Magna International Inc (MGA) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Magna International second 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 press the 1, followed by the 4 on your telephone.

As a reminder this conference call is being recorded Friday, August 6, 2004.

I would now like to turn the conference call over to Mr. Vincent Galifi, Vice President and Chief Financial Officer for Magna International.

Please go ahead, sir,.

Good morning and welcome to our second quarter conference call.

With me today is Louis Tonelli, Vice President, Investor Relations.

Yesterday, our Board of Directors met and approved our financial results for the second quarter, ended June 30, 2004.

All figures are in U.S. dollars.

Our Board also declared a quarterly dividend of 38 cents per share, payable on September 15th to shareholders of record on August 31st.

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.

I will discuss highlights of our second quarter and briefly comment on our revised outlook for 2004.

Louis will then review our detailed financial results for the second quarter.

The second quarter was another strong quarter in business awards from our customers.

This continued the high level of sourcing activity should allow Magna to continue to grow content in future years.

In particular, I would like to highlight one of the key programs awarded to Magna during the second quarter.

Our Cosma group was awarded a major contract from Ford Motor Company to manufacture the complete frame assembly for its next generation F-250 and F-350 Light Truck program.

This is the second frame contract awarded by Ford to Cosma, the first being the new Ford Explorer that launches next year.

To facilitate the launch of the 2 Ford programs, Cosma is constructing a facility in Bowling Green, Kentucky.

We now have frame contracts with 3 of the world's largest OEMs, and with the launch of the Ford frame business, we will become the world's largest supplier of truck frames.

Recall, that we only entered the frame business in 1998 with the launch of GM's current full-sized pickups and sport utilities.

We announced yesterday that our Board approved a call for redemption of of all of the Series A and B Preferred Securities in September.

This will require a use of our cash resources in the amount of approximately $295 million.

The Series A Securities carry an interest rate of 8.65%, and a Series B, a rate of 8.875%.

The redemption will be approximately 3 cents accretive to the fourth quarter of 2004, and approximately 12 cents accretive to 2005.

Back in May, we announced the acquisition of New Venture Gear for a purchase price of approximately 435 million subject to certain purchase price adjustments.

When we announced the transaction, we noted that there were 2 key steps to completion of the deal.

First, the receipt of regulatory approvals in both the U.S. and Europe, and, secondly, the negotiation of a satisfactory collective bargaining agreement with the UAW.

The waiting period has expired for our Hart-Scott-Rodino filing in the U.S.

We are still awaiting EU antitrust approval.

Talks with the UAW began back in May following our announcement, and following a brief break during summer shutdown, talks have resumed.

During the second quarter, we acquired 2 small acquisitions.

In May, we acquired a Class A stamping facility in Ramos, Mexico, paying approximately 42 million cash.

The capacity will be utilized to facilitate the 2005 launch of a new program awarded to Cosma.

And in June, we acquired the engineering group of Duarte, which includes 5 locations in France and approximately 300 employees.

The acquisition strengthens Magna Steyr's position in the European market as a leading engineering and development partner of the OEMs.

The acquisition also increases our exposure to the French-based OEMs, Duarte's primary customers, which is a key focus area for us.

Through a combination of selective acquisitions, the redemption of our Preferred Securities, capital spending to support our future growth and to update our facilities, and the increased dividend that we announced last quarter, we are putting our cash balances to work to continue to generate strong returns for our shareholders.

Next, I would like to update you on the important launch of the BMW X3 at Magna Steyr.

We have said for some time that we expected to be at full volume by the second half of 2004.

The launch has gone well, and in fact, we reached full volume slightly ahead of schedule in June of this year.

While Louis will review the details with you, I would like to comment that we are very pleased with our record second quarter results, including sales, net income from operations, and diluted earnings per share from operations of $1.93.

As we expected, the investment and launches we made throughout 2003 continue to bear fruit, and we continue to generate a strong return on funds employed, despite the substantial ongoing investments being made for future vehicle programs that we expect to drive sales and earnings in the future.

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

Please note, that our outlook excludes the impact of potential acquisitions including NVG, which has yet to close.

To recap, our most recent assumptions for production volumes in 2004, which are implicit in our earnings outlook, remain unchanged from our outlook provided in May.

North American light vehicle production remains at approximately 16 million units, or about 1% above 2003 levels.

And European production is expected to be level with 2003, at approximately 16.4 million units.

North American content per vehicle is expected to be in the 585 to $605 range, slightly higher than our previous outlook.

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

Some of the key programs contributing to our content growth include the Chevy Equinox and Malibu, the Ford Freestar and F-150, the GMC Canyon and Chevy Colorado, Dodge Durango, Cadillac SRX and the Chrysler Minivan.

European content per vehicle is expected to be in the 515 to $540 range, which is also higher than our previous outlook.

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

Some of the new programs in Europe contributed to content growth for 2004 are the BMW X3 and 5 series, Saab 9(3) Convertible, and the Volkswagen Golf.

In addition, we continue to be involved in new program launches, and expect our tooling and other automotive sales to be in the 1.2 billion to $1.4 billion range.

As a result, total sales are expected to be in the 19 million to $20 billion range for 2004, surpassing 2003's record levels, and higher than the outlook we disclosed in May.

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

Our tax rate is expected to be approximately 36%, unchanged from our outlook in May.

We continue to expect diluted EPS from operations for 2004 to exceed 2003 levels.

And capital expenditures are expected to be approximately 800 to $850 million for 2004, compared to 754 million for 2003, restated to reflect the distribution of MID.

While we are not providing specific EPS ranges in our outlook, we would like to highlight a few factors that will impact earnings in the second half of this year.

First, we are undergoing a plant consolidation in one of our wholly-owned groups, and our Intier group recently sign a Letter of Intent to proceed with the sale of one of its European facilities.

Together, these two items are expected to negatively impact Q3 earnings in the range of 10 to 15 cents.

In addition, higher steel prices and surcharges are expected to continue to negatively impact earnings in the second half of the year.

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

Thanks, Vince.

Good morning, everyone.

I would like to review our financial results for the second quarter, ended June 30th.

All figures are in U.S. dollars.

Let me first make the comment that we experienced less variance in foreign exchange rates this past quarter for the principle currencies in which we operate, thus the foreign exchange impacts on our reported results in Q2 were less significant than we experienced throughout 2003.

In fact, the average exchange rates for the Canadian dollar, the euro and the British pound, each relative to the U.S. dollar all declined in Q2 versus Q1.

Consolidated sales increased 40% to a record $5.1 billion in the second quarter of 2004.

Let me take you through the specifics.

In the second quarter, North American production sales grew by 16%, while production was essentially level with the comparable quarter, at 4.2 million units.

North American content grew by 15% to $595 for the quarter.

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

These new programs include the Chevy Equinox, which launched in the first quarter of 2004 and the Ford Freestar, Mercury Monterey, Ford F-150, GMC Canyon, Chevy Colorado, Cadillac SRX, Chevy Malibu, and Dodge Durango, all of which launched during 2003.

In addition, strong volumes on certain high content programs, including the Ford Escape, Mazda Tribute, Ford F-Series Superduty trucks, Dodge Ram pickup, BMW X5, and Chrysler Minivan, as well as net acquisitions, and the strengthening of the Canadian dollar against the U.S. dollar also increased content per vehicle.

Offsetting these, were high-content programs that experienced lower volumes including the GMT800, the Buick Rendezvous, the GM Minivan, the BMW X4, the Ford Explorer and Mercury Mountaineer, and the Ford Ranger, as well as customer price concessions.

European production and complete vehicle assembly sales grew by $2.3 billion representing an 89% increase.

This improvement was the result of an 86% increase in European content per vehicle to $527, and a 2% increase in European production volumes.

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

Programs that also contributed to content growth include the BMW 5 and 6 series, the Mercedes E, C, and SL-Class, the Volkswagen Golf and Passat, and the Opel Zafira.

Offsetting this growth were OEM price concessions and programs that experienced lower volumes in the second quarter of 2004, including Mercedes G-Class, assembled at Magna Steyr, and the Ford Transit.

In summary, consolidated production and completed vehicle assembly sales increased approximately 43%, or $1.4 billion in the second quarter, with global content growth including the $857 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 297 million for the quarter, up 16 million from the comparable period.

The increase was primarily the result of an increase in reported U.S. dollar sales during -- 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 18.1% in Q2 '03, to 15.2% this past quarter, due to the launch of the Saab 9(3) Convertible and BMW X3 at Magna Steyr, since the cost of these vehicle assembly contracts are reflected on a full-cost basis in the selling price of the vehicle.

The MID distribution, which effectively added additional lease expense compared to the second quarter of 2003, the strengthening of the euro and British pound, against the U.S. dollar, which resulted in more of the Magna's consolidated gross margin being earned in Europe in the second 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.

Steel price increases and surcharges and customer price assessments: These items were partially offset by the positive impact of the programs that launched during, or subsequent to the second quarter of 2003, improved performance and productivity improvements at a number of divisions, as well as a relatively unchanged level of low or [Inaudible] tooling, and other automotive sales.

A more relevant comparison for gross margin is Q1 versus Q2.

Second quarter gross margin increased to 15.2% in Q2, compared to 14.7% in the first quarter of 2004.

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

Magna's return on funds employed increased to 29% in the second quarter of 2004, from 26% in Q2, 2003, 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 5.8% for the second quarter, compared to 6.8% for the comparable quarter.

This it consistent with a decline in gross margin percentage described above.

Our operating margin percentage was 6.7%, compared to 8.2% in Q2, 2003.

This decline largely reflects the decline in gross margin percentage, partially offset by reduced SG&A as a percent of sales, all as previously described.

Our effective tax rate was 35.7% in the quarter, higher than the comparable quarter, due to an increase in income tax rates in Ontario, and shift in the distribution of earnings towards higher tax jurisdictions.

Net income from continuing operations increased 12% to $193 million in the quarter, compared to 172 million in the second quarter of 2003.

Diluted EPS from continuing operations increased 10% to $1.93 per share, from 1.75 in the comparable quarter in 2003.

Further, excluding the impact of MID in the second quarter of 2003, diluted EPS increased 21%, from $1.60 in Q2 2003.

I'll now review our cash flows and investment activities.

During the second quarter of 2004, we generated a record 408 million in cash from operations, prior to changes in non-cash operating assets and liabilities.

We invested 46 million in non-cash operating assets and liabilities.

And for the quarter, investment activities amount to 235 million, comprised of approximately 172 million of fixed assets, 53 million to purchase subsidiaries, and 10 million in other assets.

This concludes our formal remarks.

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

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

Please refer to yesterday's press release and attached MD&A for complete description of our Safe Harbor disclaimer.

Thanks 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, press the 1, followed by the 4 on your telephone.

You will hear a 3-tone prompt to acknowledge your request.

If your question has been answered, and you would like to withdraw your request, press the 1, followed by the 3.

If you are using a speaker phone, please lift up your handset before entering your request.

One moment, please, and we will take the first question.

The first question comes from the line of John Murphy from Merrill Lynch.

Please go ahead with your question.

Good morning.

I have 3 quick questions.

The first is, on the X3, are you running into capacity constraints over at Magna Steyr, and is there the ability to stretch that a little bit further?

Just wondering how you are addressing that.

Seems like the ramp up is going quicker than expected, and, you know, it seems like the demand might be higher than expected.

The second is: Two quarters ago, you gave pretty guidance on the gross margin walk on year-over-year.

And I know you guys have highlighted the major factors.

I was just wondering if you could give any more detail there.

And then, the third is on the pricing environment with the OEMs, if you're seeing any increased pricing pressure relative to what you've seen, more than the typical 2 to 3% price-downs.

Good morning, Jon.

Let me try to answer some of those questions for you.

In terms of the X3 launch at Magna Steyr, as you know, they -- the launch has gone extremely well for us.

We're very pleased with it, and BMW is very pleased, and the vehicle's selling quite well in the marketplace.

In terms of overall capacity, and, sort of, where we are right now, and what the production schedule looks like, we have the capacity in place to support BMW.

Remember, we do have some flexibility at the site.

You have the ability to run overtime, to run 7 days a week for some period of time, so there is periods that -- short periods of time when you can actually stretch capacity, but we don't see capacity being an overall constraint in the second half of the year.

And your second question with respect to margins year-over-year basis, the first point I wanted to make, Jon, before I get into a year-over-year comparison, is if you look at, sort of, the first quarter to the second quarter, where sales, overall, were relatively flat, but quarter-over-quarter margins improved from 14.7% to 15.2%, so we are certainly trending in the right direction.

But on a year-over-year basis, we did expect margins to decline, and there is a couple of major factors contributing to that.

The first is the assembly business that was launching at Magna Steyr, and we have been saying all along at Magna Steyr, that they have a different type of model because they purchase all the components that ultimately get sold back to the customer.

Just the impact of higher assembly sales has resulted in margins on a year-over-year basis declining by about 2 percentage points.

The other big factor, again, which we had talked about in the past was the spinoff of MID, which was completed in the third quarter of last year.

In the second quarter of 2003, we were consolidating MID, so we actually owned the real estate, and our costs for the real estate were reflected in depreciation.

When we spun out MID, what we have now is lease costs to a third party, which reduced depreciation.

So, the impact of additional lease costs have impacted margins by about half a point.

And then, you've got a whole, sort of, bunch of ups and downs that account for the balance of the difference.

With respect to pricing pressures, you know, pricing pressures have been around for a very long time.

For as far as I can remember.

But I would say in the last couple of years, that the pressures have been more intense than ever.

And those prices pressures continue.

However, when you look at Magna and the strength of our balance sheets and our process manufacturing expertise, I believe we're the low cost supplier.

So in terms of moving forward and being successful and profitable, I think we're probably the best positioned supplier to benefit in this difficult environment.

One, actually, last quick question on the F-250 and 350.

Is that going to -- how much is that going to increase your CapEx next year?

John -- John, it's Louis.

We're not going get into that kind of detail just yet.

Okay.

So we'll have to see down the road.

All right.

Thanks a lot, guys.

The next question comes from the line of Himanshu Patel from J.P. Morgan.

Please go ahead with your question.

I just had a quick question, Vince.

The steel impact during the quarter, could you put numbers around that?

Maybe either on a year-over-year dollar amount, or just a rough guidance on how that impacted gross margins?

We have not publicly quantified the impact of steel in the quarter, but I can tell you that in the first quarter of this year, the impact on steel in margins was fairly neutral.

It wasn't significant.

It was more significant in the second quarter.

And we continue to face demands from our suppliers on surcharges.

Although we have long-term contracts in place, and we've been resisting some of these surcharges, the pressures going to continue in the second half of the year.

And we expect that margins will be negatively impacted Q3 and Q4, versus where we were last year.

Okay.

And then when you look into the second half, in terms of variability of your internal forecasts, is it fair to say that, is it really the T800 production volumes that concern you the most, or is it more this whole issue of commodity prices, in general?

Well, there's a couple of things.

You know, in terms of commodity pricing, you know, the biggest thing that is on my mind is steel.

Obviously steel is our biggest input.

But also mix, particularly in North America, and I really look at 3 programs.

One is the GMT800.

The other is the Ford Freestar and the Ford Explorer.

I think based on our internal forecasts, those 3 programs are going to have a negative mix impact on our overall content for the second half of this year.

And Himanshu, I think if you look at our guidance our guidance on content, while we did move the range up, if you look at where we are year-to-date, I think what it really describes is that, in the first half of the year, mix has been a little -- while it's been negative to us, and sequentially Q2 versus Q1 negative, relative to the expectations it's been a little positive.

But the -- obviously, the direction from Q1 to Q2 is getting worse, and we're [Inaudible] on certain key platforms.

So, while we're at $600 year-to-date, you know, our range is, you know, is doesn't really reflect a extended growth, you know, 585 to 605 for the whole year.

Mm-hmm.

Okay.

Thank you.

The next question comes from the line of Fadi Chamoun from UBS.

Please go ahead with your question.

Good morning, gentlemen.

Good morning.

One quick follow-up question on the Steyr margin.

With the BMX3 almost at ramp up volume here, is this as good as it's going to get for the Steyr margin?

Or we can expect a little bit improvement in Q3 and Q4?

And if you can quantify, or give us a bit of guidance on that?

In terms of the X3, you know, keep in mind that we have been producing X3 for 3 quarters and as I stated, we are now at full volumes.

And there's likely some room for efficiencies, but frankly, the launch has gone quite well which is a big positive for us and BMW.

I wouldn't necessarily expect substantial improvements in margins on the BMW program.

It's been a very, very successful launch for us.

Okay.

The other question is on the GMT800 -- GMT900 transfer case program.

You mentioned that there was some cost for the planning and engineering that is beginning to go through the income statement.

When does this start to pick up, really, more in -- more in -- [Inaudible -- highly accented language] basically, and how can we factor that into our forecast, going forward?

Is that -- is that -- is that going to be a big impact on margin?

A big issue?

The up-front costs in the GMT900 both start to step up as we move closer to production.

So, you know, they start up in '04.

They're going to ramp up more in '05.

You know, but in terms of the particular impact that it's going to have an overall margins I think you have got to sit back and look at our entire business.

And that's just one program, and there is a number of programs we are involved in.

And it's really a relative cost one year versus the next, so at this point I'm not in a position to quantify the impact, if any, that that's going to have, going forward on margins.

Okay.

Last question on steel.

Can you remind us a bit on the break down between how much of your steel needs are passed along from OEMs, and how much is under Magna contracts?

Sure, let me -- let me just start that we've got to look at the 2 markets: North America and Europe.

Just a comment on Europe before I move to North America.

In Europe, we haven't seen the same level of pressures on steel as we have in North America.

Keep in mind that a substantial amount of our European sales are through Magna Steyr, where the costs are being passed through to the customer.

Let me turn to North America.

Approximately 75 to 80% of our steel purchases are either through OEM resale programs with our customers or covered under long-term contracts.

We saved about 20 to 25% of our steel purchases on the spot markets.

We have long-term contracts where we have -- with certain steel mills.

And as you know, I'll just elaborate a little bit on steel, because I know it's a question that's going to continue to come up.

Our steel suppliers are demanding surcharges, even in the case where we have long-term contracts in place.

And we have been resisting the surcharges, but in certain situations we've been forced to pay some higher prices.

Okay.

Thank you.

Our next question comes from the line of Chris Ceraso from Credit Suisse First Boston.

Please go ahead with your question.

Thanks.

Good morning, guys.

Good morning, Chris.

Just want to, maybe, dig into a couple of these issues a little bit deeper, and then one, kind of, maintenance-type question.

First, with regard to the question about the margins at Steyr, if the program continues to be successful, and you talked about being able to flex your volume and maybe incur some overtime, would that also argue for, maybe, you're, kind of, at sweet spot here for margins there?

I don't really quite understand your question, Chris.

If the X3 program continues to accelerate, and the product sells well, and you have to, as you suggest, flex your volume up by, you know, taking advantage of overtime and working 7 days straight for certain periods, would that also suggest that what you achieved in the second quarter is, kind of, reflective of the sweet spot of margins at Steyr?

Chris, I'm not going to specifically comment about margins in one of our operating groups.

If you step back for a moment and let's think about European margins.

And European margins are impacted by Magna Steyr and our other operations.

And Magna Steyr's actually done quite well, and we're very pleased with the progress there.

But when you look at other European operations, in certain operations, we have been doing well for quite some time.

We have been having operational inefficiencies in certain other groups and divisions, and we have been making some progress over the last several quarters.

So when you start thinking about the Q3 and Q4 margins, you really got to look at the impact of Magna Steyr, if any, as well as improvements that may come in our other operating groups, as well, in Europe.

Okay.

Fair enough.

On the steel issue, are any of your tier-2 suppliers really in trouble because they're, kind of, squeezed between yourself and the steel suppliers.

And will that put more pressure on you to, maybe, give a little bit to them?

I'm not sure whether -- I can't comment on whether we have any tier-2 and 3 suppliers that are in some serious financial difficulty, but I do know that we are feeling some upstream pressure from some tier-2 and tier-3 suppliers, when your focus on things such as smaller stampings and fasteners, for example You know, at the end of the day, we're going to have to look at, not only our supply chain, but we're going to have to look at the situation and try to also deal with the OEM in a bigger picture on how we, as an industry, deal with increasing steel prices.

Right.

If you think about the industry, in general, and you look at our balance sheet, we have a very strong balance sheet.

I think the strongest in the industry.

And there's a lot of suppliers out there that don't have the strength we have, and are not producing the results we are.

I think, in general, there needs to be some overall industry solutions to increasing steel prices.

Okay.

On the mix issue, I understand the risks associated with the GMT800 and some of the other programs that you mentioned.

What about the other side of the equation, some of the Chrysler products, particularly the new ones are selling well.

Is that going to be an offset?

Or are those overwhelmed a little bit because, maybe, you've got a higher margin on, say, the GM program?

I think we -- when you look at not specifically comment on margins for each one of programs, but I think when you look at some of the Chrysler programs, you know, that the LX has been doing extremely well for Chrysler, and we have substantial content on that.

The Minivan has done quite well in the first half of the year, and that's certainly helped somewhat in overall content per vehicle.

And the Ram pickup has actually done quite well, as well, for Chrysler.

So when you look at overall content per vehicle in the second half of the year, I mean, what we really focused on is our, sort of, top-10 programs.

And I discussed earlier that the 3 programs that we believe are going to have the biggest overall impact on content per vehicle in the second half.

Okay.

And then lastly, just the corporate other line was down really sharply year-to-year.

And it was also about half what it was in the first quarter.

Can you just refresh my memory as to what that is, and maybe explain what the decline was resulting from?

Sure, on a year-over-year basis, there's really 2 items that are impacting our corporate income.

The first is the MID distribution that we completed in the third quarter of 2003.

MID's net rental income would have been recorded in the corporate line in 2003.

The second thing '03 to '04 is that -- and is disclosed in the MD&A that was press released last night -- we took some provisions against certain assets at the corporate level, and that's reflected in the -- as a corporate expense in the second quarter of 2004.

When you compare '01 -- Q1 '04 to Q2 '04, the variances would be, first of all, the provision against certain assets that I just discussed.

Really, additional SG&A to support the various -- oh, that is not in the corporate line, I'm sorry.

The first thing would be the provisions against certain assets.

There's a number of smaller items just impacting SG&A, including -- and there's also equity income.

If you noticed on the income statement equity income Q1 versus Q2 is down $3 million.

Offsetting that, in the first quarter, you recall, we had a $12 million expense for stock options that's not there in the second quarter of 2004.

But that is basically accounts for the variance Q1 to Q2.

Okay.

Thank you, very much.

Our next question comes from the line of John Novak from CIBC World Markets.

Please go ahead with your question.

Can you quantify the amount of the corporate charge, and give us a little bit of description of what it was?

John, I can tell you that the amount is not very significant.

It relates to a couple of items.

It relates to a receivable that we had on hand on a joint venture that was established some time ago, and at this point, how we look at that receivable, we question whether we are going to be able to collect it.

So we provided for that.

And then there is some redundant fixed assets that we provided for as well at the corporate office.

I mean, can you give us a sense in EPS?

Was it, like, 2 or 3 pennies or a higher amount?

It's going to be a higher amount than 2 or 3 pennies.

John, I guess, if you wanted to, sort of, quantify that, I would say that it's in order of magnitude of the stock option expense in the first quarter.

Can you refresh me what was that, just to get a sense of what the add back may be.

The stock option expense was $12 million in the last quarter.

And that was the amount of the -- and that's similar to the amount of that charge for the second quarter.

Pretty well of that magnitude, John.

Okay.

And the other question I had is: You talked a little bit about -- about steel costs impacting your margins in the second -- in the second half.

However, there was really no change at all to your margin guidance for the full year.

Obviously, I mean, there's -- there must be some other offsets, otherwise, you would have take than margin guidance down.

Is that correct?

Well, John, I think when you look -- we talked about, you know, operating margins low to mid 6%.

I think in the quarter, we were at 6.7.

Year-to-date we are at 6, 6.

So we are at the high end of that range.

So there's still range in our overall guidance.

But keep in mind, our business is not all [Inaudible].

We've talked about Europe, and from a European perspective, steel pricing hasn't impacted us.

In our North American operations, some of our operations don't use, you know -- use very little steel, so we are expecting additional steel costs in the second half of the year.

But there's a whole bunch of ups and downs, John, so we're still comfortable with the overall range we discussed during the call.

For the most part you're able to offset these steel costs then?

No, John, I think they're, incrementally, they're negative to earnings.

Okay.

Thank you, very much.

They are in the range, John.

Our next question comes from the line of David Tyerman from Scotia Capital.

Please go ahead with your question.

Yes.

Two questions.

First on the Magna Steyr margins, I see that there was a recovery from Daimler.

Can you tell us how much that was?

David I'm not going to get into specific amounts.

All I can tell you was that it related to some older items and the amount was not substantial.

Okay.

So, the big pickup in margins at Steyr, then is largely what you have from an operating standpoint and what we should be thinking of, going forward?

It was primarily from operations.

I'm not going to specifically comment on go-forward margins, David.

Okay.

Fair enough.

I'm just trying to understand, though, whether the Q2 was -- what I see, the number when I calculate it is, kind of, a good tight basis to think about.

It's a -- the Q2 number is a good number.

Okay.

Fair enough.

The second question, just to go back to the steel.

Two questions there.

One, is the new year rollover, many of these contracts seem to -- steel contracts seem to roll over in the new year.

Are we looking at a further, fairly hefty hit at that point?

The second question has to do with the OEM steel buys.

When the new year comes, presumably, they're facing the same thing that you would be in this rollover.

Do they raise their prices significantly to you on the steel at that point in time?

Is that -- you're talking the second question is that on resale?

Yes, on resale.

It's not going matter anyway, because we're not paying for it, right?

You're not paying for at all?

It's a passthrough.

It's a complete passthrough.

Okay.

That's the answer, then, thank you.

Just for further comments on steel.

We do have long-term contracts that typically roll over as a staggered basis, so they're not all going to come to an end at a particular point in time.

Keep in mind, as well, on some of the new programs that, you know, we're quoting and we've been awarded.

Our assumptions on steel pricing there are higher than, sort of, where we are today or we've had steel prices in the past.

So those additional increases in steel are being reflected in future quotes and future program awards.

With respect to 2005, as you look out, we went to an annual, sort of, price get-back discussion with our customers.

And those discussions, there's a whole number of things that come in to that.

One is price get-backs.

One is technical savings, engineering ideas.

Obviously, with respect to the pressures that we are feeling on the supply of steel, that'll enter the equation as well.

So how that all is going, sort of, work out in 2005, that this point in time, we're not absolutely sure.

And by telling you this in 2005, we don't really know where steel prices are going to be.

China seems to be slowing down a little bit.

The pressure on scrap may be reduced, and that could have an overall impact on the pricing for steel.

So we are monitoring the situation closely.

We are coordinating our efforts across the Company to make sure that we have the most appropriate strategy, given today's environment.

Given what's known today, I mean, if the prices stay where they are, which the steel companies certainly seem to hope, and obviously, for obvious reasons, would you see a big impact in Q1 if you couldn't get from the OEMs?

Get some kind of offset?

If -- I'm not going to comment on a hypothetical question, other than to say that, you know, we said that we're expecting in the second half of this year, that steel pricing is going to be negative for us.

So if that carries forward to the first quarter of 2005, compared to the first quarter of 2004, where steel is negatively useful for us, that's going have a negative impact year-over-year.

Okay.

One last question.

Is there anything that -- have you guys been thinking at all about helping deal with the liquidity issue at the subs, and in particular, I'm thinking Intier?

In what respect, David?

They are obviously, they've a major liquidity problem, and it's been sitting there for quite a long time.

I'm just wondering whether there's that Magna has been thinking about in terms of helping these companies with their liquidity, since you own so much of the stock?

Well, David, you know, obviously, we want all of our public companies to be successful and to have high multiples, and there is a number of things that we consider.

I look back at the very first ven-co we did, which was Tesma, and that was really our model where we spun out a company with, you know, 10 to 15% of the shares and the public vote.

And as a company, Tesma, in particular, grew either by acquisition or by new program awards.

They improved their liquidity by issuing stock.

And look at Decoma and Intier, I suspect that our models will continue to hold at some point.

Okay.

So nothing right now. it sounds like just wait.

Thank you.

Thanks, David.

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

Please go ahead with your question.

Vince, just two questions.

One on the contract win for the F-Series, can you give us some timing on that?

On-site launches in 2007 time frame, Peter.

Is that model or --

Yeah, that's model.

Model year.

And can you give some indication of what the revenue would be when, you know, you are up and running on that?

Peter, we can't at this point.

It's a bit too early to talk about this, our customer would rather we stay quiet other than what we disclosed today.

Okay.

And then my second question is: I believe you said that earnings in the third quarter would be negatively impacted 10 to 15 cents a share, due to a plant closure at Intier and, I believe, a plant rationalization at one of Mag -- or plant consolidation at one of Magna's wholly-owned subs.

I believe, Intier said the other day that they -- that that cost for them would be a charge.

And is that your understanding?

And the costs related to the plant consolidation at Magna, would that be taken as a charge?

Well, just to clarify what we said is there's a plant consolidation in one of our wholly-owned groups and that Intier, they're not -- their intent is to -- they've got a Letter of Intent to proceed with the sale, not a closure.

Right.

In terms of a charge, you know, we are expecting that these two items will be an expense in our income statement in the third quarter.

If that is what you mean by a charge?

And, you know, we've got it built into our numbers is Intier's expectations.

Plus what we expect from our OEM group.

Right.

Okay.

Thank you.

Thanks, Peter.

Our next question comes from the line of Justin Wu from GMP Securities.

Please go ahead with your question.

Good morning, guys.

Good morning.

Hi, justin.

Most of my questions have been answered.

I just have a question, first, on your increased sales guidance for the year.

Was it more of a function of sales being a little bit stronger than you had expected internally in the first half, or was there anything else specific that you can talk about that led to the increased guidance?

Yeah, Justin.

It really is that.

I would say that in terms of our content, while -- as I said earlier, while it was negative, sort of, year-over-year, or even sequentially, in the first half of the year, content has been running a little higher than we had anticipated earlier.

So it's really the follow through of the first half of the year, for the full year, and having some caution about the second half of the year's content.

Okay.

Second question is just a follow-up on that, the Ford frame program.

Is that the hydroform frame or stamp frame?

Justin, we can't comment on the design of the frame at this stage.

Ford would rather we don't talk about that.

Okay.

And just my last question.

I was wondering if you can give us an update on gur spinco strategies, specifically Magna Steyr?

That's one you talked about in the past.

Now that the X3 has launched so successfully, and margins are quite good, any thoughts there?

In terms of Magna Steyr, we are committed to our spinco philosophy.

And, you know, when we believe the right time for our group is there, we'll consider spinning it off.

In terms of Magna Steyr, as we have been commenting in the past little while, our focus has been on launching various assembly programs in the last year, and up to this point, there has been no focus on putting up Magna Steyr as a separate public company.

Okay.

Great. thank you.

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

Please go ahead with your question.

Good morning.

Good morning.

Could you give us a little background on the lawsuit that you mentioned in your footnotes with Solectron?

That's a lawsuit's also disclosed in the Intier financial statements.

I don't know if you had a chance to --

I looked that.

It sounds like it's, maybe, more of a nuisance lawsuit than something to be too concerned about.

But I just wondered if you could just explain how it came about?

Nick, I think, yesterday on Intier's call Don really preferred not talk a lot about that lawsuit, and don't think we should, you know, we should also stay quiet in terms of the lawsuit.

Is it a liability of, if it is found against you, would it be Magna's problem or Intier's problem?

Nick, I'm not going to specifically comment on that.

While this is in process, I won't be commenting on it.

Okay.

Then the second question is on cash flow, which is very positive in the most recent quarter.

Should we expect some kind of reversal later on in the year with the change in working capital?

Or how does that work?

In terms of -- are you looking -- specifically looking at change in working capital?

Yes, which was very positive, I think.

Well it was, it was positive in the first quarter.

It was negative in the second quarter.

I think as you look out into the third and fourth quarter, it most likely would be a little negative in the second half of this year.

Okay.

And next year on your CapEx, do you expect it to be higher or lower than this year?

Nick, we're not going comment on anything specifically related to 2005 until we give our full guidance for 2005.

And we are just, you know, a few months away from our consolidated budget planning process.

In fact, you know, the group's already going on with that right now.

Until we have everything rolled up and we have, you know, we're scrutinized and have Board approval, we're not going to talk about that.

Okay.

Thanks, very much.

Operator, we're going to take one more question.

All right, sir.

The last question comes from Mike Heifler from Deutsche Banc.

Please go ahead with your question.

Hi, guys.

Good morning.

Good morning, Mike.

A couple questions.

First, I'm going to try to hit this margin question from another angle.

It sounds like Magna is launching on a lot of new business over the next 18 months, and I'm wondering from a launch cost perspective, is this new business going to be a drag on overall margins?

Or will the maturation of the $3 billion in new business that you've launched over the past year offset the new launch costs?

You're asking, like, there's really a couple things you're asking there.

One is if we are taking on new business, are we purchasing more components, are we assembling more of it, and is that going to have, sort of, negative impact on margins, but have no impact on our overall return on funds employed, I think, is one part of your question.

And the second part of the question is: Are you going to have more launch costs in '04 versus '03.

Let me talk start with '04 versus '03.

As we've always talked about, '03 was a very important year for us for launches, and we had substantial launch costs.

And we've always talked about '04 in terms of absolute launch costs being less than '03, but we continue to incur launch costs because our content per vehicle's growing.

I would think that when I look at '04 versus '03, really the major difference relates to the number of new facilities that we're working on in '04 versus '03.

But when you start looking at launch costs and new facility costs and put that all together and design and engineering costs for new program, it's really difficult for us to determine the overall impact on '04 versus '03.

With respect to a new program awards and the impact that that's going to have, potentially, on margin, positive or negative, Mike, at this point in time until we -- we complete our business plan process, I'm not in a position to comment on that.

Okay.

I think the question was asked before, specifically, relating to the X3 program, whether, you know, the margins have peaked there.

But I'm just wondering on all the business that you've launched over the past year, it seems like there is the potential for margin improvement, going forward, which might offset some of the additional costs that you have, going forward.

Keep in mind, just in terms of -- let's talk about purchased components, Decoma is launching a bunch of new front-end module business, and that, you know, that, obviously, has a lot of purchase components in it.

That has an impact on margins.

As we, sort of, build out the assembly programs full-year for next year, that is going to have a negative impact on the margin percentages.

So that's why we're trying to focus a little more on the ROFE side.

So, Mike, to the extent that the non-Magna Steyr assembly business is growing faster than the Magna Steyr assembly business, then margins will tend to move -- should tend to move up because Magna Steyr's margins are less than Magna's overall margins.

But, again, I just want to keep on reiterating that margins is an important metrics that we focus on in our organization, and we look at margins period-to-period at a particular group or particular division.

But the way to look at our business is really return on capital return on funds employed.

And the substantial investments we made in 2003 negatively impacted our ROFE in '03, and as we anticipated, as the those launches generate revenues and some profits, we expected ROFE to move up.

And you can see in the first 2 quarters of this year our ROFE has sequentially improved quarter-over-quarter.

Gotcha.

Just one last thing.

I might have missed this.

Did you mention what the currency impact from -- the impact was on the top line, and also the operating profits?

Just in terms of top-line impact it was about 143 million year-over-year.

Mm-hmm.

In fact, it was negative quarter, sequentially, because of the decline in our currencies against the U.S. dollar.

We haven't given any detail on the operating margin impact and it is the same discussion that you've had over the last 6 quarters or so, Mike, about how difficult it is for us to actually quantify, given hedging programs that we have in place, et cetera.

Okay.

Thanks.

Thanks, Mike.

Thanks to everyone that participated in our conference call this morning.

We look forward to a strong second half of 2004, despite the ongoing industry challenges.

And we will keep you apprised of our progress.

As always, Louis is available for the rest of day to follow-up questions.

Please enjoy the rest of your day, and have a great weekend.

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

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