Magna International Inc (MGA) 2004 Q1 法說會逐字稿

Ladies and gentleman, thank you for standing by.

Welcome to the first quarter 2004 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 one followed by the four on your telephone.

As a reminder, this conference is being recorded Friday May 7th, 2004.

I would now like to turn the conference over to Mr. Vince Galifi, Executive Vice President, and Chief Executive Officer of Magna International.

Please go ahead, sir.

Thank you.

Good morning, and welcome to our first quarter conference call.

With me today is [Lewis Tinelli], Vice President Investor Relations.

Yesterday, we held our annual shareholders meeting in Toronto, which I'm sure some of you attended in person or via our webcast.

As a result, we will be brief in our formal remarks, leaving more time for us to answer questions.

We issued a press release yesterday during the meeting for the first quarter ended March 31, 2004.

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.

I will discuss our first quarter highlights, as well as comment on our revised outlook for 2004.

Lewis will then review our detailed financial results for the first quarter.

We enjoyed an excellent quarter and business awards from our customers, in particular with Asian-based, new domestics, and European customers in North America.

The awards represented more than 20% of the business awarded to us in the quarter, and was won across a number of our product groups, and about two-thirds of those business awards were with Asian-based new domestics.

I would like to briefly comment on the important launch of the BMW X3 at our Magna Star facility.

The program launched during the fourth quarter of 2003, and we continued to climb the launch curve during the first quarter of 2004.

To this point, the launch has gone well, and we continue to anticipate reaching full volumes in the second half of 2004.

While Lewis will review the details with you, I would like to comment that we are very pleased with our first quarter results, including record sales of $5.1 billion, record net income, record earnings per share of $1.84, and as anticipated, a very strong return on funds employed.

In early 2003, with a heavy launch year in front of us, we were focused on launch execution.

We realized that in the short-term, earnings would be affected by our launch activity, and as we expected, the investments and launches we made throughout 2003 are beginning to bear fruit in 2004.

We ended the first quarter with an even stronger balance sheet, including cash of $1.9 billion.

We will deploy cash for major new program opportunities, potential acquisitions, including New Venture Gear, on which our discussions continue, and possibly to redeem our preferred securities and buy back stock.

In addition, we announced yesterday that their board increased Magna's dividends by 12% from 34 cents to 38 cents per quarter beginning with our first quarter dividend.

This move underscores our strong cash flow generation, and the board's confidence in our future.

In our press release issued yesterday, we revised our outlook for 2004.

Please note that our outlook excludes the impact of potential acquisition.

To recap, our most recent assumptions for production volumes in 2004, which are implicit in our earnings outlook are as follows: North American light vehicle production of approximately 15 million units, or about 1% above 2003 levels.

Our previous guidance of 15.1 million units has been trimmed due to high vehicle inventory levels.

European production is expected to be approximately 16.4 million units.

This is leveled with 2003 and unchanged from our previous outlook.

North American content per vehicle is expected to be in the $580 to $600 range, higher than our previous outlook.

Given our strong first quarter content, this range indicates some of our caution above potentially negative mix for the balance of 2004, as well as ongoing fluctuations in the Canadian dollar relative to our U.S. dollar reporting currency.

There are a number of programs expected to contribute to our content growth, including the Ford Free Star and F150, the GMC Canyon and Chevy Colorado, the Chevy Equinox and Malibu, and the Chrysler Minivan.

European content per vehicle is expected to be in the $495 to $520 range, which is also higher than our previous outlook.

The key items affecting European content per vehicle includes fluctuations in the euro and British pound relative to the U.S. dollar, and shifts in sales mix.

Some of the new programs in Europe that are expected to contribute to content growth for 2004, are the BMW X3 and 5 series, Saab 9-3 Convertible, Volkswagen Golf, Mercedes C Class and the [inaudible].

In addition, we continue to be involved in new program launches, and expect our tooling and other automotive sales to be in the $1.1 to $1.3 billion range.

As a result, total sales are expected to be in the $18.5 to $19.4 billion range for 2004.

Eclipsing 2003's record levels, and higher than the outlook we disclosed in January.

We continue to expect operating margin to be the low to mid 6% range.

Our tax rate is expected to be approximately 36%.

We continue to expect [inaudible] from operations for 2004 to exceed 2003 levels.

And capital expenditures are expected to be approximately 800 to 850 million for 2004, compared to the $750 million in 2003 restated to reflect distribution of MIB.

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

Thanks Vince.

Good morning, everyone.

I'll review our financial results for the first quarter ended March 31, 2004.

All figures are in U.S. dollars.

I'd first like to mention that our quarterly figures for 2003 have been restated to reflect the adoption of the Canadian Institute of Chartered Accountant's new recommendation on asset retirement obligations.

This standard requires that we estimate and accrue the present value of our obligations to restore lease premises at the end - end of the lease.

We adopted this recommendation effective January 1, 2004 on a retroactive basis.

There was no retroactive change to the consolidated statement of income for the three-month period ended March 31, 2003.

This accounting change, which is consistent with U.S. practice, results in a P&L impact of approximately $2 million in expense, or 2 cents per share for the full year 2003.

Further details can be found in Note 2 to our financial statements included with yesterday's press release.

Consolidated sales increased 46% to a record $5.1 billion in the first quarter of 2004.

Let me take you through the specifics.

In Q1 2004, North American production sales grew by 26%, while production was level compared to Q1 2003, North American content grew by 26% to $606 for the quarter.

The growth in content was attributable to our involvement in new production programs.

These programs include a Chevy Equinox, which launched in the first quarter of 2004; and the Ford Free Star, Mercury Monterey, GMC Canyon, Chevy Colorado, Chrysler Pacifica, Cadillac SRX, Chevrolet Malibu, and Dodge Durango, all of which launched during 2003.

Offsetting these are programs that experienced lower volumes including the GMC 800, Chrysler Minivan, and the Ford Explorer.

The strengthening of the Canadian dollar against the U.S. dollar and net acquisitions also increased content per vehicle.

European production and complete vehicle assembly sales grew to $2.2 billion representing an 88% increase.

This improvement was a result of an 86% increase in European content per vehicle to $512 and a 1% increase in European production volumes.

The launch of new programs in particular complete vehicle assembly of the BMW X3 and the Saab 9-3 Convertible, and the strengthening of the euro and the British pound against the U.S. dollar were the most significant factors in this increase in the quarter.

Programs that also contributed to content growth were, the Mercedes E class, the Volkswagen Touareg, the - and the BMW Mini.

Offsetting this growth were programs that experienced lower volumes in the first quarter in 2004, including the Mercedes G Class, assembled at Magna Steyr, the Volkswagen Golf and the [inaudible], the [inaudible] and Nissan Primeastar.

In summary, consolidated production and complete vehicle assembly sales increased approximately $1.5 billion in the first quarter with global content including a $749 million increase in complete vehicle assembly sales, and the movement of currencies against the U.S. dollar being the most significant factors contributing to sales.

Tooling and other sales were $378 million for the quarter, up 58 million from the comparable period.

The increase was primarily the result of an increase in reported U.S. dollar sales due to the strengthening of the Canadian dollar, euro and British pound, each against the U.S. dollar.

As we expected, gross margin as a percentage of sales declined from the comparable quarter from 17.4% in Q1 2003, to 14.7% this past quarter due to the launch of the 9-3 convertible for Saab and the BMW X3 at Magna Steyr since the cost of these vehicle assembly contracts are reflected on a full cost basis in the selling place of the vehicle.

The MID distribution was effectively added additional lease expense compared to the first quarter of 2003.

Foreign exchange movements, the strengthening of the euro and British pound each against the U. S. dollar, resulted in relatively more of Magna's consolidated gross margin being earned in Europe in the first quarter of 2004, 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 is currently lower in Europe compared to North America, and customer price concessions.

These were all partially offset by the positive impact of programs that launched during and subsequent to, the first quarter of 2003, improved performance and productivity improvement at a number of divisions and the relatively unchanged level of tooling and other automotive sales that earned low or no margins.

We have commented over the last couple of years that with the increase in integration, marginal assembly and complete vehicle assembly programs, margin percent metrics have become less relevant and return measures such as [inaudible] have become more meaningful tools to measure success in our business.

Magna's return on funds employed increased to 27% in the first quarter of 2004, from 24% in Q1 2003 reflected to - restated to reflect the MID distribution.

As expected, due to the increase in assembly sales on which SG&A as a percentage of sales is substantially lower than the Magna average, Magna's consolidated SG&A as a percentage of sales declined to 5.7% for the first quarter compared to 6.8% for the comparable quarter.

During the first quarter of 2004, stock option agreements with certain former employees were modified, which resulted in a one time charge of $12 million.

This charge represents the remaining measured but unrecognized compensation expense related to certain stock options granted prior to 2004.

Our operating margin percentage was 6.4% in line with our full year operating margin outlook.

Our effective tax rate was 37.5% in the quarter.

The higher than expected tax rate is primarily the result of the $12 million stock option expense which has not been tax effected.

Net income from continuing operations increased 19% to 184 million in the quarter compared to 154 million in the first quarter of 2003.

Diluted EPS from continuing operations increased 17% to $1.84 per share from $1.57 in the comparable quarter in 2003.

Excluding the one time charge of 12 cents per share, diluted earnings per share was $1.96.

Further, excluding the impact of MIB in the first quarter of 2003, diluted EPS increased 36% from $1.44 in the first quarter of 2003.

I will now review our cash flows and investments activities.

During the first quarter of 2004 we generated a record 399 million in cash from operations.

Another 202 million was generated from working capital.

For the quarter, we invested 182 million comprised of approximately 148 million in fixed assets, 11 million to purchase subsidiaries, and 23 million in other assets.

This concludes our formal remarks.

Just as a reminder, the discussion today contains forward-looking statements within the meaning of the applicable securities legislation.

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

Please refer to 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.

Ladies and gentlemen, if you would like to register a question, please press the one followed by the four 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 your registration, please press the one followed by the three.

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 [Himanshi Patel] for J. P. Morgan.

Please proceed with your question.

Hi, good morning.

Good morning.

I've got three questions.

First, just a small question.

The 12 million charge on the, on the stock options, which line on the P&L did that go through?

Included in SG&A.

SG&A, okay.

And then Vince--actually Lewis, you had mentioned-- I don't know if I was reading into this too much, but when you were describing the year on year decline in gross margin, the sequencing of the cars you mentioned, you mentioned the Saab 93 and the BMW X3.

Are we to read from that that the 93 is actually more margin dilutive than the X3 contract for some reason -

I wouldn't read anything into that.

There isn't anything particular about the order.

They're both programs that have an impact.

They're both full costed programs.

Okay.

And then - lastly, the X3 assembly capacity itself, I'm guessing you guys are now close to kind of at a 90,000 unit annual capacity.

If BMW came back to you and asked you to raise the bar a lot more from that, let's say, you know, maybe double that or something down the road, what-- just can you give us some color around what sort of timeframe you guys would need to go ahead and execute on that?

Well, in terms of where we are with this program right now, as we've mentioned, we're ramping up.

We expect to be at full volumes in the second half of 2004, and we believe that, you know, based on the discussions we've had with BMW, we have sufficient capacity to work with BMW as a program moves forward.

Okay.

That-- when you say we'll get up to full capacity by the second half of '04, is that, you know, BMW just announced I think a couple months ago that they were raising production capacity for the X3 by 30% or something around that order.

I mean, does that get you to that level - that they implied by the second half of '04?

We can-- we're going to continue to ramp up throughout the first half of this year, so as I mentioned in my comments, and I don't want to be too specific, based on guidelines BMW has given us, but as I said, we expect to continue to ramp up and reach full volumes in the second half of 2004.

Okay, and then, Vince, the ROFE target for-- I mean you did 27% on your metric for the first quarter.

Does that grow going, you know, kind of as an exit rate into '04 or should we kind of view that as where you're probably going to annualize for the full year at?

I'm not going to comment specifically about where 2005 is going to head to.

There's a whole bunch of things that impact ROFE.

One certainly is the level of operating EBIT and the other is the funds we have employed.

The other is number of launches that we have in any particular year.

We're very pleased with the improvement that we've made in the first quarter.

We weren't-- I'll tell you, surprised, we were expecting it because we did have a low launch cost last year, and some of those launches are now starting to generate some returns as we had anticipated.

In terms of our target ROFE, the 27% is still below our target ROFE.

It's always difficult to get to your target ROFE because the business continues to expand.

So we're happy with where ROFE is today.

Okay, and then maybe just a different way of putting that question, the capital required for the X3 contract, is it fair to assume that the bulk of that got captured on your year end 2003 balance sheet?

Yes.

Okay.

Thank you.

Our next question comes from the line of John Casesa from Merrill Lynch.

Please proceed with your question.

Hello and thank you.

Just a handful of things.

First, how much of the - of the increase in your sales outlook is attributable to currency, and how much of it is, you know, just business?

John, when I look at 2004, couple reasons why we've moved up total sales.

I mean it's all driven by content per vehicle.

That's what drives really sales.

Right.

Couple things.

One is just the good performance we had in the first quarter in terms of a very good product mix.

And secondly, currency was a little-- the Canadian dollar and the European currencies were a little stronger relative to the U.S.

Dollar than we had anticipated, so we're carrying that through to the balance of the year, and the euro - our current view on the euro today compared to where we were - let's say four months ago - is that the euro is probably going be a little stronger than what we thought it was in January.

Right - but if it's largely content mix, would - we tend to think that the in increment in revenues would be favorable for margins without putting a number on it, it should be directly favorable for margins, is that correct?

Well, I think if you look at couple of currencies, first of all, the Canadian dollar, let's look at the Canadian dollar versus the U.S. dollar.

And we go back a year.

The Canadian dollar was appreciating throughout 2003, but if you look at the Canadian dollars post the first quarter of 2003, it was probably about 76 cents.

The dollar right now is about 73 cents.

I mean - I think the average so far this quarter is about 75 cents.

So, we don't expect to see a lot of movement, a lot of translation impact, Canadian to U.S. dollar year over year, but there - continues to be based on current exchange rates some positive impacts from the euro appreciating versus the U.S. dollar.

And since in Europe this year we're pleased to report that we do have improved results, higher European sales with positive European margins going to translate into more U.S. dollar reported margins.

Okay.

And then just two other questions.

You know, what's the status of this new Venture Gear thing, you guys have been talking for a long time, why is it not resolved yet?

I mean, what can you tell us about this?

Well John, the transaction with Daimler Chrysler - we - as I mentioned in my remarks, we continue our discussions with Daimler Chrysler.

It's a complex transaction.

There's really three parties at the table, there's Magna, there's Daimler Chrysler, and there's the UAW.

We - you know, from our perspective, we need to end up with a transaction that's positive for the company.

Daimler Chrysler is also looking for the same time.

At the same time, we have to end up with a - transaction that's positive for the UAW employees, and that's what we're working with currently.

Okay.

That's great.

Two more quick ones.

What's your comment on the performance of the mirror business?

Now that you've been with Donnelly for a while.

And what about the Steyr right deal?

The mirror business continues to show improvement quarter over quarter, and so we're pleased with the performance.

I would say that the mirror business is still underperforming in terms of ROFE compared to our other business units, but we anticipate, or we're expecting that, the mirror business will continue to improve as the quarters pass.

With respect to the Magna Steyr right deal, John, our focus has been at Magna Steyr is launching the BMW X3, the Saab 9-3, as well as the E-class program, and we really haven't had a lot of focus on that IPO at this time.

Thanks, Vince.

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

Please proceed with your question.

Good morning, gentlemen.

Good morning.

Good morning, Fadi.

My first question is on commodity prices along with your prices.

If you can give us some sense of the impact in the first quarter, and if you can also give us an idea on how should we interpret rising steel prices going forward on the margins.

And my second question is, you raised your outlook for the top line by about 600 million.

It's mainly in - on the European side and if my guess is right, it's Magna Steyr.

How does this change your margin outlook, the margin guidance that you gave us earlier this year?

Well, just wanted to clarify that we did not give any guidance on gross margin percent.

We did talk about our operating margins and what we said in January was that we expected operating margins to be somewhere in the low to mid 6%, and what we reaffirm today is we - we continue to expect operating margins to be in the low to mid 6%.

In terms of commodity pricing, I would - when I look at the first quarter and in particular look at steel pricing, certainly there has been some pressure on steel pricing.

We do have long-term agreements with a number of steel mills.

We're also on a lot of directed buys with our customers, but we do feel some pressure with respect to pricing.

The impact in the first quarter, I would say, was insignificant, but as we look to the balance of the year and sort of some of the concerns I would have is what's going to happen to steel prices?

Could have have a negative impact going forward, and some feel that prices are going to ease up a bit.

They continue high, there may be impact going forward.

The other thing that - you know - look through the balance of the year, we've had - not only us, but our peer group has had a very tough time with the pricing pressures from the OEMs.

So as I look to the balance of 2004, in terms of, you know, what might happen to earnings, it's commodity pricing, pricing pressures as well as, as Lewis alluded to in his comments, you know, negative mix on vehicles whether that's in North America.

It's a little less extreme in Europe, but that could all impact our earnings in a certain way for the balance of the year.

Okay.

One thing, the 600 million increase in revenues, I think about 500 on Europe, can you narrow that down a little bit, what the area of these are coming from?

For the balance of 2004?

Yes.

You know, the-- a large portion of that certainly is, is related to Magna Steyr, but really it's across all of our groups.

Okay.

Got to be careful because we have public companies, and you know - and being careful what they have said and not said, but it is across all of our groups.

Magna Steyr being a big one.

Okay.

Last question is in the segmented reporting, Cosma and other margins declined, and I think this has been going on for the last three or four quarters.

What are the factors impacting that and how should we look at this going forward as well?

Well, some of the factors impacting margins, is a couple things.

First of all, when you look back at 2003 and the program launches that we were involved in, the bulk of them were with groups other than Cosma.

Cosma has a couple of substantial launches that they are working on.

They're working on a facility in Kentucky, to supply the next generation of Ford Explorer frame.

They're also working in a new facility in Hermasillo, Mexico, so Cosmo's margins are being impacted by that.

And they're launching the M-class this year as well.

And, you know, across all of our business, pricing pressures are, are high.

And Cosmo's certainly feeling some of that impact as well.

Okay.

Thank you.

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

Please proceed with your question.

Well, good morning.

Good morning.

Good morning.

Would you break out the currency impacts on revenue and earnings for us.

In terms of - from a revenue perspective, David if you'd look at Q1 '03 to Q1 '04, about $500 million of production sales increased was related to currency movement.

But keep in mind that, you know, content growth, the North American euro, excluding currency, the impact, that positive impact there was about $990 million, but - or $980 million.

That's pretty positive.

From an earnings perspective, David, you know, we've been asked the quarter over quarter what's the impact on currency on earnings.

I can tell you that the impact's positive.

Trying to determine what the exact impact is is difficult.

Our business is complex.

There's a number of foreign exchange contracts in place, so when you try to work through all of that, it's very difficult to determine, but it has been positive for us.

So if I understood you correctly, 500 million is currency.

On sales, that's right, production sales.

And-- okay.

And can you split that between the euro, you know, European impact and North American impact?

When you look at, in Canada, currency is probably about $100 million, and the balance of it is primarily in Europe.

Okay.

Great.

Euro and British pound.

Okay.

And then as we look at, at the assembly business flows through and its impact on margin, what we're seeing here in the first quarter, is this what we should expect as a normal margin going forward, or is there some incremental impact that we're going to see yet later this year?

Well, David we, we've talked about operating margins, you know, where we think operating margins are going to be for the year.

Okay.

You've seen what our first quarter numbers are.

I think everything is pretty well in line - to actual numbers to where our outlook is.

But in our business, what we're focused on, and, you know, Lewis talked quite a bit about that during his formal comments is return on funds employed.

That's what we need to focus on in our business.

As we enter into programs, whether they're complete vehicle assembly programs or larger chunks of components, i.e. module systems, where we're purchasing more components, there is going be a negative impact on gross margins.

And I'm not alarmed by that provided that our return on funds employed continues at a very strong rate.

No, I agree with you completely on that.

And then one last item.

And I'm not-- I caught a piece of this question, so maybe - maybe that's one that's already asked, but is there a way to take the X3 and 9-3 revenue impact and put it into buckets across the business units at all?

Not sure what you mean by that, David.

How much of it falls into your Cosma, Tesma, and, you know, we can see-- and then the balance of the business?

No, we haven't had that level of detail certainly at our fingertips at this point.

But what we've talked about, David, is that, when you look at complete vehicle assembly sales, that's entirely Magna Steyr, and in the quarter, again, excluding engineering, just looking at vehicle assembly sales, our sales in the first quarter were $1 billion, 23 million.

Right.

Compared to in the first quarter of 2003, 274 million.

Right.

I realize that.

Did - do you think that there's a comparable revenue impact that flows across the three public companies?

Comparable revenue impact, I mean the- for the full content program, the amount of content that we have including the amount of Magna Steyr pieces, much smaller than you would expect.

It's still substantial as a component program, but much more than the overall -

But, David, as our groups, putting Magna Steyr aside, as our groups get into bigger modules and you think about interiors development - they launched the BMW 6 series where they doing a complete interior, now they're doing a lot of manufacturing for that complete interior, but certainly there's a high level of purchase components.

Tacoma, which is the leader in front end modules, and they have a dominant position in Europe, as that business continues to grow, they are going to purchase components, they're going to manufacture a bigger chunk of those components, but they are purchasing components.

So generally, you are seeing that pretty well across all of our groups--and even Donnelly, for example, as they move into higher value added mirrors, when we look at a prismatic mirror that sells for a couple bucks and a high value mirror that sells for over $100, there's going to be more components that are being purchased.

So, its a general trend across the industry and as, you know, we become a bigger and bigger tier one supplier, we're taking on bigger and bigger chunks of the vehicles.

We are going be purchasing some components.

Okay.

Thank you.

Our next question comes from the line of Rod Lache from Deutsche Bank.

Please proceed with your question.

Good morning, guys.

It's Mike Heifler.

Hi, Mike.

Good morning, Mike.

Just a couple questions.

I think in the past you guys have helped us look at it this way.

If you look at the gross margin decline of 270 basis points, Lewis, you mentioned that the assembly business contributed to that MID and FX.

Can you, you know, break that out, decompose that, give us the details?

Mike, I would say that the biggest impact on margins was the assembly programs that Magna Steyr, the BMW and the Saab program in terms of order of magnitude, when you look at the impact of MID and translation, there were about equal.

Because I'm not going to sort of get into specifics and tell you exactly what we think the - what we know is the impact of BMW and Saab on our overall gross margins.

Okay, because I thought you did that last quarter.

Okay.

We did last quarter.

We wanted to give people the flavor, we'd just started launching a program that had an impact, we wanted to give you a little flavor of how much it, is but we would rather not get into the exercise of trying to quantify all the little pieces going forward.

Okay.

Lewis, you mentioned that the margins improved in Europe.

Can you help us out with what type of margin levels Europe's at now?

Just trying to find it .

Margins-- sorry.

I'm lost a little bit.

The margins in Europe were actually down, gross margin, as expected with the launch of the X3.

We were closer to the 11-12%.

We're now below 10% in margins in Europe. ut as I said, that - that would be very much as expected with the launch of the X3 and Saab 9-3 convertible.

You get the full costed programs, we've talked about the impact on margins, obviously it's very pronounced on the European side.

Maybe your comments spoke to some of the underperforming operations improving there?

Yeah.

We were talking about underperforming operations not only in Europe, but in North America.

And can you give us an idea, you know, what kind of benefit that was?

Once again, we don't want to start piecemealing the pieces of our gross margin roll.

We would rather not get into that level of detail.

We're making progress in Europe across all of our groups.

Some more advanced than others, but - you know, we've had that as a major focal point through 2003 and we're going to continue to doing that making it more broad based across all of our groups in 2004, so we're on the right track.

Okay.

All right.

Thanks.

Thank you, Mike.

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

Please proceed with your question.

Thanks.

Good morning, everyone.

Good morning.

Hello Ron.

On this vehicle assembly line, the sales line, what was the purpose of breaking that out?

The purpose of breaking that out is to just get - give an indication of the impact the vehicle assembly sales are having on content per vehicle.

So you're not intent on giving us the margins at all, or - unless some rough idea?

No, we're--

What we said was to just give you a flavor for the size of the vehicle assembly programs and when you look at the growth and content per vehicle in Europe, which was substantial, looking at vehicle assembly sales, a big part of that growth came from Magna Steyr, but we did have good growth across the rest of our groups in Europe as well.

All right.

Keep in mind we've always said in terms of Europe in particular, content of vehicles, we have two different profiles.

We have an assembly program, which you launch it and it stays relatively flat until you win a new program.

You have ups and downs with volumes.

And then our component business has been growing with new launches, new programs from year to year.

So this hopefully gives you a little bit of indication of the two pieces of the profile .

Alright, and have you - have you yet quantified roughly what you think the X3 then could be over the next few years on that line or on the vehicle assembly line?

No, we haven't - haven't disclosed that at all.

Okay.

On the currency, when you say 500 million on production sales, does that include the assembly?

Was it - was that included in the currency impact?

The assembly, if you think about some of the programs there at Magna Steyr, the X3 just launched in 2004.

So that was excluded from overall currency impact - if we looked at that really an incremental program in 2004.

So, currency really relates to programs that were in existence in 2003.

Oh, okay.

Okay.

So year over year thing.

So, all right.

Then finally, you said your gross margin is running now a little below 10% in Europe, which, you know, implies that the vehicle assembly business on a gross basis is running below 10%.

sure.

How do you reconcile that with like if we look at a lot of the auto makers, their gross margins are running solidly above 10%.

Should - is there a way to think about why that may be different?

Ron - I - I'm not that much - about where the gross margin is in Europe.

Obviously I want them to - to move up.

Especially - and excluding Magna Steyr for the time being.

We've been working at improving operations across Europe generally, and we do have some really good operations but we do still need to make improvements during this - there's positive plans already in place, but when I look at the Magna Steyr business, I've been say thing for years, I don't look at gross margins.

What I look at is return on funds employed, and the, the amount of capital we have employed and the operating income is the right relationship to look at.

Compared to the - I'm just speculating, but compared to the OEM, we probably have less capital employ indeed our business than the OEMs have, which would imply a lower margin, but an adequate return on funds employed.

Okay, and then just finally here on this 200 million on the operating cash flow, the 200 million of other non-operating assets and liabilities, did you go through roughly what that is?

In terms of generation?

Yeah, the source.

We-- no, we haven't gone through that.

When you look at the fourth quarter to the first quarter, what we have seen is even though sales have really shot up, looking at the production receivables haven't grown at the same rate of sales.

The days in production receivables were down quarter over quarter, which has generated some cash as well as we - and [inaudible] at the launch, we moved into the launch as our receivables at our - normal pattern.

As well when you look at inventory turns as we have been programs, we have been getting our plants to a more normal run rate.

Our inventory turns have improved quite a bit, which has helped overall generate some cash from working capital, and there is a big spike in payables.

Again, as we have been launching, we have been able to put get to our normal process of paying our suppliers.

So all in all, that's helped to reduce non-cash working capital and generate some cash for us.

So most of the 200 million is working capital?

Oh, yes.

There is only one item in there that's sort of non-working capital, $2 million, and it relates to deferred revenue that we've recognized in the previous years that now's flowed into income.

So that's the only non-cash working capital item in there.

Okay.

Thanks a lot.

Our next question comes from the line of Nick Morton from RBC Capital Markets.

Please proceed with your question.

Good morning.

My comment's more a general question on the state of the economy with the interest rates perhaps rising, and valuations for auto parts companies being still quite low, what do you think of the acquisition market?

It was a topic I guess you raised a few times at the annual meeting yesterday that you haven't factored in acquisitions in your projections, but you're hinting strongly that you're interested.

Could you make a few comments just on what the market looks like for acquisitions?

Sure.

When I look generally at the market, I would say in the last 3 to 4 months that the level of opportunities have increased substantially.

Valuations in a lot of cases are still from my perspective too high, but if the economy doesn't tighten up a bit, there may be some opportunities out there where we make some fairly descent acquisitions.

From my perspective, an acquisition is not necessarily going out and buying a company.

An acquisition could also mean taking over contracts, which would be beneficial to us.

So things that - I think have changed quite a bit.

Valuations, I believe, are going to start to become a little bit more reasonable, but they're still quite high, but there could be some opportunities as we progress through 2004, depending on how the economy makes out the balance of this year.

Okay, and the beginning of your comments you made, you said that your balance sheet's in great shape and you might buy back some stock, et cetera.

What kind of leverage would you put on the company?

What - do have you sort of a ceiling internally on the debt equity or debt to total cap?

Yes.

Nick, in terms of balance sheet, our views are, have been consistent for a whole number of years.

One, we want to have a very strong balance sheet.

Nick, I wouldn't think of Magna going out and raising a whole bunch of debt.

We're going to want to run our company with a positive net cash position.

We believe in our industry, particularly an industry having that positive cash position allows us, if we need to, to use that for new program opportunities, major new program opportunities or potential acquisitions.

So we wouldn't count on us putting on leverage on the balance sheet.

Okay.

Great.

Thanks.

Our next question comes from the line of [Himanshi Patel] from J.P. Morgan.

Please proceed with your question.

Hi.

Just one follow-up question.

Vince, could you give us the number of units of the X3 and the 9-3 that you guys produced in the quarter?

Is that possible?

No, that's not possible.

In the press release that we issued yesterday, what we disclosed was the total vehicles assembled at Magna Steyr, but we haven't broken that up between the various programs.

In terms of total vehicles assembled - we assembled 51,100 in the first quarter of 2004, compared to about 28 ,500 for 2003.

That's up about 79%, and what's accounted for the increase in assembled vehicles, are number of programs the BMW X3, the Saab 9-3 convertible, as well as the Mercedes E-class [inaudible].

Okay.

Great.

Thank you.

Certain of our customers don't disclose that on a quarterly basis, and so we have to comply as well.

Right.

Okay.

Thank you.

Our next question comes from the line of [John Rogers] from Smith Barney Citigroup.

Please proceed with your question.

Yes, thanks.

Most of my questions have been answered.

I just want to follow up on the, the Steyr margin.

Vince, do you think that, is that at a level that's sustainable here, or is there more blending of the assembly business that might drive that down through the rest of the year?

The Steyr margin, when I look at the Steyr margin on its own, all that margin is generated from assembly programs, so - it's additional being produced.

It's not going to impact Steyr's margin.

However, if Steyr does operate at margins less than the rest of the company for the reasons we talked about, so there is a substantial spike in sales, that will have a corresponding impact on overall consolidated margins.

Right - but as-- I mean there was a dramatic improvement for a lot of different reasons year over year, and is that a level where you think it can be or can it rise from here?

Some of it within that segment that you're seeing is Magna Drive Train, which is showing improvement as well, and will likely continue to improve.

So you have to keep that in mind.

The Magna Steyr vehicle assembly and engineering business and Magna Drive Train are included in that segment.

The Magna drive train, as you know, is working on the transfer cases for the next generation of GM full size pickup trucks and sport utility vehicles, and based on our accounting policies, all those costs are expenses incurred, so there are investments being made in Magna drive train, so there's is a mix of things in that one line item that we're showing for Magna Steyr.

I guess the last question the - the ROFE target, can you just remind us what that target is for the consolidated company.

For new programs, our target is 30% on average over the life of the program.

That's what we expect.

And as Vince mention , if you look at our rate, we're close but we're not quite there, and that's because you're always investing, so you've always got some programs that are incurring costs and generate no revenues.

In fact, they had some that are above that level, and some that are below that level.

But, we're certainly creeping up to that level, which is good news.

Thank you.

Our next question comes from the line of Peter Sklar of BMO Nesbitt Burns, please proceed with your question.

On this ROFE parameter that you're talking about now, can you explain exactly how you calculate ROFE, and is that something that we can calculate based on the, you know, the financial statements?

Sure, yeah.

ROFE is EBIT as your numerator, over the assets employed, and assets employed is total assets excluding cash.

And we look at working capital, we're looking at networking capital.

So we're netting off the payable side.

The 27% that you're talking about, I should be able to do that calculation.

Well, there is some averaging in the funds employed that you've got to keep in mind, but much of the details is available there on our analyst report.

Peter, we come up with average roughly, we look at it monthly, so you don't have access to our monthly results, so you're going to only be able to see quarterly numbers, but it's going correlate very closely.

Okay, and I won't really be able to go back and really track a history because of the MID spin out.

That's fair.

Well, I mean, the press release does have - does have some detail.

We've actually got - I don't know if-- yeah, we actually - stated a lot of information in our November press release last year.

Right.

So it's a good place to start, but beyond that, we don't have that available to us, no.

So given that management now is emphasizing ROFE over margins given the assembly business, would you consider providing a proforma history on a quarterly basis, of the ROFE of the company - is that something you could think about?

When I said proforma, proforma the MID.

I guess it's something we can certainly consider.

How far back we can go is - is going to be a challenge, I guess, for us, but some of that information we can consider I think.

But Peter, I just - I just wanted to make a comment here.

Management obviously is focused on ROFE as a way to evaluate our various business units, because each one of our business are so different in terms of what they produce and what they buy.

We still focus on gross margin, and gross margin is still very relevant if have you a particular plant that's similar to - another plant, we'll want to make sure that we look at margins, and say why are margins in plant A higher than margins in plant B.

It's not that we completely abandon gross margin as a metric to evaluate our performance, but sitting back from our corporate office over here, the best way to evaluate all our various investments is return on assets.

Okay.

I understand.

Just one last question, just in the detail.

I notice that depreciation expense was effectively flat quarter over quarter meaning versus the fourth quarter.

There is, remember--

Is that the write offs, or the write downs and the subsidiaries?

No.

The biggest impact - we had a number of things in depreciation.

Remember that in 2-- first quarter of 2003 we were consolidating MID, so we had depreciation on all the properties.

Vince, I was looking relative to the fourth quarter.

Relative to the first quarter.

I believe depreciation in the quarter just reported was 135 million.

Even the fourth quarter, it was 136 million.

Peter, part of that may relate to the write-offs, but that's not going to be substantial.

I don't have the answer right--

See if we can dig it up, Peter.

Okay.

Thanks very much.

Okay.

Our next question comes from the line of David Tyerman from Scotia Capital Please proceed with your question.

I have four questions.

Guidance on the margins, excluding the 12 million charge, you did 6.7%.

Are you saying this is the high water mark for the year and you're going to go down?

We're not saying that.

We're just saying what the number, that we expect to be in the range that we - that we had when we gave our guidance in January.

But you're above it in Q1.

Right.

So you can imply the number's going to go down, yes.

Okay.

And is it for the reasons you stated earlier, things like mix from the assembly and so on?

Yeah, ramping on the assembly side, mix, are going to be factors for sure.

Okay.

A little bit about, you know, impact of steel pricing and price concession.

Yes, all those factors?

Yes.

Okay.

Do you see the margins improving at any point, or is this sort of a go-forward mix for sometime?

You know what, we're not going talk too much about it other than the guidance that we've provided on margins, we're not going to get into a lot of detail on that, David.

Okay.

On the CPV, again on the guidance--North America you're already past the top end of the guidance range, in Europe you're past the midpoint.

Yeah, and Vince talked a little bit about mix being a big impact, bigger in North America certainly than Europe, but certainly in the first quarter, we came up above our guidance range as well, and I think that one of the things that happened was some of the programs we expected to be weaker ended up not being as weak as our forecast, but we still believe that some of those programs are going to weaken throughout the year and that's going to have an impact on the full year, obviously.

So even with the launches you have coming really no CPV growth for the rest of the year?

Launch is positive, potential negative mix would be negative.

And exchange rates.

Change and exchanges rates.

Good point.

With the Canadian dollar where it is today versus what the first quarter average exchange rate was--at that exchange rate in the first quarter was 76 cents, we're sitting at 73 cents now.

That's going to have an impact.

Okay, fair enough.

At the AGM it was mentioned that you have two new engineering contracts in North America.

I got the impression they were vehicle contracts--is that true and is there the for production related to them?

David, at this time, we don't have production contract on hand.

We are doing some work for North American OEMs in Detroit and that's under the Magna Steyr Group.

Are they vehicle, full vehicle?

I assume they must be if they are Magna Steyr.

I'm not going to get into the particular details of the contracts, but, David, remember that what Magna Steyr does--and you mentioned the [inaudible]facility-- they do complete vehicle engineering.

They also do engineering for big chunks of the vehicle.

I'm not exactly sure on the nature of the contract in North America.

Stay tuned.

And the last question I had is you mentioned the 12 million charge option agreements with certain employees were modified.

Who was this and what's going on basically there?

What it relates to is four employees that left the organization in the first quarter of 2004--and as part of the arrangement, what we did is we modified the various stock option agreements so that the options remain in place and, you know, over-- left in their stock option agreements, whether they're 2 to 4 years, but under the new accounting rules when you modify a stock option agreement, you're required to first of all revalue the stock options based on the current share price.

The second thing you're required to do, the stock option rules came into effect for us January 1st, 2003.

So we need to express options that were issued after December 31, 2002.

Except in the case where you modify options that were issued prior to December 31st, 2002, then you've got to expense those options as well.

So that $12 million charge relates to - first of all - options that were issued post-December 2002, that we would have expensed in the years to come, and a part of that relates to options that were issued prior to December-- prior to January 1, 2003 that we would have never expensed under the transitional rules and the stock option accounting if these employees would have continued being employees of Magna.

So from our perspective this, is a one time non-cash cost, and I think the right way to look at our numbers for the first quarter is the 184 plus another, I think the $12 million translates to about 12 to 13 cents per share.

So effectively, we're at 196 to 197 per share.

Right.

Isn't that a bit unusual though to essentially let people who left your company keep their options?

David, it depends on the circumstances.

We, we've- we've done that in the past, and it's up to the compensation committee in looking at sort of the facts and the situations to make the determination and not in every case are the options left in place.

Okay.

Fair enough.

Thank you.

Our next question comes from the line of Justin Wu from [G.

Andrew Securities].

Please proceed with your question.

Good morning, guys.

Good morning.

Vince, I guess in your initial comments you mentioned some business awards, some new domestic business.

I kind of missed that. can you repeat that for me, please.

Sure, what my comment said was that when we looked at new domestic awards--and we define new domestic awards as awards from the Asian based OEM as well as the European OEMs in North America--of our total worth in the first quarter 20% of those awards were with both customers.

In addition, what I said was when you look at that 20% of the awards, about, I think it was two-thirds of that related to awards from the Japanese new domestics.

The point we're trying to make is that we've been focused on for quite sometime to increase the amount of work that we're doing for the Asian-based new domestics, as well as for European OEMs in North America and based on the awards in the first quarter, we've made some real positive progress.

Continuing the positive progress that we've made during 2003.

Okay.

Great.

And just in terms of SG&A, I don't know if you mentioned within your guidance comments of any guidance going forward on SG&A.

I guess in the quarter you were at 5.7% of sales and that includes the 12 million on the option expensing.

So going forward, you mean Justin?

Yeah, going forward.

No, we didn't disclose it, we talked about operating margins, we didn't talk about SG&A.

But Justin, you need to think about the vehicle assembly business, and we've talked about the negative impact it has on gross margins, but it also has a positive impact SG&A percent for the same reason that gross margin is reduced, SG&A percent is also reduced.

Because of the high level of purchase components.

Okay.

In other words, the amount of dollars you spend for, on SG&A for complete vehicle assembly programs is less than a dollar you would spend on SG&A for a program where you're doing the complete manufacturing.

Or as I said earlier, the percentage of sales is lower than the Magna average.

That drags the average down.

Okay.

That makes sense.

Just my last question on steel, how much of your steel buy is done through your own purchasing departments versus purchased through some of your customers?

Well, if you look at our total buy, total buy, I guess, 75 to 80% of that is either long-term contracts or - spot - sorry, of the 80% we have about half of that is our long-term contracts, the rest of is resale through our customers and the remaining 20 to 25% is spot purchases.

And are you get a sense from your customers, I mean obviously steel prices are high and looks like they will probably remain high for sometime, at least on a historical basis.

Are you getting a sense that your customers are going to be willing to absorb the higher costs?

We have a number of discussions with customers, Justin, in terms of, you know, pricing discussions that we have with them on a quite regular basis.

There's a number of factors that are taken into accounting, including commodity pricing, overall competitiveness and innovation.

I'm not going specifically comment on commodity pricing.

Okay.

Okay.

Great.

Thank you.

Operator, we're going to take one more call before we wrap up.

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

Hi, David.

Hello.

Welcome back.

Can you hear me okay?

Yeah.

What portion of your revenues are Canadian dollars?

You know, that's not a number I have at my fingertips right now, David.

Okay.

I'll follow up with you.

All right.

Thank you.

Okay.

Well, thank you, thank you everyone, for participating in our conference call this morning.

We look forward to keeping you all up to date on our progress.

Enjoy the rest of your day.

Bye-bye.

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

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