC income from operations.

The only thing that's excluded from consolidated earnings are the impairment charges relate to the MID spin off.

Okay.

And the difference then between the $1.21 and the $1.22, there is another number you're reporting above it, $1.21.

The $1.21 is a required GAAP disclosure.

And that's EPS from continuing operations.

That includes three months of automotive, and two months of MID, as well as the $6 million impairment loss on the disposition of the MID -- or the distribution of the MID shares to our shareholders.

No MEC.

And no MEC.

Okay that's clear now, thanks.

The -- just going back to the BMW X3 were you in volume production at all during the quarter or were you kind of stop and starts more prototype production?

Start of production from our perspective on the X3 is fourth quarter, Peter.

We have built a small number of preproduction units in the third quarter, Peter.

All right.

Couple of your subsidiaries on their call, it was Intier one of Cosma or Decoma, the percentage they were giving back in 2003 as in excess of last year, I just was wondering if you could comment is that the case for Magna as a whole?

They didn't provide specific numbers, they said directionally the number was bigger this year than it was last year.

We have always talked about pricing concessions with our customers and they've been around for years and years, and some years the pressures are a little more difficult than others.

And you know, I've gone out and said publicly that 2003 has been a little more difficult than prior years.

So the impact overall on the reduction of the P&L as a result of price give-back is a little more severe than prior years.

That will evolve over time goes up and down.

What we're focused over here is really working with our customer.

Because they're under severe pressure as well and you can see the incentive it.

You know, there are record levels and our challenge at Magna is to continue with ways to improve taking cost out of the system, innovation, technology to help in very simple terms, give the customer better products for a better price which will help them in the market and help us continue improve our operations.

If I could just add, while the pricing pressures I'd say are difficult, I think there's a greater appreciation for the need to have a strong supply base as well and better systems in place for purchasing and engineering to work together to, you know, receive ideas for whether it be better products or improved waives manufacturing.

Okay.

Just one last question, a technical issue.

On the minority interest line, with, you know, Magna Entertainment now out of the picture, what operations are left that are reflected in minority interest?

Public subs, Cosma, Intier and Decoma.

There’s not private companies that are significant that have minority interest?

No a minority interest, we do in equity income but no in minority interest.

Okay that's all I have, thank you.

Next question comes from Chris Ceraso, Credit Suisse First Boston.

Please proceed with your question.

Hey good morning, thanks.

Vince did you say that the total new business that’s launching this year is 3.3 billion Net new --

No, we said that new and replacement business is 3.3 billion.

Part of it is replacement part of it is new business.

Okay.

How much of that is for the X3?

Chris, that's a good question.

What we've talked about publicly and what BMW allows us to say is that we expect overall sales revenue in the BMW X3 to be in essence of 3.3 billion.

[inaudible] is on a annualized basis as well, its not all coming in this year.

Okay, that makes more sense.

Back to the question that came up earlier about your ability to bid for business and how a rising Canadian dollar affects that.

You said you are showing quotes at what was it 70 to 72, and it's not reflective of current rates.

Is that because of your hedging activities or how are you able to do that?

Let me just clarify, when what we have historically been quoting from Canadian plant in Canadian dollars is something that is going to be shipped to the United States, we submit a quote in Canadian dollars.

But our customer would take that Canadian dollar price and convert it to U.S. dollars for the purpose of comparing our price to our peers.

They have not used the current exchange rate to convert those prices, they would use an exchange rate that would be in excess of 70 cents.

So my point was we have been successful, even if you go back one or two or three years back of being awarded business where our customer had used a 70 cent plus dollar to convert Canadian prices to U.S. prices.

So if the current Canadian exchange rate is at 75 cents it's not substantially different to what our customer would have converted our price two or three years ago.

And is that because they're hedged or because they're assuming it will normalize at something north of 70 cents?

I'm speculating but I've got to believe that you know, their view of the Canadian dollars is that it was artificially low and eventually it was going to move up.

That the 60 cent dollar wasn't sustainable.

And remember that the OEMs are long in Canadian dollars as well.

Okay.

Then one just housekeeping question, I apologize if I missed this in the release.

Did you give us the U.S. production sales revenue number and the European sales revenue number?

North American and European production revenue for the quarter?

Yes.

It's 1.9 billion in North America and 1.3 billion in Europe.

In the quarter.

Okay.

Thanks a lot.

Thank you.

Our next question comes from the line of Michael Heifler, Deutsche Banc.

Please proceed with your question.

Good morning everyone.

Good morning.

Just a couple of forward-looking questions, as you guys are going through your planning process for 2004, just wondering how you're thinking about mix.

On some of your existing platforms, your more mature platforms, how mix will affect content per vehicle and margins next year and just to get your thinking on that.

And also on capital spending, what are some of the factors that might affect capital spending over the next 12 months or so?

Mike, it's Lewis .

We can't go through the details of 2004 and building up our models but we can say basically when we do our business plans, we start with looking at volumes, by segment, looking at all the competitors coming into the market, looking at the age of the vehicles, and building that in.

So implicit in our content per vehicle growth is, you know, a mix of business that reflects all that, you know, new programs, new vehicles in each of the segments.

And what that means is a competitive threat to those segments in our high content vehicles.

So you can rest assured that we've taken our best stab at what we think that mark is going to look like in terms of the breakdown by platform.

Mike, with respect to capital spending, we always talk about having business on hand today that's booked for the next several years.

So as we look into 2004, and capital, a substantial part of the capital that we're going to spend in 2004 relates to programs that have been awarded, is both the price list and what the capital is going to be for 2004.

Because we've had those commitments for a couple of years if not longer.

The other elements of capital, we do invest in equipment to improve overall productivity.

We do have to maintain equipment, and there is things that we also spend for environmental perspective.

That also comes into capital the.

That's discretionary.

The bulk of what we spend is awarded already, we can't back out of those commitments.

The other thing that might affect capital, a program might be delayed three or six months or put forward.

Capital for the quarter is going to move.

We've got a pretty good idea for what our capital will be for '04 as well as '05.

But at this time Mike we are not in a position to talk about capital in isolation.

Once we talk about our entire outlook for 2004 we'll talk a little bit about capital as well.

Vince, would you be prepared to give directionally you know some sort of a view here?

Mike, I guess what I've been saying directionally if you look at capital this year of about $750 million, excluding MID, you know, directionally, you're not going to see it jumping up a whole bunch or jumping down a whole bunch.

We have new business coming on, our content per vehicle is going to continue to grow , and we're going to have to invest to support the increase in sales.

Thanks, that's helpful.

Next question comes from Nick Morton, RBC Dominion Securities.

Please proceed with your question.

Good morning.

Just looking at your operating income, I notice that the total operating income from the three spin codes was down while the 100% owned operations had improvement.

Do you feel that maybe some of your spin co need help from the home office or do you have comment there?

Each of the business units and what they're going through, in terms of I think in Tesma case, I don’t have the numbers in front of me, but I would relay operating income was up and not down.

In case of Decoma and Intier, they have a number of launches that are taking place both in North America and in Europe.

And when we talk about their launch activity that certainly impacted Magna consolidated.

On the Magna Steyr side from a wholly owned perspective, we have seen improvements in Magna Steyr.

You know as expected and there are really two components for that.

One is our power train operations, last year we had some operational efficiencies.

There were the launch mode, we have improved efficiencies there.

Our sales are improving, and that’s resulted in additional profit.

Magna Steyr was launching a whole bunch of programs as well, getting ready to launch at the end of 2002.

They had E Class that launch, not only the four by four version, but the four by two version, they had the Saab 9-3 which now launched in the third quarter, so all those factors improved Magna Steyr.

In the other automotive operating line you know, we've got the benefit of Donnelly which is contributing to bottom line profitability.

So --

The other thing too with Intier, you know, I talked about my comments, negative mix in the quarter.

What I didn't say in the positive time is GMP [inaudible] was positive toss us but if you look at the RS and the CS mini van platforms in Chrysler where Magna supplies the seats, that hurt us from the content and sales perspective, that hurts Intier a little bit more than the rest of the company.

And Decoma was affected by fairly weak Explorer production, mini van has also been weak and the LH which is closing down as well.

Three of their top five that affected Decoma in the quarter.

Great, thank you very much.

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

Please proceed with you question.

Good morning.

Morning.

Belinda the comment you made the 3% with Japanese OEMs does that refer to current sales in North America?

That's current sales yes with our Japanese customer.

And that's in North America?

No, that's worldwide.

Global.

Okay, would most of it be in North America?

Most in North America yes.

Just wondering if you could provide an idea of the Canadian dollar denominated revenue?

David, I don't have that information here.

Even ballpark idea?

And would that move up and down?

Presumably that's going to affect your CPV and sales as exchange rates change.

Let me see if I can dig it up.

Okay, that's great.

I would say it's in the 30, 35% range David.

If you could get back to me that would be great.

Replacement of 3.3 billion, can you give a rough idea of the split?

New and replacement?

Yes.

No we haven't provided details on that at all.

You can tell by content growth that we expected for this year and next that there's substantial new business that's included.

I would guess.

3.3 billion was also to say look if we have new business or replacement business, we're launching new business and there is additional risks and that affects our margin and earnings.

That’s really what the 3.3 billion is an absolute number that people can focus on.

North American numbers were down particularly in the quarter and particularly big 3.

Do you have a sense how that impacted your margins on a consolidated basis?

By OEMs, is that what you mean?

Not by OEM but just in total, like the big 3 were down a lot more than the market, that had negative impact on your CPV and I presume also we may have had some negative impact on your margins.

We don't look at gross margin that way David so we would just be guessing.

Okay, E class are both the versions launched?

Yes.

And SG&A, you said Vince that you had built -- or you built some SG&A to get the launches off nicely.

Is it reasonable to assume that that will then decline to the lower 6% level your sort of historic level in the future?

Expect as we move on to 2004 that SG&A as a percentage of sales was going to come down.

Okay, that makes sense.

Last question I had, your balance sheet is still hugely powerful, but also extremely inefficient from a financial standpoint.

Do you have any thoughts on that both in terms of buy-backs, did you buy any back, and then also in terms of other uses of the balance sheet?

I would look at our balance sheet and say that we've got a very strong balance sheet.

And you might be able to run some mathematical analysis if you put some leverage it's going to improve the earnings per share.

But we've got a longer term vision at our company and we run the company for growing sales and profitably longer term.

A strong balance sheet David, allows us to be successful in winning huge programs.

We look at the BMW X3, BMW is extremely happy with us but one thing they considered before they awarded us that program is Magna had the financial backing to take on that program.

What if something went wrong?

Nothing has gone wrong but what if something went wrong, BMW is thinking does - can Magna throw dollars to fix the problem.

Having a strong balance sheet from a customer perspective allows us to grow.

And as you look around, there is a whole bunch of opportunities out there, some we may pursue.

And I should add, it's also very attractive to our Japanese customers as well that we have financial stability.

They look at that very closely.

Okay.

Great, thank you.

One more question operator.

Our next question would come from the line of Jon Rogers at Wachovia.

Please proceed request your with your question.

Most of my questions have been answered.

Vince can you mentioned come down based on the MID spin off.

Can you quantify that for us?

It is not significant in any way.

If you turn -- appendix A on page 23 of the press release, when you look at the pro forma impact of MID on SG&A is really negligible.

It will be a million bucks a quarter.

It's going to be insignificant.

Okay.

And then I guess just for a quick comment on the margin performance, and it looks like the public subs came under some margin pressure for a variety of reasons.

Can you give us some color on where you made up the performance in the wholly owned subsidiaries?

And what might have contributed to that?

Well, I think we've previously, where Weaver seen some margin excitement, you can see it through our segment information on note 10 to the financials.

You know certainly as Magna Steyr we've seen some overall major margin expansion for the reasons we've talked about, improvement in product mix in North America, and as well in Donnelly, all of that is contributing to margin growth.

Okay.

Thank you.

Just go back for a moment, when you look through the whole company and you look around whether it's Decoma, Magna Donnelly, I can see pockets of improvement across all those groups and I can also see why margins are going down.

The central component impacting margin is the business that's being launched.

We've talked about going into 2003 that launches were going to impact their margin and profitability in 2003.

As we expect the results are affecting that in a big way.

Okay.

Thank you.

I would now like to thank everyone for participating in our conference call this morning.

The key theme for Magna this year has clearly been launches and we are generally pleased with where we are today but we're not out of the woods yet.

We need to continue to ramp up on recent launches and our highest profile launch this quarter with the BMW X3 at Magna Steyr and we look forward to a strong fourth quarter.

Thank you.

Ladies and gentlemen, that does conclude the conference call today.

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