Magna International Inc (MGA) 2004 Q3 法說會逐字稿

Welcome to the Intier Automotive third-quarter 2004 and year-to-date results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Thursday, November 4, 2004. I would now like to turn the conference over to Mr. Don Walker, President, Chief Executive Officer and Chairman of Intier Automotive.

Good morning, everyone. Thanks for joining our call to discuss the 2004 third-quarter results. Sorry about the 1 day delay because I was tied up in Ottawa yesterday with the CAPSI Group for automotive industry with the government; we had some very positive discussions. My name is Don Walker; I'm the President, CEO and Chairman of Intier. I'm here with Michael McCarthy, our Executive Vice President and Chief Financial Officer.

Our Board of Directors met last Tuesday and approved our financial statements and the MD&A for the third quarter ended September 30, 2004. Following the Board meeting we issued a press release for the third quarter that included the financial statements and the MD&A.

Today I will provide a summary comment on our third quarter. Michael will then discuss our financial performance for the third quarter and provide our updated outlook for the full year 2004. Following Michael's comments we'll be pleased to answer any questions. As a reminder, our discussions today contain forward-looking statements within the applicable securities legislation. We'll provide a full disclaimer at the end of today's session.

The record third quarter our sales, operating income and EPS all increased significantly in comparison to the third quarter of the prior year. Higher sales from new products, lower launch costs and improved efficiencies have had a positive impact on our results. We accomplished many tasks during the third quarter. We successfully returned our European operation to profitability. We completed our European restructuring program with the successful disposition of a non-strategic manufacturing operation previously reported in the European interior segment. We successfully launched new programs including the complete interior excluding the seats for the new Cadillac STS, the seats for the Mercury Mariner and the carpet, acoustic and other interior trim for the Mercedes A-Class.

Subsequent to the quarter end on October 25, 2004, Magna International Inc. announced a proposal to acquire all of the outstanding shares of Intier not owned by Magna by way of a court approved plan of arrangement under Ontario law. On November 2, 2004 Intier's Board of Directors established a special committee of independent directors consisting of Lawrence Worrell, who'll be the Chairman, and Neil Davis to consider and make recommendations to the Intier Board regarding Magna's proposal.

The special committee will work with legal and financial advisers to determine whether the Magna proposal is fair for Intier's minority shareholders. Following receipt of the special committee's recommendations the Intier Board will respond to Magna's proposal.

I want to assure our shareholders that Intier management remains committed and focused on running the day-to-day business. We will continue to work toward achieving our previously established objectives including continued topline and bottom-line growth and the strong balance sheet. Furthermore we will continue to investigate acquisition opportunities that meet our previously stated criteria.

I'll now ask Michael to review our financial performance.

Thanks, Don, and good morning, everyone. For today's conference call I will review our 2004 third-quarter results compared to our 2003 third-quarter results. I will briefly comment on our year-to-date results and finish with an update to our full year 2004 outlook.

The Company sold a manufacturing plant during the third quarter and is required by the CIC handbook section 3475. The financial statements of the manufacturing plant have been disclosed as a discontinued operation. Prior year comparative information has been restated for discontinued operations, further disclosure of which can be found in note 5 to our September 30, 2004 financial statement and in the MD&A for the period ended September 30, 2004.

Our financial results are reported in U.S. dollars and as such our results are directly affected by the average exchange rates used to translate the results of operation having a domestic currency other than the U.S. dollar. During the third quarter of 2004 compared to the third quarter of 2003 the euro strengthened approximately 9 percent, the pound 13 percent and the Canadian dollar 6 percent relative to the U.S. dollar. Our consolidated sales increased $233 million or by 22 percent to $1272 million. Approximately $60 million of this increase is due to foreign exchange translation.

Overall our production sales increased $246 million or by 26 percent to $1178 million and tooling and engineering sales decreased 12 percent to approximately $95 million. North American production sales increased $188 million to 782 million compared to 594 million as a result of our higher average content per vehicle and the strengthening of the Canadian dollar.

North American vehicle production volumes remain relatively unchanged declining less than 1 percent to 3.6 million units. Average content per vehicle increased $53 per vehicle to $215 compared to $162. Approximately $48 of this content per vehicle increase was due to new products and $5.00 was due to the strengthening Canadian dollar.

New products contributing to the growth included product launches during the third quarter of 2004 such as the complete interior, excluding the seats, for the Cadillac STS and the complete seats for the Mercury Mariner and new products launched during the first half of 2004 and the second half of 2003 such as the second and third row STOW 'N GO seats for the Chrysler minivan and the complete seats, instrument panel and overhead system for the Chevy Equinox.

European production sales increased $58 million to 396 million primarily as a result of the strengthening pound and euro and also due to our higher average content per vehicle. Vehicle production volumes increased approximately 2 percent to 3.7 million units. Our European average content per vehicle increased $13 to $106 during the third quarter compared to $93 for the third quarter of 2003. Approximately $9.00 of this content per vehicle increase is due to the strengthening euro and pound and $4.00 is due to increased market penetration. New products contributing to the increase include the carpet, acoustics and interior trim for the Mercedes A-Class and modular side door latches for a number of Audi programs.

We continue to increase our gross margin improving by $42 million to 158 million. As a percentage of sales, gross margin improved to 12.4 percent in the third quarter of 2004 compared to 11.1 percent in the third quarter of 2003. Operating income was $48.2 million for the third quarter compared to $17.6 million for the third quarter of the prior year. Overall operating income was positively impacted by higher sales from new products, improved operating efficiencies and lower overall launch costs that more than offset increased raw material prices and higher customer price reductions, SG&A, depreciation and affiliation fees.

Operating income increased in both our interior and enclosure business units. Operating income for the North American interior business increased by $19.8 million to 32.8 million and for the European interior business to -- by $600,000 to $1.9 million for the third quarter of 2004 compared to the third quarter of 2003. Operating income for the closure business increased by $11.9 million to $15 million in the third quarter of 2004.

Diluted earnings per share from continuing operations was 45 cents for the quarter compared to 12 cents in the prior year. Earnings per share from continuing operations has increased due to higher operating income, lower overall financing charges and a lower effective income tax rate. Net loss from discontinued operations of $5.8 million for the third quarter relates to the sale and results of operations of a manufacturing facility formerly reported in the European interior segment.

Net income from discontinued operations of $2 million for the third quarter of 2003 includes the results of operations of the manufacturing facility sold during the third quarter of 2004 and the manufacturing facility that was sold during the first quarter of 2004 as previously reported. The impact of discontinued operations on diluted earnings per share for the third quarter of 2004 was a reduction of 9 cents per share compared to an increase of 4 cents per share for the third quarter of 2003.

I will now discuss our cash flow. We generated $61 million of cash from operations and invested $58 million of cash and working capital. This compares favorably to the $35 million of cash from operations and the $91 million of cash invested in working capital during the third quarter of 2003. We spent $26 million on capital assets and other assets during the third quarter of 2004 compared to $35 million in the third quarter of 2003. Our available cash at September 30, 2004 was $298 million and our debt, excluding the convertible series preferred shares, was $92 million. Overall we have net cash of approximately $207 million.

I will now briefly comment on our year-to-date results compared to the 2003 9-month results. Consolidated sales increased $897 million to over $4 billion. North American production sales increased $744 million to $2.6 billion due to our higher average content per vehicle of $214 versus $151 and the strengthening of the Canadian dollar. North American vehicle production volumes have remained unchanged at approximately 11.9 million units.

European production sales increased $185 million to over 1.2 billion due to the strengthening of the euro and pound relative to the U.S. dollar and to our higher average content per vehicle that increased to $98 compared to $85. European production volumes increased by approximately 2 percent to 12.5 million units compared to 12.3 million units.

Year-to-date operating income has increased by approximately $90 million to 175 million due to our higher average content per vehicle, stable vehicle production volumes, lower launch cost and improved results at previously underperforming divisions that more than offset increased customer price reductions and higher raw material prices, SG&A costs and affiliation fees. Diluted earnings per share from continuing operations for the 9 months ended September 30, 2004 was $1.61 compared to 73 cents for the first 9 months of 2003.

I will now discuss the 2004 outlook. We've continued to launch new programs in 2004 including our current launch of the complete seats for the Chevy Cobalt and a number of new product launches in our closures business. We expect North American vehicle production volumes of 15.9 million units and Western European production volumes of 16.2 million units for the full year.

Based on these vehicle production volume estimates, product mix assumptions, current foreign exchange rates and tooling and engineering sale estimates we expect full year 2004 sales to range between 5.2 billion to 5.4 billion U.S. dollars. We expect full year capital spending between $110 to $125 million and expect to fund our investment activities from cash generated from operations.

As a reminder, the discussions today contain forward-looking statements within the meaning of applicable securities legislation. Such statements involve certain risks and assumptions and uncertainties which may cause the Company's actual future results and performance to be materially different from those expressed or implied in these statements.

These risks, assumptions and uncertainties include but are not limited to industry cyclicality including reductions and increases in production volumes, the Company's financial performance, changes in economic and competitive markets in which the Company competes, relationships with OEM customers, customer price pressures, the Company's dependence on certain vehicle programs, currency exposure, trade and labor disruptions, recall and product liability cost, pricing concessions and cost absorption, energy prices and certain other risks, assumptions and uncertainties disclosed in the Company's public filings.

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

This ends our formal comments and we would now be pleased to answer any questions that you might have.

(OPERATOR INSTRUCTIONS) John Novak, CIBC World Markets.

Don, can you give us a bit of insight into why content on a sequential basis was down a little bit? I'm sure it all relates to mix, but if you can give us a few of those particulars and then also your outlook for mix for the remainder of the year.

It is -- where we're at in the third quarter I guess compared to where we were in the second quarter in North America is mix. Some of our high content vehicles, the production volumes are lower within the overall production volumes of North America. For instance, the RS is lower and the Dodge Ram pickup. So that has an impact on us, John. I guess going forward in the fourth quarter, it is similar within our projected volumes for the year, although the third quarter North American volume increases compared to the third quarter -- within that mix again, some of our -- our assumptions on the top content vehicles are we have a number of our vehicles that actually -- the volume is down on we're estimating compared to the third quarter.

And I guess my last question relates to raw material costs. I guess Intier, unlike most other companies really didn't talk a lot about the impact of the raw material cost. I was wondering if you could, one, tell us what the impacts are and what you've been doing successfully to offset a lot of those costs.

Like everybody else the resin prices -- we're seeing pressure there and steel prices, obviously we're seeing a lot of pressure there. We have -- a lot of our contracts run to the end of the year, some of them don't. So it's a real mixed bag. We've got a lot of steel products in our closures group, both here and we make some in Europe and in Asia all the seat mechanisms have a lot of steel content in them as well. A lot of steel we buy direct, a lot of it we buy from sub suppliers.

And to be quite frank, I guess we have done a lot of work on looking at our strategy going forward. It's very difficult for us to quantify it. We've got about 100 different reporting groups and we haven't done a deep dive into what the actual number is. But steel has had an impact on our results and I assume that will continue until steel pricing -- hopefully the surcharges come down next year, but it's anybody's guess at this point in time.

What we've been doing to offset it is discontinuing the -- we've been focusing, as you know, since we launched Intier over 3 years ago on (indiscernible) divisions, restructuring the Company. We've launched a total of 18 new divisions now from the latter part of '02 into '04. We have sold or closed or restructured I think another eight divisions. We continue to work on efficiency improvements. So all the activities we've got to improve results sort of balances out the prices we've got on pricing from our customers and raw material increases. You can see the overall results. I don't have an exact number for you, though.

Can you give us a rough idea in terms of either cost of sales or cost of goods sold for steel and resin at this stage?

I guess. I don't really know what it is.

Okay. Thank you very much.

Nick Morton, RBC Capital Markets.

Good morning. Your results were excellent and I guess the Company is growing at a very rapid rate. I just wondered if you could give us a feel for the next couple of years, what you think the outlook is based on your backlog and your view of the market.

Right now we're only going to be giving the outlook for this year, Nick. As we typically do, we'd give our outlook for 2005 at the end of next quarter.

But can you give some general comments on the industry and your position and what you know about programs you've won for the next few years, just a general comment on how the company is positioned for the next couple of years?

I think what we can say is we certainly continue to grow on our top line. We're not going to at this stage, though, get into by how much. For the industry I think we're looking at pretty stable production volumes next year compared to this year with perhaps a slight increase in North America. That's really where we're at right now. We're just in the process actually of finalizing our business plan that will end up doing that over the next week or so.

Okay. The European interiors business is still marginally -- just barely profitable, even though you got rid of a couple of problem plants. What other measures can you do to improve the profits there?

One of the things we're doing is we're going through a lot of launches in the last quarter and next quarter and we've done a lot of restructuring, as you mentioned. I would expect that we are not building a lot of new facilities over there. We continue our move into low-cost country jurisdictions for high labor content. But I would think with the business we've got coming on-stream, the restructuring we've completed and the operational improvement -- and I think we've got a good management team in place in Europe now. So I would expect the results to definitely start moving up. I don't know if they'll ever get to the same level as North America. There's no inherent reason why they shouldn't. But we're going in the right direction now.

What about your competitors? How do you feel they're doing? I know the bigger ones, JCI and Lear reported, but what about the ones that we don't concentrate on? The condition of the whole industry is what I'm after. How do you view that?

I don't have specific details, but I would say it's a real mixed bag over there. We've seen as we bought a lot of companies a number of years ago -- some of them well run, some of them seem to be happy running very thin margins -- there's a lot of pricing pressure going on in Europe now. I think we're going to continue to see weak suppliers be forced out of the supply base. The Asian automakers are now gaining more volume over there. We've seen continuing trends to major modules and global sourcing of major modules. So we've got global pricing pressure is setting in.

So, I don't have a definitive answer to give you, but I would say on whole you probably have slightly lower profit margins over in Europe. But again, it's all over the mat. There are some very profitable companies and very weak companies over there.

Any companies you're looking at thinking of acquiring?

We continue to look at acquisitions. We are sitting on a lot of cash, as you know. We've had a greater focus on it over the past three quarters, putting that team in place. We have a number of discussions. We're not looking at too many over in Asia. We actually -- sorry. No, no, not too many over in Europe. We are looking at some companies to get our foot in the door with some of the Asian OEMs to try and grow our business there as well as in North America and Europe. We did do one very small acquisition in England. It was a sub supplier that was having financial difficulty in launch so we bought them. It actually had a loss for the quarter, a small loss and we expect to get that to be profitable next year.

Thanks very much.

David Tyeman, Scotia Capital.

A question on the margins, just following on Nick's question. On the European interior it sounds like, Don, you think it's going to get better. Is that a fairly immediate process or does this take a fairly long flow type of time frame?

Maybe I'll answer that, David. I guess over the -- in the first quarter we lost quite a bit of money in that segment. In the second quarter we improved; we still lost money. This quarter we've made a bit of money and it is a trend that we expect should continue. So we will expect to improve in the fourth quarter upon what we achieved in the third quarter.

Okay, great. And just extending to the other divisions, it looks like North American interiors and closures are near peak levels. Is this pretty much where you will be going forward including obviously the seasonality that occurred in Q3? Or is there more room for improvement in North America in closures also?

Well, again, we'll always strive to improve. But there's a lot of things going on in our industry -- raw material price increases and continual pricing pressure from our customers. And part of that depends on how much new business we win. If we win major contracts that require up front engineering and we expense all that, as you know. So there's a lot of different factors.

It sounds to me, though, like what you're saying is there's a lot of different things at play, but you're probably somewhere near normal levels; it's not any big pockets of things to improve? The other question I had -- actually sort of a broad comment. Are you guys going to provide any guidance prior to -- on '05 and '06 prior to the vote that's coming up because investors have no way of really knowing what you've got coming and no way to judge the Magna bid without that?

The special committee will appoint financial advisers to do exactly that. They'll perform a valuation on the Company and that would be information that would be contained in the proxy circular. I think for us to comment on anything at this stage would be premature.

So the expectation is that there will be a forecast presented in the proxy circular or at least financials that give us some idea of where the business is --?

There will be a valuation in the circular. I'm not sure at this stage, David, exactly what information is in there, but there will clearly be a valuation and an evaluation opinion. We'll find out whether that's something that's recommended by the special committee or not.

Fair enough. Just one last question. North American production going down or at least being very weak year-over-year. Do you expect a material impact from that in Q4 and maybe even into Q1?

Well, in Q4 we've still held our sales forecast where we were in the prior quarter. So that is reflective of where we believe our sales will be in the fourth quarter.

How about on the margin side, though?

I'm not going to comment on margin in advance. Typically for fourth quarter compared to third quarter it is a quarter that is certainly at least as good as third quarter because you have the summer shutdown in third and then you have your December time down also in the fourth.

So it sounds like typical is the way to think about that about Q4?

I'm not going to comment further on it, David.

Thank you.

(OPERATOR INSTRUCTIONS) Andrew McKendrick (ph), BMO Nesbitt Burns.

I just have one question. With respect to the $5.8 million loss from discontinued operations in the quarter, I was just wondering how that breaks down between the loss on sales, being the capital loss, and the operating loss for that unit?

There is both figures in that, you're correct. We do have some operating results in there for the period in the quarter up until we sold the operation. But we haven't broken that out, but if you take a look at the 9-month results, also the 9-month results for the year also include -- what the operating losses will be. So I'm not really -- I don't really think it is relevant in the third quarter number, but I think you can see what it is certainly on a full year basis and in the first 6 months of the year that was just purely operating results.

So to clarify then, the 3 month is primarily the loss -- like the capital loss?

Again, the capital loss and the operating loss for the period up until we sold -- is in that 3-month period, yes.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Donato Sferra, TD Newcrest.

I was wondering if you could update us on your China strategy, if there's any sort of bidding on any major contracts going on in China and just generally what you see happening in China over the next few quarters if there's anything major there.

We have one joint venture which we've had for a number of years there. We got it through an acquisition, divested (indiscernible) in a seating company years ago. We've taken a more active role in that joint venture over the past couple of years their operating management. We've also started up a Greenfield 100 percent owned facility which came on stream April/May/June time period, continues to ramp up.

Most of the production there initially is going back to our operations in Europe or North America. However, we're seeing opportunities now to continue to grow the business now that we have a full management team in place for sales to the Chinese OEMs. We have a number of requests from our existing customers to support them in China. So we've got a larger team located there now beyond managing our facilities and looking at purchasing activities. We're looking at building up an engineering team and launch team.

So, I don't plan on spending any major capital over there. We're having a number of discussions with potential partners in China or in other areas of Asia that want to get started in China as well. I would expect to see our sales continue to grow in China. However, my personal opinion is I don't want to poor a lot of capital in there early on until we see what the production volumes are. However, we want to support our existing customers so at least we've got a foothold in there.

We've built up a management team, we have a presence, we've done a number of tech shows over in -- in Korea, Japan and China in the past 8 months showing them technology so that we at least are on their radar screen when they want to give out high-volume contracts. We're being pretty careful who we take contracts from and how far spread we get in China because (indiscernible) country, as you know.

Okay. And can you also just update us on the timing of the launch of the Cobalt and how that -- what the launch curve looks like?

It's in launch right now so we'll be in production in the fourth quarter, but not for the full quarter. And it will be a full quarter production in the first quarter of 2005.

Okay, great. Thank you.

Mr. Walker, there are no further questions at this time. I will now turn the call over back to you.

I appreciate everybody calling it. Obviously we've got a lot of work we're doing based on the proposal from Magna, but I just want to assures everybody it's our shareholders we are focused on, running the Company. Whatever the outcome is will be decided by the minority shareholders and myself and the management team collectively are going to continue to work on behalf of the Intier shareholders. So appreciate everybody calling in today. If there are no further questions, thanks very much.

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.