Magna International Inc (MGA) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Magna International 4th quarter 2004 results conference call.

During the presentation all participants will be in a listen-only mode, and afterwards you will be invited to participate in a question-and-answer session.

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

As a reminder today's conference is being recorded Tuesday, March 1st, 2005.

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

Please go ahead, sir.

Good morning and welcome to our 4th quarter 2004 conference call.

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

Before I begin I'd like to apologize for the technical delay in getting our press release and MD&A out yesterday.

Our board meeting ran late and we made some later changes so that's why we decided to postpone the conference call until this morning.

So thank you for joining us.

Yesterday our board of directors met and approved our financial results for the 4th quarter and fiscal year ended December 31st, 2004.

Our board also declared a quarterly dividend of $0.38 per share payable on March 23rd, 2005 to shareholders of record on March 11th, 2005.

We issued a press release yesterday for the 4th quarter and fiscal year ended December 31st, 2004.

You will find the press release, today's conference call and the slide presentation to go along with the call, all in the Investor Relations section of our website.

Our address is www.magna.com.

For the 4th quarter of 2004, we posted solid results despite a number of challenges including higher steel costs, operational issues at certain of Dacoma's European facilities, lower production volumes on some of our key vehicle platforms as well as substantial investments that we had been making in new production facilities for our customer's future vehicle programs.

This morning I will briefly highlight our record results for 2004 and address how 2005 is shaping up.

Vince will then review in detail our 4th quarter performance and update our outlook for 2005.

And upon completion of our formal remarks we will be pleased to answer any questions you may have.

Despite the challenges that we've faced during 2004 including negative mix on certain key high-content platforms, significantly higher steel prices and continued pricing pressures from our customers, we posted record results including sales of $20.7 billion, operating income of $1.2 billion, and diluted EPS from operations excluding impairments of $7.12.

We were able to achieve those record results as a result of the very hard work and dedication of our 81,000 employees around the world.

Our unique corporate culture which drives employees and management remains our most critical competitive advantage, and that culture will continue to serve us in both prosperous and challenging times.

On the new domestic front we continue to make very good progress.

After growing sales to Asian new domestics by more than 60 percent in 2003 we grew again by 22 percent during 2004 and booked approximately $390 million in incremental business in 2004.

Further growth with the Asian-based OEMs remains one of my top priorities and a key area of focus for Magna management.

Now I would like to bring you all up to date on the status of our privatization of Tesma, Dacoma and Intier.

As most of you know, we completed the privatization of Tesma earlier this month.

Yesterday Dacoma's shareholders voted overwhelmingly in favor of our proposal leaving approval from the anterior of the course of the plan of arrangement as the last hurdle to the privatization of Dacoma.

And Intier's shareholders will get a chance to vote on our proposal on March 30th at its special meeting of shareholders.

We have laid out our rational for the transactions previously.

However, I would like to emphasize is that we believe this transaction will provide Magna with the strategic flexibility necessary to better position us to compete in the global automotive industry.

Now I'd like to spend a minute discussing operating issues at Dacoma.

First I want to say that despite a challenging and fiercly competitive market, Dacoma's North American operations overall continue to perform well.

We continue to hold the position as the strongest supplier in these product areas.

We have been launching a brand-new facility in Georgia to produce Mercedes M-class facias which naturally has been a drag on earnings leading up to the launch.

And the M-class launch is ramping slowly.

However, once the program is fully ramped up, we expect significant improvements in earnings from that facility.

Dacoma's operating challenges in Europe are for the most part contained in three facilities and one of those facilities, Belplas, has been the biggest problem.

First time capability on both of the belt plat -- paint plat paint lines is well below Dacoma's standard.

This has resulted in significant rework and scrap costs.

Members of Magna's senior management team visited the plant late last month with Dacoma senior management and we are confident that the detailed action plan set out by Dacoma's management will yield improvements.

But dramatic improvements are not expected in the 1st half of 2005.

And generating acceptable returns in the plant will take more hard work than simply improving current paint yields.

We continue to closely monitor the Belplas situation to ensure that incremental improvements are made.

Now I'd like to comment on the current commodity pricing environment.

Starting with steel, we continue to see some signs of softening in the steel market in both North America and Europe.

As demand for steel in China has lessened recently.

Nevertheless, at present there are three factors negatively impacting our results.

First, the renewal of short-term contracts in January 2005 at prices well above previous levels.

Second, to this point we have had limited success at passing on the higher steel prices to our customers.

And third, while steel prices have declined somewhat from their peak in October and November of last year, scrap steel prices have declined even more reducing our scrap revenues, an important offsetting benefit in the overall steel equation.

Increases in the price of iron ore, an important input in steel manufacturing, is is partially offsetting the decline in scrap steel prices.

And with respect to resin pricing, after resisting pressures from our suppliers to increase resin prices during 2004 we are starting to see significant increases beginning in the 1st half of 2005.

Now, we certainly aren't alone in facing the challenge of higher commodity prices, and as always we consider how we can turn this challenge into an opportunity.

We are well capitalized and among the strongest manufacturers, and this is a good position to be in when the operating environment is difficult and many suppliers are weakened.

Magna continues to invest heavily in new production facilities.

In the 2nd half of the year, Ford will launch two key new product programs.

The Ford Fusion mid-size passenger car and the Ford Explorer SUV.

Our content on these new programs is substantial.

And as most of you know, we expense start-up costs as they are incurred.

Development costs continue as well for the all-new transfer case on GM's next-generation full-size pickups and sport utilities.

And Magna Styers is preparing for the launch of the Chrysler 300-C assembly program in our garage facility as well as the new Jeep Grand Cherokee.

Finally, I would like to comment on how we anticipate the 1st half of 2005 will unfold.

It won't be a surprise to anyone closely following the industry and listening to our serious commentary that the 1st half of 2005 is going to be particularly challenging.

Production cuts at the big three in particular which we would characterize as being somewhat worse than we had originally forecasted will be a significant headwind for all suppliers including Magna, earlier in the year.

In the 1st quarter of 2005 we will be negatively impacted by lower production schedules, particularly on certain key Magna platforms.

Start-up costs, higher commodity prices, OEM price concessions, and Dacoma's European operational issues.

Positive factors in the 1st quarter including earnings from recent launches, productivity improvements, and a lower effective tax rate.

Nevertheless, we will continue to focus on lean manufacturing, pay close attention to upcoming program launches, and we will be opportunistic with respect to potential acquisitions and take-over businesses and we will be relentless in seeking profitable growth opportunities in new markets, in broadening our customer base, and in continuing to bring to market new technologies.

And we expect the anticipated stronger production schedules in the 2nd half of 2005 the launch of the Ford business, improvements at Dacoma and potential for improving steel price environment to allow Magna to post a relatively stronger 2nd half of the year.

Now I'd like to turn the call over to Vince.

Vince?

Thanks, Mark, and good morning, everyone.

I would like to review our financial results for the 4th quarter ended December 31st, 2004.

Please note that all figures are in U.S. dollars.

In the 4th quarter, consulted sales increased 22 percent to a record $5.7 billion.

North American production sales grew by 15 percent in the 4th quarter despite a 3 percent decline in production from the comparable quarter to 3.8 million units.

North American content grew by 18 percent to $712 for the quarter.

Key drivers of the growth in content were acquisition, in particular the acquisitions of New Venture Gear, or NVG, at the end of September and Davis Industries in January.

The launch of new programs and the strengthening of the Canadian dollar against the U.S. dollar.

New launches contributing to content growth quarter over quarter included the Chrysler 300, 300-C, Dodge Magnum, the Chevrolet Equinox, the Cadillac STS, the Chevrolet Cobalt, Pontiac Pursuit, the GMC Canyon, Chevrolet Colorado, the Mercury Mariner, and the Jeep Grand Cherokee.

Offsetting these were high content programs that experienced lower volumes and in some cases lower content including the Ford Freestar, Mercury Monterey, the GMC 800 series of trucks and sport utility vehicles, the GMC Envoy and Chevrolet Trailblazer.

European production and complete vehicle assembly sales grew to 2.5 billion representing a 41 percent increase.

This improvement was a result of a 44 percent increase in European content per vehicle to $604 despite a 2 percent decline in European production volumes from the comparable quarter in 2003.

The most significant factors in this increase during the 4th quarter were the launch of new programs in particular complete vehicle assembly and production sales for the BMW X3, which launched during the 4th quarter of 2003 and the strengthening of the Euro and the British pound each against the U.S. dollar as well as acquisitions completed during or subsequent to the 4th quarter of 2003, including the acquisition of NVG.

New production programs that launched during or subsequent to the 4th quarter of 2003 included the Mercedes SLK and the BMW 1 M-6 series.

Other programs that also contributed to content growth include the Mercedes C class offset by programs that experienced lower volumes and/or content in the 4th quarter 2004 including a Saab 9-3 convertible, assemble at Magna Styers, the disposition of two facilities during 2004 and OEM price concessions.

In summary, consolidated production and complete vehicle assembly sales increased approximately 26 percent or $1.1 billion in the 4th quarter.

Global content growth including a 530 million increase in complete vehicle assembly sales, the movement of currencies against the U.S. dollar and the acquisition of NVG were the most significant factors contributing to sales.

Tooling, engineering, and other sales were $498 million for the quarter, a reduction of 7 percent or 40 million from the comparable period.

The decline reflects the launch of more programs during the 4th quarter of 2003 compared to the 4th quarter of 2004 partially offset by the translation impact of an increase in reported U.S. dollar tooling sales due to the strengthening of the Euro, Canadian dollar and British pound each against the U.S. dollar.

In 2004, the major programs for which we reported tooling, engineering and other sales were the Ford Fusion, Mercury Milan and the Ford Explorer whereas in 2003 the major programs in which we recorded tooling, engineering and other sales included the BMW X3, the second and third row stow and floor seats for the DaimlerChrysler minivan, the Ford Freestar and the Ford Mustang.

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

Gross margin in the quarter was 13.7 percent compared to 14.8 percent in the 4th quarter of 2003.

Factors impacting the change in gross margin percentage include the ramp-up of the BMW X3 at Magna Styer since the cost of this vehicle assembly contract is reflected on a full cost basis on the selling price of the vehicle.

Recall that the launch of the X3 started in the 4th quarter of 2003.

Inefficiencies at certain of Dacoma's European operations which impacted margin by approximately .4 of a percent, costs incurred for new facilities, the strengthening of the Euro and British pound each against the U.S. dollar which resulted in relatively more of Magna's consolidated gross margin being earned in Europe in the 4th quarter 2004 compared to the comparable quarter.

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

Higher cost for raw materials, the impact of the acquisition of NVG and Davis, both of which operate at gross margins below the Magna average, and customer price concessions.

These were partially offset by 29 million of noncash income as a result of freezing Magna Donnelly's defined benefit pension plan, the positive impact of the programs that launched during or subsequent to the 4th quarter of 2003, improved performance and productivity improvement at a number of divisions as well as lower level of lull or no margin tooling and other automotive sales.

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 percentage of sales declined to 5.6 percent for the 4th quarter compared to 6 percent for the comparable quarter.

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

Our operating margin percentage was 4.5 percent compared to 5.6 percent in the 4th quarter of 2003.

This decline largely reflects the decline in gross margin percentage as well as the increase in impairment charges in Q4, 2004, as compared to Q4 2003, which negatively impacted operating margin by .3 percent partially offset by reduced SG&A as a percent of sales.

Our effective tax rate was 31.5 percent in the quarter, lower than comparable quarter due to a future tax recovery of 6 million from a reduction in future income tax rates in Europe compared to a future income tax charge of 10 million in the 4th quarter of 2003 related to the increase in future income tax rates in Ontario.

The tax rate was also benefited in the quarter by favorable tax settlements of approximately $7 million.

Excluding these items and impairment charges, the effective tax rate in the 4th quarter was approximately 32 percent reflecting the utilization of tax losses not previously benefited and tax planning strategies.

I would now like to take you through a reconciliation of net income and earnings per share beginning with reported and adjusting out some of the unusual items.

Reported net income was 178 million and diluted EPS was $1.81.

Included in these numbers were the following two items.

Firstly, a future income tax recovery discussed above of 6 million or $0.06 per share.

And impairment charges at Dacoma of 22 million or $0.23 per share as disclosed in our press release of December of last year.

Adjusting to these items brings to us net income and diluted EPS from operations excluding impairments of 194 million or $1.98 per share.

The three other items in the quarter of note are the freezing of Magna Donnelly's pension plan for 18 million or $0.18 per share, tax settlement of 7 million or $0.07 discussed above, and closer costs of 7 million or $0.07 per share including consolidation of Dacoma's Analtec facility as previously disclosed by Dacoma.

Adjusting for these additional items brings adjusted net income and EPS to 176 million and $1.80 respectively, compared to 167 million and $1.64 in the 4th quarter of last year.

In arriving at these figures for last year we start with reported net income and EPS of 139 million and $1.36 respectively and add back the future income tax charge of 10 million or $0.10 for the increase in Ontario tax rates, Dacoma impairment charges of 13 million or $0.13 and closure costs of 5 million or $0.05.

I will now review our cash flows and investment activities.

During the 4th quarter of 2004, we generated 377 million in cash from operations prior to changes in noncash operating assets and liabilities.

We invested 179 million in noncash operating assets and liabilities largely related to the tooling build for our new facility in Sonora, and timing of cash receipts at Magna Styers.

For the quarter, investment activity amounted to $376 million comprised of approximately 328 million in fixed assets and 48 million in investment and other assets.

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

Our debt to total capitalization at December 31st stood at 14 percent and our cash balance was approximately $1.5 billion.

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

I would now like to turn to our full-year 2004 performance.

As Mark mentioned early he we posted record results in sales, operating income and diluted EPS from operations excluding impairment.

Consulting and sales increased 35 percent in 2004 to a record $20.7 billion for the year.

North American content grew 19 percent to $629 for the year and European content grew to $556 representing a 16 percent increase over 2003.

Net income from operations excluding impairments for the year was $708 million representing an increase of $127 million or 22 percent over pro forma 2003.

And diluted EPS from operations excluding impairments was $7.12 compared to pro forma diluted EPS from operations excluding impairment charges of $5.80.

During 2004, we generated 1.5 billion in cash from operations prior to changes in noncash operating assets and liabilities.

We invested 95 million in noncash operating assets and liabilities.

For the year, investment activities amounted to $1.4 billion comprised of 859 million in fixed assets, 417 million to purchase subsidiaries, and 81 million in other assets.

In our press release issued yesterday we revised our outlook for 2005.

First, I would like to note that our assumptions for North American production volumes in 2005 which are implicit in our earnings outlook has been lowered to reflect increased caution about our customers' production plans for 2005.

North American light vehicle production is expected to be 15.8 million units essentially level with 2004.

This is down from our previous outlook of 15.9 million units.

We continue to expect European production to be approximately 16.2 million units compared to 16.6 million units for 2003.

North American content per vehicle is expected to be in the 700 to $725 range down from our January outlook, largely as a result of lower anticipated volumes on key Magna platforms including the GMC 800, the Ford Freestar and DaimlerChrysler minivan.

These programs will have the biggest negative impact on our Intier and Cosma groups.

European content per vehicle is expected to be in the 315 to $335 range which is unchanged from our previous outlook.

Our tooling and other automotive sales and expectations are unchanged in the 1.3 billion to $1.5 billion range.

As a result, total sales are now expected to be in the 21.8 to $23.1 billion range for 2005 down from our previous outlook as a result of lower North American production volume assumptions and a lower North American content range.

We expect operating margin to be in the mid 5 percent range.

This is below our previous outlook of high 5 percent up to 6 percent range largely reflecting the Tesma and Dacoma privatization which adds depreciation on fair value increments, ongoing operating losses at Dacoma's European operations, lower North American production volumes, and our worsened level of North American sales mix which has driven down our North American content expectations.

In addition the consolidation of a plant in the 1st half of 2005 is expected to cost us approximately $6 million.

Our tax rate is expected to be approximately 33 percent unchanged from our outlook in January.

We continue to expect diluted EPS from operation for 2005 to exceed 2004 levels.

And capital expenditures are expected to be in the range of 875 to $925 million for 2005 also unchanged from our January outlook.

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 a complete discussion of our Safe Harbor disclaimer.

Thank you for your attention.

We will now open the call for questions.

Thank you.

Ladies and gentlemen if you would like to register a question please press the 1 followed by the 4 on your telephone.

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

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

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One moment for our first question.

Our first question comes from the line of Chris Ceraso at CSFB.

Please proceed with your question

Thanks.

Good morning, everybody.

Good morning, Chris.

A few items.

First, on the guidance to grow earnings in 2005 do you think you'll actually have higher EPS each quarter or could you potentially be lower year to year in the 1st half?

Chris, we're not going to give specific guidance quarter by quarter.

Obviously earnings in any quarter are going to be impacted by overall production volumes, production mix, as well as performance at some of our underperforming divisions that we've talked about as well as launches because we do have a substantial number of new facilities coming on board in 2005 as well as 2006.

So it's going to depend on all those factors.

So I'm not going to give specific guidance quarter by quarter.

Okay.

Fair enough.

With regard to your comments on volume and content you specifically mentioned that it's not just volume but in some cases you're actually seeing lower content on existing programs.

Could you expand on that a little bit?

That was with respect to the 4th quarter discussion on content per vehicle.

Some of the lower content year-over-year first of all is a result of pricing concessions.

If the price drops 3 or 4 percent then your content per vehicle is also lost.

The other thing we're seeing when you look at some of the installation rates and some of the options and higher end trim paddles and so on we're seeing we've had a little bit of a negative mix there so that's also impacted average content per vehicle.

Okay.

A couple more quick ones.

The working capital in the 4th quarter, normally that's a strong one.

I think you mentioned something about that.

It's customer timing.

Has anyone changed payment terms on you or will this revert back to normal in the beginning '05?

Just basically timing of accounts receipts, Chris.

Remember, we have a floating month end.

We don't always close at the end of the calendar month.

We always close on a Saturday, so it depends on when our month end closes and when the cash is received.

If the cash is received a day or two after the month end it has a substantial impact on our working capital number.

Chris, it's Louis here.

You asked a question about content We did a little business on GM's 360, 370 frame.

Recall when they launched the supplier who was providing the frame was having some difficulty and we stepped in and helped them out with a chunk of the volume but as the volumes have come down there's been less of a need to be involved in that program.

So we're not producing a portion of the frames on that.

Okay.

Thanks.

Last one, would you comment at all about what was going on at the board meeting that made it run late?

Mark mentioned there was kind of late change in the release.

Could you talk about what that was?

The board meeting started later than usual because we had the Dacoma shareholders meeting in the morning so we -- some of us were downtown and had to rush up so we started later and we had a slight change in the MD&A, a couple of words got changed, and when you think about, the size of the MD&A is about 44 pages.

Running it through the system and getting it out took a little longer than expected.

Okay, thanks everybody.

Thank you.

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

Please proceed with your question.

Good morning, everybody.

Good morning.

Got a couple questions.

Also a suggestion.

You may want to start your board meetings earlier or just plan on releasing in the morning would be particularly helpful on our end.

A few things.

First of all the $29 million curtailment gain on the pension in the quarter, the footnote says that there's a future service cost benefit.

Can you quantify that?

What was the service cost in 2004?

Rod, I don't have all that information available.

Whatever change is going to be is not going to be material in any way.

What we've done in terms of our overall pension plans is that we've been moving away from defined benefit plans and moving towards defined contribution plans.

And from our perspective what we want to do is really know what our liability is going to be.

On the defined contribution plan you know what that liability is once you make the contribution, so there's been a switch over.

We'll continue to switch over some of the Canadian and U.S. plans effective January 1st of this year but the ongoing impact in 2005 is going to be insignificant from P&L perspective.

Okay.

And on the CPV, could you just talk about what the organic growth was in the quarter excluding the acquisitions and excluding currency?

What is the implied organic growth for 2005 with your new revenue guidance?

Well, Rod, in the 4th quarter, when you look at what's happened to content, if I look at Q4 '03 versus Q4 '04, content is from six '03 to 7/12.

Acquisitions account for $84 of that content growth.

And translation account for about $30.

So we actually didn't have any content growth in the quarter.

Content decline of about $5.

And that is primarily a result of the things we've talked about, I would say negative mix of sort of our higher content vehicles quarter-over-quarter represented less overall production for us, and we've had some content decline that we've talked about earlier as well.

In the '05 expectation is the --.

The '05 expectation, we're at $700 to $725.

And we brought that down $20, sort of the high end and the low end of our previous outlook, and that relates solely to negative mix that we anticipate in 2005, and some of the programs that are going to -- from our perspective, are going to hurt us on a negative mix side, our programs, the Chrysler minivan, the RX and the Pacifica, the Ford Freestar, the Ram pickup as well as the GMC 800 program.

As I mentioned earlier in my comments, the GMC 800 is definitely -- is going to impact -- Cosma primarily and the RX, the Freestar and the Ram pickup are going to impact primarily Intier.

Rod, just a pleasant perspective.

In terms of the launch, I mean the impact from the launch is not going to be double digit in growth.

What we're seeing is a huge impact on the mix side that either fully or partially offsetting our content growth from launches.

Okay.

But as far as the year-over-year walk, as you did in Q4, is the CPV in '04, I believe it was 629, is that correct?

Right.

And the New Venture gear is, what, $70-something dollars of growth?

$60.

Sixty bucks.

Sixty bucks?

Year-over-year.

And there's some currency benefit, right?

On the year-over-year base?

Yeah, there's not much.

There's a little bit of currency in there.

So kind of similar story.

There's significant growth organically being offset by mix.

There is.

There is.

There's double-digit growth [inaudible] being offset by mix.

One thing you've go got to keep in mind is pricing concessions.

Three percent and 4 percent and 2 percent.

Three percent of $700, that's $21 in content you have to make up just to stay flat.

I guess my question is you had previously sort of given longer term three-year CPV expectations and growth rates and this negative mix I guess you can argue that a lot of this is temporary and we'll come back I guess with the GMC 900.

If you look at what we look at historically we've had many, many quarters where we've had actually had positive mix that's contributed over and above the launches has contributed.

Right now we're being impacted by certain programs that are coming negative but some of those have been significantly positive in the past and the 900 launches, that's going to be much stronger than what we're seeing on the 800 currently.

Should we be thinking of a growth rate off of a lower base, though?

I mean in terms of if it's 9 to 12 percent CPV growth that you had been talking about previously the base is coming down so does that imply that we should we thinking that '06-'07 CPV is taken down a bit as well?

Our base at least from 2004, our outlook as of our last call was 620 to 627, we came in at 629, so it was just over the top end of our previous guidance for 2004.

The short answer is I don't think you should be changing any of the previous guidelines we've given for content growth in the outer years.

Okay.

Thank you.

Your next question comes from the line of John Novak of CIBC.

Please proceed with your question.

Vince, can you also do the reconciliation with respect to currency and acquisitions per European content in the 4th quarter?

Sure, John.

Let me just flip to that one chart.

If you look at content growth last year in the 4th quarter content per vehicle in Europe was $418.

We ended up at $604 at the end of the year.

The main drivers in that are Magna Styer, complete vehicle assembly added about $107 of content per vehicle.

What helped us there is BMW program offset by lower volumes on the Saab 9-3 Cabriolet.

We had organic growth of about $19 per vehicle.

Some of that was components that we're manufacturing on the X3.

The BMW 1 series, the BMW mini convertible, the 6 series, a number of other programs contributed to overall content growth.

And acquisitions, net acquisitions added about $2.

The biggest impact there was the acquisition of New Venture Gear with their European operation.

Translations helped about $58.

In the quarter.

Okay.

I guess the next question relates to the pension at Magna Donnelly.

Is there any sort of reoccurring gain that we should be -- that we should look at going into 2005 or was that a one-time -- completely a one-time item?

That was a one-time item, John.

It's a matter of really modifying from a defined benefit plan to a defined contribution plan when you start to value what the liability was on our balance sheet and what we ultimately settled, or will have to settle, we ended up with a pretax gain of $29 million so that's sort of one-time.

That's why in our role of EPS, adjusted EPS, as I took you through on the call, we back that out to look at more of a normalized earnings per share and normalized net income.

I guess more on any of the other programs that you have to convert to defined contribution, will there be anything of the same magnitude that we saw in the 4th quarter?

No, John, if there's anything it's going to be very insignificant.

Remember, the Donnelly plan was an older plan that was around for sometime.

The Canadian U.S. pension plans were recently introduced, so the numbers are -- the ultimate liability is substantially less than the Donnelly plan.

The gain if any is going to be insignificant.

On your total raw material purchases how much do you expect that they will be up in 2005 versus 2004 when you take into account the contract that rolled over on steel and some of the higher resin prices you're seeing currently?

That's a good question, John.

It ultimately depends on what happens to steel pricing in the -- in 2005 as well as resin pricing.

When we look at the impact of steel in the 4th quarter, the impact was higher than what we had anticipated.

And part of that came through suppliers, part of it came through some suppliers that were requesting some additional money to cover their costs so as we look into 2005 it's the 4th quarter the right run rate?

We think so.

So might come down a bit as steel prices -- if steel prices settle down, as they appear to be doing, but, John, we're not sure.

Okay.

And, you know, the other thing, too, to keep in mind is to the extent we have some success with our customers, in passing on some of the increased costs to them that will mitigate the overall impact to us in 2005.

Lastly, I guess as you've gotten further into your privatization programs, have you been able to quantify any of the synergies with a little more certainty now?

John, I think we're going to be in a position once we complete the Intier transaction to talk about synergies potentially on the 2nd quarter call.

The executive team here at Magna certainly with Tesma approved and Dacoma, all those are subject to court approval, we've been working and looking at how we can maximize the efficiency as a result of the privatization transaction but we're not ready to talk about that at this point.

Thank you very much, Vince.

Thank you.

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

Please proceed with your question.

Good morning, guys.

Can you hear me okay?

Yes.

On the Magna Styer margins you guys had 1.2 billion of assembly business.

I think it was like a 1 percent margin on that.

I guess I'm frankly, help me out if this is wrong but I'm trying to back into the margin on the rest of the business.

You had about like 600 million -- the other 600 million looks like it's gaining about a 7 percent margin and you said there was a bit of a drag from the X3 in there so I'm wondering is that a good run rate to use on that Styer, the kind of stuff that's not assembly?

I'll be honest with you, it was really hard to hear your question.

I think you asked something about overall margins and the impact that Magna Styer has had on our margins.

In terms of Q4 over Q4 certainly Magna Styer has had a negative impact on margins as we expected and we've been talking about that all year.

It's slightly under 1 percent year-over-year.

The other impacts on margin that you've got to think about are Dacoma and some of the issues we've had not only in Europe but also in North America at Analtec, that's had as we talked about on the call, about a .4 percent -- negative .4 percent impact on margins so we expect over time to obviously get that back.

We do have an action plan in place in Dacoma.

We expect to see some improvement in the 1st quarter but the bulk of the improvements we're not going to see until later this year, like late this year.

Remember that the acquisitions also had a negative impact on margins in the quarter, both Davis and the NVG acquisition.

That's running at over half a point.

And we haven't quantified it but we are spending a lot more on new facilities, particularly in the 4th quarter.

The -- when you look at new facilities spending, we are always spending money on new facilities, we're always spending money on launches but the 4th quarter we really ramped up our spending as our number of plants that are coming on stream including a plant for Dacoma producing facias for the new M-class and a couple of plants for Cosma so that had an overall negative impact.

One positive thing in margin, Ron, that you should be backing out is the pension curtailment gain that increased margins by .7 percent in the quarter.

I understand.

Hope that answered your question.

It was very difficult to understand your question.

Sorry about that.

Thank you.

Thank you.

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

Please proceed with your question.

Quick question on Tesma.

They had very low margins in the quarter.

Looks like some of the factors may remain in place.

Can you give us some sense of prognosis for margins there over time?

Well, at Tesma, the biggest impact is the facility that was acquired as part of the Davis acquisition.

And there's two things there.

One is the impact of steel pricing.

Davis didn't have any short-term or long term contracts so steel pricing has been moving up.

We've seen quarter-over-quarter larger negative impact on earnings.

At this one facility as well they were launching a whole bunch of new business in steel fitter doors.

They've had some operational inefficiencies launching that program so that's hurt us from an overall margin perspective.

Given that you've got to keep in mind in terms of Tesma is when you look at some of the GM programs and Tesma has a lot of GM programs, they were hurt in terms of negative mix.

From a margin perspective.

So some of it was mix, some of it was steel pricing, some of it was operational inefficiencies and launch costs at Davis facility.

So it sounds like there could be some improvement here as you work through the things like the launches and the operational inefficiencies, but some of this is a bit beyond your control like steel prices and whether the GM programs get better, which they probably wouldn't this year, I would think.

That's right.

Some of it is under our control, and we're working hard on obviously improving efficiencies and reducing start up and launch costs.

Some of the other things are going to be out of our control

Okay, and sort of the same question at Styer.

The margins declined sequentially from Q3 to Q4.

Is that steel or the start-up costs related to the 300 C or roll-in of NVG or what?

There's a couple things when you look at the Magna Styer segment.

Magna Styer segment includes New Venture Gear.

The other thing that's impacting Magna Styer is the start up costs and the GMP 900 transfer case program.

That program doesn't launch until again 2006, so we're going to see continued launch costs being expensed as we move closer to launch.

Okay.

Fair enough.

Then on the guidance for Europe for content per vehicle there's not much projected there from Q4 levels.

Can you just run it through the pluses and minuses there?

Pretty quiet year in terms of what's launching in Europe.

That's really the biggest element.

There's a little bit of negative mix going in Europe as well as North America.

But I think it's a quiet year from a launch perspective.

And then a question on the -- are there any major pockets of growth in '05 that we should especially pay attention to when we're thinking about modeling, by reported segment?

Well, I think the thing about modeling, David, you need to look at our key platforms and as production volumes and those move up you should adjust your model accordingly.

And as they go down, you should do the same thing.

Right.

But I'm talking about new launches.

By group?

Yes.

If you look at certainly with Cosma launching -- involved in the launch of the M class that's a big program for Cosma, it's 0 content on the old M class.

The Ford business in Mexico that's a big program for Cosma.

The new Ford Explorer frame that launches as well Q3 of 2005, that's a big program, the new frame obviously so that's certainly one area that I've got big growth in 2005.

And Dacoma was the M class launch as well.

Great.

Thank you.

Thank you.

Our next question comes from the line of Donato Sferra at TD Securities.

Please proceed with your question.

Hi, good morning.

In your risk section you're talking about surcharges on steel purchases that you have under contract and it seems to be a slight change in what you were talking about prior to this quarter.

Quarter's press release.

Want to refresh my memory.

I think before you had indicated that 55 percent of your steel purchases were on pass-through, 25 percent were on long-term contracts, and the remainder on short-term contracts and you're experiencing price increases or surcharges on the short-term contracts but nothing really was expected on the long-term contract or the pass-through.

Can you talk about each of those buckets and sort of the pricing pressures you're seeing on steel?

Sure, Donato.

Just to clarify some of the things we've said in the past, with respect to customer resale programs, we've always said that the benefit or risk of steel prices moving up or down ultimately rests with the OEMs.

In terms of steel that we're buying under either short-term contracts or on the spot short-term contracts typically roll over at the end of the year, so even in 2004 even though we had those short-term contracts, we were being faced with surcharges and some of those contracts had rolled over January 1st.

But we'll see the impact of that rolling into the 1st quarter.

With respect to some of the longer term contracts, what we've said and we'll continue to say, is that we do have longer term contracts.

We are getting pressure even though we have those longer term contracts to revisit pricing.

Discussions are ongoing and I think that's what the note on page 21 at the MD&A is trying to attempt to say.

In that bucket of long-term contracts what type of pricing pressures are you seeing?

Or are you settling on?

Donato, the discussions are ongoing, and I think it's too early to talk about those at this point.

But you're currently paying surcharges now on that bucket.

Not necessarily, Donato.

My other question relates to Cosma.

EBIT margins there declined to 6. -- if you exclude the pension gain at Donnelly, EBIT margins declined to 6.1 percent from 8.9 percent the prior year.

Can you talk about sort of the relative impact of steel and volumes such as GMC 800 or other big swing factors there?

Sure.

I mean, the biggest swing factors are the new facilities that we've talked about over and over.

There's new facility in Kentucky and a new facility in Mexico.

Those facilities are going to be launching in the 3rd quarter of this year, and as I mentioned earlier in my comments we've been ramping up our costs and in the 4th quarter the costs were higher relatively speaking than any other quarter.

Cosma has also been impact by mix, particularly on the GMT 800.

As well as the Freestar to some extent and Cosma has also been impact by steel pricing.

And in terms of --.

The other thing --

Would you be able to --.

if you run through the segment disclosure in the MD&A, we certainly charged Cosma some additional fees in 2004.

Those fees basically are reduction of Cosma's profits but an increase of corporate's profits.

So those are the main impacts affecting the percentages in that segment.

Keep in mind as well than Donnelly year-over-year is in the same segment and Magna Donnelly has shown improvement quarter-over-quarter excluding curtailment gain.

Okay.

Thanks.

Thank you.

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

Please proceed with your question.

Vince, on the pension curtailment gain there's two numbers being thrown around.

One is 29 million, then your reconciling item is 18 million.

Is the difference taxes?

Yes.

Okay.

And on this change from -- from a defined benefit, is Donnelly unionized?

Is this something that you would have negotiated with the union, or how did this come about?

No, Donnelly is not unionized.

Actually, it's across the entire company where in North America we've looked at the profit sharing program as well as our retirement programs and we've moved away from the DB and moved into a DC, and it's part of a -- an overall package for retirement, and we've gone out and received support from our employees.

The Donnelly plan, the amendments were effective December -- just prior to the end of the year.

That's why we adjusted for Donnelly.

The Canadian and U.S. plans changes are effective January 1st.

So again it all happened near the end of the year.

But as I mentioned earlier with respect to the Canadian and U.S. plans, there won't be any significant impact whatsoever in the quarter because the plans are fairly new.

Right.

Okay.

The last thing I wanted to ask you about is there was some discussion in your MD&A on the depreciation and the fact that you changed your underlying assumptions regarding the useful life of uncertain assets and the depreciation.

Right.

That -- we've talked about sort of closure costs and it relates to accelerated depreciation relates to a facility in Cosma where we accelerated depreciation in the 3rd and 4th quarter to the tune of about I think it was $7 million per quarter.

And again we're shutting down a facility so we accelerated depreciation to match the useful life of that facility, i.e. the end of this year.

So in your reconciling item when you roll through the EPS, you have closure costs $7 million or $0.07 a share.

Right.

There's just a couple of other things in there, too.

We talked about the Cosma facility in the quarter there was accelerated depreciation of 7.

We also incurred some severance costs of about $2 million, and then Dacoma had previously announced the shutdown of Analtec in North America and Canada, and the closure costs there, I think there was 7 or $3 million so on pretax basis that's about 12 million.

Net income.

So after taxes and after minority interest expenses 7 million or $0.07 per share.

Okay.

And so the depreciation -- the quarterly depreciation level going forward then should moderate somewhat, shouldn't it, based on your explanation?

Because you no longer have the acceleration of the depreciation.

Agreed, Peter, but remember we're also employing more assets so that's going to increase depreciation.

The other thing you've got to could in mind with depreciation, we talked about this earlier, with the privatization, I'm assuming we have Dacoma done as well, with Tesma and Dacoma we have to purchase account for the acquisitions.

And the consideration that we've paid is in excess of the underlying book value so we're going to have to look at the difference between fair value and book value and allocate that between depreciable assets and goodwill.

To the extent that the allocation is a depreciable asset that's going to increase depreciation in 2005 on a comparable basis, just that one item alone.

Right.

I understand.

Okay.

That's all I have.

Thank you.

Thanks, Peter.

Our next question comes from the line of Frank Donal at Edge Capital.

Please proceed with your question.

Hey guys.

Just have a question.

The FAS Co. in their conference call and actually in the prior one in the 3rd quarter too, and they had a press release, they had this contingent thing going on with supplier which I guess was 27 million Canadian.

They're the supplier withe the customer and 27 million Canadian in the 4th quarter and there are only a few people who could be that big a customer and they won't identify them.

Can I ask you if you're the one they're having a dispute that is of that magnitude?

We're not going to comment on any specific release by another company.

Okay.

There aren't too many people who could be the other side of that transaction.

That's it.

Thanks.

Thank you.

Our next question comes from the line of Jonathan Steinmetz at Morgan Stanley.

Please proceed with your question.

Good morning, everybody.

Good morning.

Couple of questions.

You talked a lot about raw materials.

Have you given or are you able to give a number in aggregate net of recoveries of what you believe the year-over-year increase in raw material was?

We haven't talked about that number.

It's -- difficult to also calculate but the number -- the magnitude of the impact quarter-over-quarter has been increasing as we've been moving through 2004.

Could you give some idea of order of magnitude in terms of dollar amount or just basis points, just sort of a range?

I really don't want to get into the specifics.

Keep in mind that we have ongoing negotiations with our customers so certain information we don't like to publicly disclose.

Okay.

When you talk about a year-over-year earnings increase does that include any benefit in the 2nd half of the year from synergies relative to the privatization or does that exclude it then we should see a further benefit?

What we've assumed in that comment is that Dacoma and Tesma privatization transaction have occurred and we've assumed that Intier is still a separate public company until we have the positive vote then we'll obviously communicate the impact if any, to our outlook.

So we have -- we have made assumptions on purchase accounting and additional depreciation.

We've made assumptions on goodwill and minority interest as well as additional stock option expense and the conclusion that we've reached is that our earnings are going to be higher than 2004 earnings.

Thank you very much.

We're going to take one more question, operator.

Okay.

Certainly.

The final question is a follow up question from the line of David Tyerman of Scotia Capital.

Just on a question on the subacquisitions.

My impression from when you guys made these acquisitions or when you announced the potential acquisitions, is that the synergy side was not a big deal, this wasn't what that was about, at least in terms of cost.

Is there a change going on, in your view?

No, what we've always said is the privatization make a whole bunch of sense for Magna because it better positions us for the future.

And that's the main reason that we're proceeding with the transaction.

From a synergy standpoint we definitely are going to save some money as a result of privatizing the company.

There's going to be some duplicate costs and duplicate expenditures that are going to be eliminated.

The offset to that is higher noncash charges for depreciation and higher stock option expense because we need to revalue the stock options that the public subsidiaries.

What we've also said is that the real benefits of the privatization are going to be longer term as we look at engineering programs, as we look at research and development, as we look at how we position ourselves with the customers on larger modules and in new markets like Asia.

Okay.

Sounds like what you were saying before, more or less.

Just on the steel question, is it possible based on ongoing negotiations that this could become a risk to your forecast?

Well, commodity pricing is a risk and an opportunity.

Yeah, no, I understand that but based on what you have today assuming steel prices, let's say assuming steel prices did not change from where they were today, are you in the situation where you're in enough negotiations that the steel price could materially impact your results at those contracts ended up going higher because of extra surcharges or whatever it is that you're negotiating?

David, I'm not going to do a "What if" scenario.

What we've done in our forecast we've looked at where we are today to the best of our ability, information we have, and we've made certain assumptions and in our mind we've got a range of where we believe earnings and earnings per share is going to be.

But specifically in terms of what happens if this happens or that happens.

There's a whole bunch of things that could happen in a year.

You get good production mix, not so good production mix, it's really difficult to comment at this point.

I don't want to specifically talk about only one item.

Fair enough.

Last question.

Just on the D&A should we use last quarter?

Sounds like it could even go higher from last quarter for the remainder of this year.

Well, the fair value increment on the [inaudible] we have down will have an impact as will of course, capital expenses in 2005.

Do you have the number in mind, the year?

No.

We haven't given any guidance.

Okay.

Thanks.

Okay.

We'd like to thank everyone for participating in our conference call this morning.

Despite ongoing industry challenges, Magna continues to perform very well for its shareholders and customers and we'll keep you apprised of our progress.

Thank you.

Thank you, ladies and gentlemen.

That does conclude the conference call for today.

Once again we thank very much for your participation and does that you please disconnect your lines.

Thank you, and have a very good day.