Magna International Inc (MGA) 0 Q0 法說會逐字稿

Ladies and gentlemen, thank you for standing, and welcome to the Magna International, Inc. third-quarter 2004 results.

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.

Your speakers for today are Mr. Mark Hogan, President, and Mr. Vincent Galifi, Executive Vice President and Chief Financial Officer of Magna International.

I would now like to turn the conference ever to Mr. Mark Hogan, President of Magna International.

Please proceed.

Thank you.

Good afternoon, and welcome to our third-quarter conference call.

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

Today, our Board of Directors met and approved our financial results for the third quarter, ended September 30, 2004.

Our Board also declared a quarterly dividend of 38 cents per share, payable on December 15, 2004, to shareholders of record on November 30, 2004.

We issued a press release today 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.

For the third quarter of 2004, we posted solid results, despite an ever more challenging industry environment which includes higher steel costs, some operational issues, particularly at Decoma, as well as substantial investments that we have been making in new facilities for our customers' future product programs.

Before I get into recent activities at Magna, I want to spend a few moments discussing my role and priorities as President of Magna.

First and foremost, I believe that I can bring a seasoned OEM perspective to Magna management, given my 31 years at General Motors.

In particular, given my most recent job, which was in charge of advanced vehicle development at GM, I can provide Magna with a view of what OEMs to see as the emerging trends in vehicle design, engineering and manufacturing.

I bring with me not only a very strong relationship with GM, but also strong relationships with many of the leaders of most other automakers.

In particular, beginning with my time at NUMMI, the GM/Toyota joint venture, we have developed close personal relationships with many of the top members of management at Toyota.

What I have quickly gathered in my time at Magna so far is that the management at all levels of the organization is highly energized, motivated and extremely entrepreneurial.

I think we have a terrific senior management team, and I will work closely with and support Siggy Wolf, Fred Gingl and Vince Galifi, all of whom play cortical roles in shaping Magna's future.

I have it as my top priority cultivating our relationships with what have traditionally been our largest customers, as well as growing our relationship and business with the Asian-based OEMs.

I would now like to comment on our recently announced privatization proposals to the boards of Intier, Decoma and Tesma.

As I mentioned in last week's conference call, at GM, we saw Magna as a great innovator, with an entrepreneurial spirit and possessing the broadest product capabilities in the supply base.

What we think is needed to improve our responsiveness is for Magna to get organized more efficiently to capitalize on the trends.

We believe these transactions will provide Magna with the strategic flexibility necessary to better position us to compete in the global automotive industry, and we are confident that the public company shareholders will support it.

The total cost of the transaction is expected to be approximately $1.3 billion Canadian, of which up to half may be paid in cash.

We have been pleased with the positive feedback we have received from the shareholders of Intier, Decoma and Tesma and Magna in our discussions with them over the past week and a half.

In September, we completed the acquisition of New Venture Gear.

We welcome NVG's employees to the Magna family.

New Venture Gear is a valuable addition to our Magna Drivetrain Group.

We believe the drivetrain is a product area that has significant potential for sales growth, due to the emerging and ever-increasing trend by the OEMs to outsource components and eventually entire drivetrain and powertrain modules.

The NVG business gives us the additional capacity and resources to take advantage of these growth opportunities.

We also believe that NVG has technologies and engineering capabilities that complement those of our existing drivetrain businesses.

With its broad range of technologies, a strong footprint in North America and Europe and an emerging footprint in China and a highly skilled workforce, we believe Magna Drivetrain and Tesma are well-positioned to become leading global suppliers of drivetrain and powertrain systems and modules.

Also in September, we completed the reduction of our Series A and Series B preferred securities, using $300 million in cash.

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

Now I would like to highlight one of the key programs awarded to Magna very recently.

Just last week, Magna Steyr was awarded a vehicle assembly contract for the popular Chrysler 300C touring and sedan vehicles for distribution to all markets outside of North America.

Magna Steyr will assemble various 300C derivatives, including left- and right-hand drive versions, a high-performance version, which is the SRTA, and a diesel-powered model.

The program will launch at Magna Steyr's Graz facility in mid-2005.

This contract award further demonstrates Magna Steyr's unique ability to meet the needs of its customers, in what we believe is one of the world's most flexible assembly facilities.

Through a combination of selective acquisitions, the redemption of our preferred securities, capital spending to support our future growth and to upgrade our facilities, our recently announced privatization proposals and the increased dividend that we announced in the first quarter, we continue to put our cash balances to work to generate strong returns for our shareholders.

Next, I would like to give you an update on our progress with the new domestic OEMs.

I was in Japan just last week, meeting with Toyota, and we have started on a path to substantially increase Magna's support for their future product programs.

Finally, before I pass the call over to Vince, I want to address commodity costs, an important topic that has and will continue to impact our whole industry in the near term.

Clearly, higher levels of steel pricing throughout 2004 have had a negative impact on our results, as well as the results of many of the participants in the auto industry this year.

And to the extent that steel prices remain high, we will continue to feel some negative impact in 2005.

But there is some encouraging news.

Among the most significant factors driving up the price of steel in the past year was the explosive growth in China.

There have been recent indications of a slowdown in the Chinese automotive market, which will lessen the pressure on the global demand for steel.

Also, additional steelmaking capacity is coming onstream, including new capacity in China, which will balance out the supply/demand equation for the steel market.

All of this has recently led to some softening in the pricing of steel, which we expect to continue into 2005.

And with respect to resins, another significant commodity that we purchased for our manufacturing operations, we have not seen significant price increases to this point in 2004.

More recently, however, suppliers have been more aggressive in negotiating for higher prices, given the continued high level of global prices for oil.

However, we also believe there will be some moderation in global oil prices, which should lessen the demand for higher resin prices.

In times of significant commodity price increases, which affects all industry participants in different degrees, it's important to remember that the suppliers with the most efficient manufacturing operations and the strongest balance sheets will be in a position to benefit from this uncertainty.

And we believe that Magna is in that very position.

Now, I would like to turn the call over to Vince.

Thanks, Mark, and good afternoon, everyone.

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

All figures are in US dollars.

Consolidated sales increased 34 percent to a record $4.8 billion in the third quarter of 2004.

In the third quarter, North American production sales grew by 16 percent, while production was down 1 percent from the comparable quarter to 3.6 million units.

North American content grew by 16 percent to $608 for the quarter.

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

The new programs include the Chevy Equinox, the Chrysler 300, 300C, Dodge Magnum and Cadillac STS, which launched in the first half of 2004, and the GMC Canyon, Chevy Colorado, Chevy Malibu, Cadillac SRX, Ford F-150, Ford Freestar and Mercury Monterey and Dodge Durango, all of which launched during 2003.

In addition, the strengthening of the Canadian dollar against the US dollar, net acquisitions as well as higher content annual production of certain programs, including the BMW S5, also increased content per vehicle.

Offsetting these were high-content programs that experienced lower volumes, including the GMT800, the Chevrolet Venture, Pontiac Montana, the Ford Explorer and Mercury Mountaineer, the Jeep Grand Cherokee and the BMW X4, as well as customer price concessions.

European production and completed vehicle assembly sales grew to $2.2 billion, representing a 72 percent increase.

This improvement was the result of a 69 percent decrease in European content per vehicle to $592 and a 2 percent increase in European production volumes.

The most significant factors of this increase during the third quarter were the strengthening of the Euro and the British pound, each against the US dollar, and the launch of new programs, in particular complete vehicle assembly of the BMW X3.

New programs that launched in the second half of 2003 having an impact included the Volkswagen Golf and BMW 6 series.

Programs that also contributed to content growth included the BMW 5 series and the Mercedes C class, offset by plant dispositions, OEM price concessions and programs that experienced lower volumes in the third quarter of 2004, which included the Ford Transit.

In summary, consolidate production and complete vehicle assembly sales increased approximately 38 percent or $1.2 billion in the third quarter.

Global content growth, including a 711 million increase in complete vehicle assembly sales and the movement of currency against the US dollar, were the most significant factors contributing to sales.

Tooling and other sales were 369 million for the quarter, a reduction of 8 (ph) million from the comparable period.

The decline is primarily the result of a decrease in tooling and certain divisions that launched new programs during or subsequent to the third quarter of 2003, partially offset by the translation impact of an increase in reported US dollar tooling sales, due to the strengthening of the Canadian dollar, Euro and British pound, each against the US dollar.

As we expected, gross margin as a percentage of sales declined from the comparable quarter.

Gross margin in the quarter was 13.8 percent, compared to 16.4 percent in the third quarter of 2003.

Factors impacting the change in gross margin percentage include the launch of the 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; costs for the new facilities and other inefficiencies at Decoma; the MID distribution, which effectively added additional lease expense, compared to the first quarter of 2003; costs incurred at Cosma for new facilities; the strengthening of the euro and British pound, each against the US dollar, which resulted in relatively more Magna consolidate gross margin being earned in Europe in the third quarter of 2004, compared to the comparable quarter -- this had the effect of decreasing Magna's overall gross margin percentage as the gross margin as a percentage of sales is currently lower in Europe compared to North America; higher costs for steel; and, finally, customer price concessions.

These were partially offset by the positive impact of the programs that launched during or subsequent to the third quarter of 2003, improved performance and productivity improvements at a number of divisions, as well as a relatively unchanged level of low-margin tooling and other automotive sales.

Magna's return on funds employed declined to 19 percent in the third quarter of 2004 from 21 percent in the third quarter of 2003, restated (ph) to reflect the MID distribution.

The factors contributing to the decline include costs for new facilities and other inefficiencies at Decoma, accelerated depreciation and costs for new facilities at Cosma, the negative impact of higher steel prices and operating inefficiencies at one of Tesma's newly acquired Davis facilities.

As expected, due to the increase in assembly sales, on which SG&A as a percent of sales is substantially lower than the Magna average, Magna's consolidated SG&A as a percent of sales declined to 5.9 percent for the third quarter, compared to 6.8 percent for the comparable quarter in the prior year.

This is consistent with the decline in the gross margin percentage described above.

Our operating margin percentage was 4.9 percent, compared to 6.1 percent in the third quarter of 2003.

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

Last quarter, we talked about plant rationalizations that we expected in the second half of this year.

In Q3, operating margin was impacted by accelerated depreciation at Cosma of $7 million or approximately 5 cents per share, relating to a plant that we're closing.

We expect to incur another $7 million in accelerated depreciation in the fourth quarter.

In addition, Intier took a loss on the sale of its New Eastwood facility, negatively impacting operating margin.

Our effective tax rate was 36.2 percent in the quarter, higher than the comparable quarter, due to an increase in income tax rates in Ontario and an increase in losses not benefited, partially offset by a change in the mix of earnings.

Net income from continuing operations increased 12 percent to $137 million in the quarter, compared with 122 million in the third quarter of 2003.

Diluted EPS from continuing operations increased by 28 percent to $1.55 for the third quarter.

Excluding the foreign exchange gain of 18 cents associated with the redemption of a preferred securities, diluted EPS from continuing operations would have been $1.37 for the third quarter of 2004.

Excluding the impact of MID on the third quarter of 2003, diluted EPS would have been $1.17 in the third quarter of 2003.

Overall, Q3 2004 represented a 17 percent increase over the comparable quarter in the prior year.

I will now review our cash flows and investment activities.

During the third quarter of 2004, we generated 317 million in cash from operations, prior to changes in non-cash operating assets and liabilities.

We invested 72 million in non-cash operating assets and liabilities.

For the quarter, investment activities amounted to 566 million, comprised of approximately 353 million to purchase subsidiaries, 211 million in fixed assets and 2 million in other assets.

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

Our debt to total capitalization at September 30 stood at 15 (ph) percent, and our cash balance was approximately $1.6 billion.

We have the financial resources to continue our automotive growth strategy.

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

First, I would like to note that our assumption for production volumes in 2004, which are reflected in our earnings outlook, have been lowered from our previous outlook provided in August to reflect, among other items, most recent OEM production schedules.

North American light vehicle production is expected to be essentially level with 2003 levels, at approximately 15.9 million units.

This is down from our previous outlook of 16 million units.

Earlier this year, we expected European production to be approximately 16.4 (ph) million units.

We have now reduced that figure to approximately 16.2 (ph) million units, a decline of 1 percent from 2003 levels.

North American content per vehicle is expected to be in the $620 to $627 range.

This is higher than our previous outlook range, largely due to the acquisition of NVG, which will add approximately $20 to content for the year and $75 for the fourth quarter.

Some of the key programs contributing to our content growth include the Chevy Equinox and Malibu, the Ford Freestar and F-15,, the GMC Canyon and Chevy Colorado, Dodge Durango, Cadillac SRX and the Chrysler minivan.

European content per vehicle is expected to be in the $560 to $565 (ph) 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 US dollar and the higher proportion of assembly sales than previously expected.

NVG will also add approximately $2 to content per vehicle for the year and $10 for the quarter.

Some of the new programs in Europe contributing 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 $1.4 to $1.5 billion range.

As a result, total sales are expected to be in the $20.3 to $20.6 billion range for 2004, surpassing 2003's record levels, and higher than our outlook we discussed in August.

We expect operating margins to be in the high 5 percent to 6 percent range.

This is below our previous range, largely due to the acquisition of NVG, which currently operates at margins below the Magna average; continued higher steel prices; expected plant rationalizations at Cosma, as noted earlier, and another wholly-owned subsidiary, which together approximate $10 million; ongoing operational inefficiencies at Decoma; and the higher level of assembly sales than previously expected.

Our tax rate is expected to be approximately in the low 36 (ph) percent range, up slightly from our outlook in August.

This reflects a higher amount of losses not benefited at certain operations than previously expected.

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

And capital expenditures are expected to be in the range of $825 to $850 million for 2004, compared to $754 million for 2003, restated to reflect the distribution of MID.

CapEx at NVG for the fourth quarter is expected to be approximately $10 million.

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 can 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 today's press release and attached MD&A for a complete description of our Safe Harbor disclaimers.

Thanks for your attention.

We will now open the call for questions.

(OPERATOR INSTRUCTIONS).

John Murphy, Merrill Lynch.

I had two questions, guys.

First, on the margin pressure in the quarter, the decline in margins, I was wondering if you could sort of parse that out beyond just sort of the general characterization and sort of put it in buckets, the decline in assembly sales, the ForEx, the one-time items that are sort of coming from Decoma and Tesma, and then the improvements that you're getting in new business and operating efficiencies.

I'll try to help you over there.

First, keep in mind that this was the third quarter in our year, and the third quarter typically is a lower quarter in terms of earnings, primarily as a result of the summer shutdown.

But let me attempt to try to take you through a role of (ph) gross margin.

As we expected, gross margin was going to be negatively impacted, as a result of the additional Magna Steyr assembly sales.

And we have been talking about that for some time, but if you think about it just in the quarter, year over year, that impact was over 1.5 percent on its own, just in margin.

Another substantial impact on margin, again, which we have talked about over the last couple of conference calls, is the fact that we are no longer consolidating MI Developments.

Where previously, we had depreciation expense on our real estate, we now have lease costs.

The impact of that was about 0.4 percent.

The other substantial factor in the quarter was Decoma's overall results, which reduced our consolidated margins by about 0.5 points.

And then, in terms of other items, we've got some positives and negatives, but that pretty well gets you from 16.4 percent to about 13.8 percent.

That's very helpful.

I just had a second question, on the capacity utilization over at Magna Steyr.

And with the new 300 assembly that's going to be going on ever there, how much room do you have?

Are you going to have to make a big expansion over there, or is there plenty of room right now?

John, it pretty well replaces some of the Chrysler business that will be moving out.

So we're going to be -- when we get the 300C in, we're going to be pretty much at 100 percent.

This program is going to start in the second quarter of 2005.

We've talked in the past about Magna Steyr being pretty well full, but we did have some excess capacity.

So we're going to be able to accommodate this program in pretty well the existing infrastructure, with some capital spending but not a significant amount.

Stephen Girsky.

I've got a philosophical question for Mark, and then a couple of specific questions.

So let's see if we -- the specifics.

Have you got any more detailed color on steel or some of the commodities?

I guess it was incrementally worse this quarter than last quarter?

And is it easing at all or no?

I guess, Steve, quarter over quarter that steel was a little bit more negative for us in this quarter compared to the second quarter.

Given the things that Mark talked about, in terms of China sort of slowing down a bit, some additional capacity coming onstream and the recent changes in steel prices, if you are looking at those, we expect the impact in the fourth quarter should be a little bit less than the third quarter.

There's been a tremendous amount of questions on steel, not just to Magna but everyone else in the supply base.

And I just want to reiterate some of the things we have been talking about for some time.

When you look at Magna's overall steel volume, over 50 percent of what we buy is on customer resale programs.

None of those resale programs -- steel costs are just a pass-through.

So it doesn't impact overall profitability.

And you have no problem passing that through?

No, we are not, Steve, at all.

Actually, pass-through is probably the wrong characterization, because what we're doing is we're buying steel at a predetermined price.

That's pretty standard for the OEMs, how they handle that, Steve.

When you look at steel that we have under long-term contracts, we have got just under 30 percent of our steel buys under long-term contracts with fixed pricing.

So that has been stable for us.

So you're paying below market on those?

We're paying based on the contract amounts, Steve, which at this point in time are below spot rates.

And when do they come up?

They are long-term contracts, Steve; they are going to run for a while.

The balance of our buys, which is under 20 percent, would be either under short-term contracts or spot.

And with the short-term contracts, we have been feeling a tremendous pressure.

Even though we were under contract, we have been paying prices above the contracted amounts, whether that's increases in steel prices or whether that's additional surcharges.

And when you look at our overall buy -- just to try to put it into context -- 400,000 tons a year, are either under spot conditions or contracts under a year.

The balance is resale or long-term contracts.

So the 400,000 is 20 percent of your buy, roughly?

Plus or minus, Steve.

And have you got any -- I know it's always challenging for you guys, but I need some more specifics on what currency helped the top line here or not.

Well, top line -- clearly, in my comments today, surely currencies helped us on the content-per-vehicle book in North America and Europe.

In North America, when you look at the change in content per vehicle, $20 was due to just translation.

When you look in Europe on a sort of translation impact, that's probably about $39.

But when you sort of look through the other things, particularly in North America, our content growth, from either programs that were launched that I talked about or just changes in mix, added about $53 of content.

That's over 10 percent of real good organic growth.

And in Europe, when you look at the growth in content, if you exclude the complete vehicle assembly business and our other businesses in Europe, we had content growth of about $33, which represents about 9 percent growth over last year's content per vehicle.

So again, we're really excited with the organic growth that we're realizing, both in North America and Europe, excluding complete vehicle assembly, which added a substantial amount to our content quarter over quarter.

And mix -- so mix was favorable to you guys?

Mix overall was favorable, both in North America as well as in Europe.

And just philosophically, Mark, I guess two issues.

Putting all these businesses together, you think the sort of 1 plus 1 plus 1 will equal more than 4 or equal more than 3?

Yes, I do, Steve, because in some cases, we have got our Magna groups competing with each other, so they are spending R&D money which could be considered redundant.

And frankly, it's tough on the OEMs to sort through that.

So are there businesses that have been held back from a revenue perspective, you think, because they have been sort of out there on their own?

That's my estimation at this point, and I think the management team here agrees.

And the way we'll validate that is over the next year or so, the business wins will start to accelerate here?

We think so, particularly as the modules get ever more complex.

You know how front-end modules are becoming more of a norm now in North America, as they have been in Europe.

And we think there's going to tailgate modules that are going to have more content, and you are going to see a merge on SUVs and even roof modules, which will have a lot more content.

And these at (ph) about three or four of the Magna groups, so we need to have better cooperation.

And what is the philosophy -- is there going to be any change in philosophy, you think, on using the balance sheet?

This company has always been very conservative on the balance sheet, some people argue too conservative.

But anything more aggressive on the balance sheet to pursue acquisitions or further investments?

Well, that's why I made the comment at the end of my remarks that the companies that have the best efficiency and the strongest balance sheets are going to be able to take advantage of, perhaps, some opportunities in the marketplace caused by maybe some competitors not having those same kind of strengths.

If you just think about some of our actions in 2004, we put $300 million of our cash to redeem some preferred securities, which is an accretive transaction for Magna.

We purchased NVG, and we have taken on some debt for that.

With these privatization proposals, we are allowing shareholders to elect to receive some cash, an aggregate maximum can't exceed 625 million Canadian or about 500 million US.

So I think we are reporting our cash to use to grow our business.

Steve, I wanted to just go back on something that I mentioned regarding the asset mix in North America and in Europe.

I just wanted to correct something I said, and I was looking at launch and mix.

In Europe, clearly, mix has helped us in the quarter.

But in North America, actually, mix has hurt us; it was a negative in the quarter.

The primary reason for that was the GMT800 program.

I just wanted to make sure that you understand that I corrected my earlier statement.

David Tyerman, Scotia Capital.

I just wanted to touch on the 300C.

I think you said, Vince -- or maybe it was Mark -- that it's replacing something that's coming out.

Is that the Voyager?

Well, we know that there are some model changes that are coming on some of the products that we are producing over there.

So that was what I was referring to.

Just let me elaborate on that.

We will be launching the new Voyager and Jeep Grand Cherokee.

So, when you look at the 300 program, it's an additional program over and above.

There was some speculation coming out of -- I believe out of Automotive News Europe -- that we were going to be losing some programs.

That is not the case.

We do have the replacement programs for the Voyager and Grand Cherokee; the 300 is an add-on program.

So is this all in that (ph), or is there something that's coming out a little bit?

Well, volumes are going to move up and down in the various programs.

But this is an incremental program for (ph) what we're doing at Magna Steyr today.

So presumably you are at full capacity, then, when this goes in, pretty much?

I hope we are never at full capacity and that we can encourage the guys to find more capacity to take on more programs.

But clearly, that's going to bring us closer to our theoretical capacity number.

Fair enough.

A question for Mark.

You talked about the new domestics and your efforts, and you were just in Japan, I guess, with Toyota, it sounds like.

Can you give us a sense of how you see this unfolding?

Is this going to be a multiyear process where, for material impacts, in terms of at least winning business, it's going to take a number of years?

Or is this something where you could win business more quickly than that?

Well, we are winning business at an increasing rate with the Japanese and the Koreans, David.

But to be effective on these longer-term programs, you really have to be early on in the product development cycle.

So as we increase our business with Toyota and Honda and Nissan and Suzuki, you are going to see the impact of those two, three, four years down the road.

And are you saying that two, three, four years because it's gone from winning to going into production?

Or are you saying that it's probably going to take two, three, four years to really get insinuated into their processes and so on, and really be able to win the programs, and then another couple of years before you go into production?

Well, no.

I mean, we're being invited to quote on product programs that are in the development stage as we speak.

So it's two to three to four years from now, depending on the model cycle in which you will start to see more Magna content.

Peter Sklar.

Vince, in your guidance you give on the operating margin percentage, I just want to make sure I understand about operating margin.

What comes off below that?

Is interest, minority interest and taxes below that?

No.

Interest is included.

What comes below that is minority interest and taxes.

Okay.

And I just want to make sure I understand your segmented reporting note.

Where is the New Venture Gear and the Steyr powertrain business?

Is that now included in the other automotive operations?

Peter, in the quarter that's really not relevant.

We closed the New Venture Gear, again, in the quarter.

But it will become relevant in the fourth quarter, and our intention is to include New Venture Gear as, actually, part of the Magna Drivetrain group.

So it's going to just be included with the Magna Steyr segment.

So, the Magna Steyr segment will include the powertrain, the assembly and New Venture Gear?

Yes, other than we refer to powertrain as Magna Drivetrain and New Venture Gear is a group within the Magna Drivetrain supergroup.

And I'm wondering, looking at the Steyr business, your EBIT margin declined there in the segmented report relative to the second quarter, almost on the same amount of revenues.

And I'm just wondering if there was a dynamic there that caused the margin decline?

Well, there's nothing that really sort of comes to mind as being significant, Peter.

Remember that in that segment there, we are investing upfront for the GMT800 transfer case business that is going to be launching in the next couple of years.

So that's a negative.

But nothing comes to mind.

It could be mix.

I'm not sure, at this point.

I don't have information in front of me, Peter.

And on the access agreement with Magna Entertainment, which you recently renewed, had you been accruing that in the first three quarters of this year, or will we see a full year's impact in the fourth quarter?

Peter, the Magna organizations continue to use the various facilities here in North America and Europe for business reasons.

So we thought it was prudent in the course of the year to accrue for those costs.

So you are not going to see a catch-up adjustment in the fourth quarter; it has been accrued for as we were going along.

And lastly, on the appreciation of the Euro relative to your reporting currency, I understand how that has a negative impact on your gross margin.

But conversely, does that appreciation of the Euro have a positive impact on your reported earnings per share?

Because you do appear to be, obviously, reporting earnings in Europe now.

So I'm just wondering;

I just want to make sure I understand the arithmetic.

On the translation, is that having a positive impact on your reported earnings per share?

Well, Peter, the good news is that overall in Europe, even though we have some difficulties with some of the operations, overall we are making money.

So that means, if you translate Euros -- a positive Euro number at a higher exchange rate, that is going to help you out in the EPS line.

John Novak, CIBC World Markets.

Vince, with the proposals out right now to take private the subs, when is the first -- are you prevented from doing any share buybacks?

What I've been advised from our legal counsel is that if we have the share buyback program in place, that we would be able to start buying stock next week until we get blacked out again, which would be, typically, December 31st.

But we don't have a share buyback program in place today.

Okay.

Is there any intention to put one in place?

John, I think we've got to wait and see what happens with the privatization proposals, and how much cash is used in that transaction.

From a Magna perspective, we've allocated about $500 million US for that transaction, and we've used quite a bit on the redemption of preferred securities.

We've taken out some debt with NVG.

So we are going to take a wait-and-see attitude.

Let's get through the privatization transaction.

And we won't get it (ph) from overall what opportunities are out there, how much cash we're going to be generating next year, and that's something we could consider.

And a question on the segmented results.

Your corporate operating income went up to about 27 million from 11 million in the prior quarter.

Can you just give me what the specifics are that allowed for that to take place?

I think, when you look at -- I don't have the second-quarter number in front of me, John, so I'll take your word that it is the $11 million for the second quarter.

The big item really relates to -- if you look at the other automotive segment, you'll see that there has been a decline, as well, when you look at Q3 '03 to Q3 '04.

Part of that, a substantial amount, really relates to the management people we've put in place between the corporate office and Cosma.

So we've moved some income from Cosma up to Magna.

So that will increase the corporate line and reduce the other automotive line.

And then it's going to be sort of pluses and minuses throughout.

But the management fee adjustment was the biggest item impacting corporate income and impacting other automotive the other way.

Chris Ceraso, Credit Suisse First Boston.

I have a few questions.

I'd like to go back to the discussion about content per vehicle in Europe.

If I look at the European volume compared with the ex-assembly sales in Europe, and then I strip out the effect of currency, which you said was $39, I get something in the 250 to 260 range, which looks to be lower than what it was a year ago, or what it was trending, let's say, maybe a year and a half ago.

Am I thinking about that right, or am I missing something there?

I don't know where you are getting your numbers from, but I think you're missing something.

Based on our analysis, stripping out the assembly business, we have a positive -- stripping out assembly, stripping out translation and stripping out divestitures, because we did have a couple of divestitures, we've had growth in content of $33 per vehicle.

It's about 9 percent on the $351 in contents we had last year.

So that's real growth.

That's on new programs and better mix?

Well, a big part of that was, as I mentioned, the launch of the BMW X3, which took place late last year, the VW Golf and the launch of the 6 series.

And what has helped us a little bit on mix is the BMW 5 series, the Mercedes C class and a couple of other programs.

Keep in mind, on the X3, we had substantial production content, including substantial stampings, the four-wheel drive systems.

So there's a lot of dollars there.

Back to the steel issue, the 50 percent that you buy on resale sounds like it was okay this year.

But you expect that the prices that you pay for that portion of your buy will be higher in '05?

No.

No?

No, don't expect it to be higher.

Okay.

One small item -- I didn't see this in the press release, but how many full-cost assembly units did you do in the quarter?

I think last quarter, you reported something around 43,900.

Have you got another question?

Louis is going to dig that up, and he'll get back to you in a second.

The other question that I had -- BorgWarner was hinting that it may be in a position to win some drivetrain business from GM, and it sounds like it might have come out of what was formerly done by NVG.

Is there still business up for grabs there that you are hoping to secure through NVG?

Well, there are a lot of product programs that GM is talking about, from a truck standpoint.

And it's possible that BorgWarner could pick up some business, but we're kind of keeping an open mind on that.

The 361/371 (ph), which is the next-gen Trailblazer, is probably the one you're referencing.

Just on the full cost of vehicles at Magna Steyr, page 28, where we have the Magna Steyr segment information, full cost of vehicle is 41,109.

David Tyerman, Scotia Capital.

Coming back to the steal, on the re-buy stuff, has there been any talk out of the OEMs about trying to share some of the pain?

It's a pretty regular conversation, but it's not unique to Magna.

No; that I believe.

But I guess the question is, are you guys going to see some hit in '05?

Well, there's a pretty defined way that we conduct business with the OEMs, like the other suppliers, David.

With respect to resale, it's essentially a pass-through.

So at this point, that is not changing.

No.

And on the long-term contract part, are you exposed to surcharges on that business, 30 percent?

David, on our long-term contracts we've got fixed pricing.

And as we talked about before, even though we do have these long-term contracts in place, our suppliers are still looking for some price increases, and we are certainly refusing all that.

But discussions are still ongoing.

And when you say long-term, Vince, can you give us an idea of like the average duration?

Like does a lot of this run for three years, or is it thinner than that?

All I can say is, when I looked at our steal buy, I talked about contracts less than a year.

So if it's a long-term contract, it's going to be more than a year.

And on Q1, you don't see major increases coming on the steel side, other than just the 20 percent stuff?

David, you know what?

We're not going to talk about 2005.

We're getting to our business plans (ph) focus, and we'll give you our views on commodity pricing at that point in time, which will be early January.

Fair enough.

Just on the Steyr, are you now pretty much at what you think will be the full margin for that operation, particularly the assembly side?

Well, David, I'm never happy with the margin we're earning in any one of our operations.

And while we try to get better, I would say that if we launch some new business in there, that's (indiscernible) profitability.

But in terms of where margin goes, it depends on mix, too, in terms of what we are selling on the BMWs.

Is it high-end BMWs, low-end BMWs?

Are you selling more value-added products versus full cost of assembly programs?

It's difficult to look on the margin lines.

Yes, where the product is in the product lifecycle will have a lot of impact and differences.

I focus more on return on funds employed.

And in looking at Magna Steyr, I'm very pleased with their return on investment.

I guess I can't do that, though.

So I kind of get a sense like -- are the margins topped out at this point in that division?

It depends on the mix.

I don't think (ph) you can say that.

It's really -- you are right, Mark.

I can't say that.

David, it's very difficult in that business. (multiple speakers) in that facility, a change in mix is going to impact margins, but may not necessarily have a big impact on profitability.

Right.

But basically what, I guess, it sounds like -- the process you went through with the X3 and the 9-3, where they were negatively impacting margins -- that has pretty much played its course?

All the programs that we have in there are full volumes, essentially.

Fair enough.

And then, on the other side, it sounds like you have a lot of stuff that is in development, especially at Cosma.

Can you just give us a sense of how you feel the margins are going to play out there?

Like is there going to be significant increases in engineering costs and so on over the next, I don't know, year or something like that?

Again, I don't want to sort of get into 2005.

All I'm going to tell you about Cosma is that, when you look at Magna in 2003, there was a substantial investment in new launches. (indiscernible) is pretty well a process (ph) company, other than in Cosma.

When you look at Cosma in 2004, they have got substantial investments in a number of things, including a facility in Sonora, Mexico and a facility in Kentucky.

And those cost are continuing.

Those programs are going to start launching in 2005.

So, again, everything else being equal, and there's a whole bunch of things in the mix, we'd expect some margin improvement as those programs launch.

And, David, Sonora in 2005, Kentucky for the Explorer in 2005 and then the 250/350 business in '06.

And then, last question I had -- can you give us some sense of where you feel you want to go with China right now?

Well, China is growing very fast, as you know, David.

We'd like to go into China in a bigger way than we are today, but we have got five facilities and a book of business for those facilities.

We want to be polled (ph) by the OEMs, and we are in the process of discussing that with the major players in China.

And we'll be able to tell you more next year.

We are going to take one more question, operator, and call it a night.

Himanshu Patel, JP Morgan.

Hi.

This is Shaz Kibert (ph) for Himanshu.

I have two quick questions.

One, on the Steyr margin, could you just give us an idea of how you see that trending over the coming quarter?

Should we expect it to kind of stay around the Q3 level, or is there any kind of mix impact that we should be thinking about?

And then maybe you could talk about how you expect the 300C launch to affect margins there?

Secondly, could you just give us some comments on Donnelly, on the mirror (ph) business, how that performed in the quarter?

I think I already talked about the Magna Steyr margin, that it's going to depend on mix of products, full assembly versus value added.

So I'm not going to repeat the answer to that.

In terms of the 300 program, I mean, all things being equal, that's going to help margins at Magna Steyr.

And the reason for that is the 300 program is a value-added program.

It's not a full assembly, full-cost assembly program.

So we're not going to be taking title (ph) to the inventory.

We are just going to be charging Chrysler a fee for, really, assembly.

So that is going to have a good margin, but this is meant to mean (ph) that it's more or less profitable than anything else.

I look at all these programs at Magna Steyr on a return-on-investment basis, and I would say that, whichever program we are looking at, they pretty well all have the same return on funds that we dedicate to those various programs.

With respect to Magna Donnelly, we are pleased with the progress the we're making at Donnelly.

We're excited with some of the new business awards, and all of those are EC Glass awards.

And you know, one of the reasons we bought Magna Donnelly was to get access to that technology.

We're excited with the new business opportunities that we see, and the business that we've been awarded.

And from an operational standpoint, there are some divisions that still need some improvement.

But we're really encouraged with the improvement we've seen.

We have seen some synergies, certainly, from the overall merger of our mirror group with the Donnelly Corporation.

But that group was positive to earnings in the third quarter of 2004.

We're going to conclude the call, but just before we conclude the call, I just want to make one more comment on European content per vehicle, because we have had some questions on that.

Just to clarify, last year, our content in the third quarter was $351 (ph).

That included two components; it had vehicle assembly sales in that number, as well as sales from our production programs.

So when I talked about $33 of content growth, that excludes Magna Steyr assembly business.

So when you look at $33 of growth, that's quite substantial, when you sort of take the 351 and split it between assembly sales and production sales.

And we thank you for listening to our third-quarter conference call today.

We are really excited about the privatization proposal.

We think that that's going to position Magna to be a much stronger player in the global automotive marketplace, and as we all know, it's a challenging environment.

To the extent that we continue to do innovative things and be ahead of the curve, we are all going to benefit.

Goodnight.

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.

Once again, we thank you for your participation, and ask that you please disconnect your lines.