Magna International Inc (MGA) 2005 Q1 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by, and welcome to the Magna International Incorporated first quarter 2005 results conference call. [OPERATOR INSTRUCTIONS].

  • As a reminder, this conference is being recorded Wednesday, May 4, 2005.

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

  • Please go ahead, sir.

  • Mark Hogan - President

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

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

  • First, I'd like to apologize for my voice.

  • I've been in Asia for the last two weeks working on expanding our Asian customer base, and I'll elaborate on our prospects later.

  • On Monday, our board of directors met and approved our financial results for the first quarter ended March 31, 2005.

  • Our board also declared a quarterly dividend of $0.38 per share payable on June 15, 2005 to shareholders of record on May 27, 2005.

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

  • As a result, we'll be brief in our formal remarks, leaving us more time to answer your questions.

  • We issued a press release yesterday during the meeting for the first quarter ended March 31, 2005.

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

  • This morning, I'll briefly comment on the current industry environment and its impact on our business.

  • Louis will then review our detailed financial results for the first quarter, and Vince will summarize our outlook for 2005.

  • And on completion of our formal remarks, we'll be pleased to answer any of your questions.

  • The first quarter 2005 proved to be a challenging quarter for Magna and the automotive supply base in general.

  • Vehicle production in both North America and Europe declined from the first quarter of 2004 by 4% and 5%, respectively.

  • In the North American market, General Motors and Ford in particular continued to lose market share.

  • That, combined with our high inventory levels entering 2005, resulted in significant production cuts in the first quarter.

  • In particular, production volumes on certain of our high content platforms declined substantially in the first quarter.

  • Production volumes on the GMT800, the Ford Freestar and Ford Explorer programs declined, 22, 38 and 35% respectively.

  • Higher commodity costs, particularly for steel and to a lesser extent resin, continued to impact our results.

  • However, industry expectations are for continued softening in steel prices.

  • And given the increasingly competitive nature of the industry, pricing pressures from our customers continued.

  • Finally, last month, MG Rover, a European customer of ours, was placed into administration, which is similar to Chapter 11 bankruptcy protection in the United States.

  • As a result, we recorded charges of approximately $15 million or $0.13 per share in the quarter related to our MG Rover assets and supplier obligations.

  • On the positive front, we continued to invest in a number of new and existing production facilities to support our continued growth.

  • And while the costs associated with these facilities negatively impact earnings until we climb the launch curve, we expect the programs, including the Ford Fusion, the new Ford Explorer, and Ford F-Series Super Duty pickups and the Mercedes M-Class, to be significant contributors to our future growth.

  • During the quarter, we successfully completed the privatizations of Tesma and Decoma and completed the privatization of Intier at the beginning of April 2005.

  • Also during the quarter, and in connection with our recent privatizations and changing industry conditions, we began a thorough assessment of our global operating footprint.

  • In the first quarter, we incurred a charge of $4 million to rationalize a facility in North America.

  • And in the coming months, we expect to complete our assessment and expect to develop and implement a facility rationalization strategy that may include plant consolidation, sales, and/or closures.

  • And while these actions will have a short-term negative impact on our results, they are necessary to ensure that we remain globally competitive and among the best suppliers to the world's OEMs.

  • I mentioned earlier that I just returned from a trip to Korea, China, and Japan, and we are aggressively expanding our presence in those countries and making progress.

  • Last week, following the successful completion of the privatizations, our management team was further strengthened.

  • On April 4th, we announced that Don Walker and Siegfried Wolf have been appointed as Co-Chief Executive Officers.

  • I believe Don and Ziggy (ph), along with Fred Gingl, Vince and I, combine to create a very strong management partnership that has the complementary skills necessary to execute our business strategy and to protect our decentralized and entrepreneurial culture which is needed to remain a leader in this very challenging industry.

  • This culture, combined with the commitment and dedication of our many managers and employees, has been and will remain the cornerstone of our success.

  • Now despite the industry challenges with which we are currently faced, with our broad and deep product capability, our strong financial position, our culture, our global strategy for growth, the steps we are taking to ensure global cost competitiveness and our concrete steps in diversifying our customer base, I believe the future is very bright for Magna.

  • Now I would like to turn the call over to Louis.

  • Louis Tonelli - VP, IR

  • Thanks, Mark, and good morning everyone.

  • I would like to review our financial results for the first quarter ended March 31, 2005.

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

  • I would first like to mention that our quarterly figures for 2004 have been restated to reflect the adoption of the Canadian Institute of Chartered Accountants’ amended recommendations on the disclosure and presentation of financial instruments.

  • This standard requires that we present preferred securities and subordinated debentures as liabilities, with the exception of the equity value ascribed to the holder's option to convert certain of our subordinated debentures into Class A subordinated voting shares.

  • The related liability carrying costs are presented as a charge to net income.

  • We adopted this recommendation effective January 1, 2005, on a retroactive basis.

  • This accounting change reduced net income by $5 million for the first quarter of 2004.

  • There was no impact on reported diluted earnings per share from operations.

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

  • Beginning in 2005, European average dollar content per vehicle reflects only our European production sales.

  • As a result, we have restated our European average dollar content per vehicle for prior years to reflect this presentation.

  • Historically, we have included both European production sales and complete vehicle assembly sales in European content.

  • In the first quarter, consolidated sales increased 12% to a record $5.7 billion.

  • North American production sales grew by 15% in the first quarter, despite a 4% decline in production from the comparable quarter, to approximately 4 million units.

  • North American content grew by 19% to $724 for the quarter.

  • Key drivers of the growth in content were the launch of new programs, acquisitions, in particular, the acquisition of New Venture Gear at the end of September of 2004, the strengthening of the Canadian dollar against the U.S. dollar, and increased production on certain programs.

  • New launches contributing to content growth quarter-over-quarter included the Chevrolet Cobalt and Pontiac Pursuit, the Chrysler 300 and 300C and Dodge Magnum, the Chevrolet Equinox, the Cadillac STS, Mercury Mariner, Ford Mustang and the Mercedes M-Class, all of which launched during 2004.

  • Programs that experienced higher volumes include the Chrysler Minivan and the Ford Escape.

  • Offsetting these programs -- offsetting these were programs that experienced lower volumes and/or content, including the GMT800, the Ford Freestar, the Dodge Ram pickup, and the Ford Explorer.

  • In addition, OEM price concessions negatively impacted content in North America.

  • European production and complete vehicle assembly sales grew 10% to $2.5 billion from Q1 2004.

  • Let me provide you with some of the details.

  • European production sales grew to $1.3 billion, an increase of 10% over the comparable quarter, despite a 5% decline in European production volumes to 4.1 million units.

  • This was a result of a 16% increase in European content per vehicle to $322.

  • The most significant factors in this increase during the first quarter were the launch of new programs, the strengthening of European currencies against the U.S. dollar -- in particular the Euro -- and acquisitions completed during or subsequent to the first quarter of 2004 -- in particular, the European operations of NVG.

  • New production programs that launched during or subsequent to the first quarter of 2004 include the Land Rover Discovery, the Mercedes A-Class, the Mercedes SLK, and the BMW 1-Series.

  • The BMW X3 also contributed to content growth, while lower volumes on programs, including the Mercedes E-Class, and incremental customer price concessions, partially offset this content growth.

  • Complete vehicle assembly sales increased 11% to approximately $1.1 billion, primarily as a result of increased production on the BMW X3, the strengthening of the Euro against the U.S. dollar, and favorable content levels on our assembly of the Mercedes G-Class.

  • Partially offsetting this growth was lower volumes on the Mercedes E-Class, the Saab 93 Convertible, and the Jeep Grand Cherokee.

  • In summary, consolidated production and complete vehicle assembly sales increased $596 million in the first quarter, with the acquisition of NVG, the movement of currencies against the U.S. dollar, global content growth, and increased complete vehicle assembly sales being the most significant factors contributing to the increase in sales.

  • Tooling and other sales were $397 million for the quarter, up $19 million from the comparable period.

  • The increase was primarily the result of an increase in reported U.S. dollar sales due to the strengthening of the Canadian dollar and Euro each against the U.S. dollar.

  • The major programs for which tooling revenue was recorded in the first quarter of 2005 were the Ford Fusion and Mercury Milan in North America and the Jeep Grand Cherokee and Chrysler 300 in Europe.

  • For the first quarter of 2004, the major programs for which tooling revenues were reported were the Ford Explorer and the Ford Mustang.

  • Gross margin as a percentage of sales declined from the comparable quarter from 14.7% in Q1 of 2004 to 12.7% this past quarter.

  • Gross margin as a percentage of sales was negatively impacted by the increase in commodity prices combined with lower scrap steel prices, the decrease in production volumes for several of our high content programs, including the GMT800, Ford Freestar and Ford Explorer, continued inefficiencies at Decoma, primarily at certain of its European facilities, the acquisition of the New Venture Gear business, which currently operates at margins that are lower than our consolidated average gross margin, incremental customer price concessions, costs incurred at new facilities in preparation for upcoming launches, or for programs that have not yet fully ramped up, including the new frame facility in Kentucky for the next generation Ford Explorer and F-Series Super Duty pickup trucks, and a new stamping facility in Sonora, Mexico to support the launch of the Ford Fusion, Mercury Milan, and Lincoln Zephyr, and a new fascia molding and paint facility in Georgia to support the ongoing launch of the Mercedes M-Class; increased complete vehicle assembly sales for the BMW X3, since the costs of this vehicle assembly contract are reflected on a full cost basis in the selling price of the vehicle; the writedown of our inventory related to MG Rover production and charges for supplier obligations as a result of the appointment of administrators for MG Rover in the UK, and the strengthening of the Euro and British pound each against the U.S. dollar, since proportionately more of our consolidated gross margin was earned in Europe during the first quarter of 2005 than in the first quarter of 2004.

  • And on average, our European operations operate at margins that are currently lower than the consolidated average margin.

  • Partially offsetting these decreases in gross margin as a percentage of sales were operational improvements at certain facilities, the closure during 2004 of certain underperforming divisions in Europe, and incremental gross margin earned on new program launches.

  • SG&A as a percentage of sales declined to 5.3% for the first quarter compared to 5.7% for the comparable quarter.

  • This reflects our efforts to control costs across the Company.

  • As a result of this decline in gross margins and increased depreciation and amortization, partially offset by lower SG&A as a percent of sales, our operating margin percentage declined from 6.3% in the first quarter of '04 to 4.4% in Q1 of 2005.

  • Our effective tax rate decreased to 28.3% in the quarter from 37.8% in the first quarter of 2004.

  • The first quarter of 2005 was negatively impacted by charges recorded as a result of the MG Rover situation, which have not been fully tax effected.

  • In the first quarter of 2004, the effective tax rate was higher as the result of a $12 million stock option expense and charges recorded with respect to the closure of a facility in Europe, both of which were not tax effected.

  • Excluding these items the effective income tax rate was 26.6% for the first quarter of '05 and 35.9% for the first quarter of '04.

  • The decrease in the effective income tax rate is primarily the result of a decrease in income tax rates in Austria and Mexico, a change in the mix of earnings whereby more profits were earned in lower tax jurisdictions during the first quarter of '05 than in the first quarter of '04; a reduction in losses not benefited, and a favorable tax settlement.

  • Net income was 172 million in the quarter compared to 179 million in the first quarter of 2004.

  • The lower operating income was partially offset by a lower tax rate and reduced minority interest as a result of the privatization.

  • Diluted earnings per share were $1.68 per share compared to $1.84 in the comparable quarter in 2004.

  • Diluted EPS of $1.68 for the quarter included charges totaling $0.17, comprised of Rover charges, costs incurred for the rationalization of a facility in North America, and the expensing of capitalized bank facility fees as a result of the cancellation of Decoma's term credit facility.

  • Unusual items in the first quarter of 2004 totaled $0.16, including a one-time charge to compensation expense as a result of modifying option agreements with certain employees and charges related to the closure of facilities in Europe.

  • Excluding these unusual items in each year, diluted EPS for the first quarter of '05 was $1.85, and for the first quarter of '04 was $2.

  • This decline in diluted EPS was a result of the decrease in net income discussed above, combined with a 5.3 million increase in the weighted average number of diluted shares outstanding.

  • The increase in shares outstanding is largely associated with the privatization.

  • I will now review cash flows and investment activities.

  • During the first quarter of 2005, we generated a record 362 million in cash from operations.

  • Another 162 million was generated from working capital.

  • For the quarter, we invested $307 million, comprised of approximately $136 million to purchase subsidiaries, including $134 million related to the privatizations, $124 million in fixed assets, and $47 million in other assets.

  • I would now like to turn the call over to Vince.

  • Vince Galifi - EVP, CFO

  • Thank you, Louis.

  • And good morning, everyone.

  • I would like to start by saying that considering the weak production levels, increased commodity costs, and the costs incurred to launch new facilities, we posted excellent first quarter results.

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

  • You should note that our outlook excludes the impact of any future acquisitions.

  • To recap, our assumptions for North American production volumes in 2005, which are implicit in our earnings outlook, have been lowered to reflect the increased caution of our customers' production plans for the remainder of 2005.

  • The North American light vehicle production is expected to be approximately 15.7 million units, essentially level with 2004 and down from our previous outlook of 15.8 million units.

  • We continue to expect European production to be approximately 16.2 million units, or 2% below 2004's 16.6 million units.

  • North American content per vehicle is expected to be in the $710 to $735 range, higher than our previous outlook.

  • The increased outlook range reflects higher expected volumes on certain high content platforms than we had anticipated back in February.

  • There are a number of programs expected to contribute to our content growth, including the Chevy Cobalt and Pontiac Pursuit, the Chrysler 300, 300C, and Dodge Magnum, the H3, the Mercedes M-Class, the Ford Mustang, the Chevrolet HHR, the Jeep Grand Cherokee, the Mercury Mariner, the Ford Freestyle and the Ford Fusion.

  • We continue to expect European content per vehicle to be in the $315 to $335 range.

  • Some of the new programs in Europe that are expected to contribute to content growth for 2005 are the Mercedes A and B-Class, the BMW X3, the BMW 1-Series and the Jeep Grand Cherokee.

  • Total sales are expected to be in the 21.8 to $23.1 billion range for 2005, which is consistent with our previous outlook.

  • We anticipate that the reduction of sales from lower expected North American production will be offset by the impact of higher North American content growth.

  • We expect our operating margin, excluding unusual items, to be in the low 5% range.

  • This is lower than our previous outlook, due to higher commodity costs, certain underperforming divisions, and increased customer givebacks.

  • The unusual items that have impacted or are expected to impact our results include charges related to our Rover business, as well as lost contribution on that business for the remainder of the year; restructuring charges arising from the privatizations, and charges associated with our facility rationalization strategy as we make our global footprint more competitive.

  • Our tax rate is expected to be in the 31 to 32% range, lower than our previous outlook, largely due to tax strategies planned following our privatizations.

  • We expect increased sales in 2005 to result in growth in diluted EPS, excluding the unusual items previously discussed.

  • This is due to a lower tax rate and reduced minority interest, offset in part by more diluted shares outstanding as a result of the privatization transaction.

  • And capital expenditures are expected to be in the range of 850 to $900 million for 2005, down from our previous outlook.

  • This is due to our efforts to reduce or defer discretionary capital spending in response to the weak automotive environment.

  • 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 for a complete description of our Safe Harbor disclaimer.

  • Thank you for your attention this morning.

  • We will now open the call for questions.

  • Operator

  • Thank you, ladies and gentlemen. [OPERATOR INSTRUCTIONS]

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

  • Please proceed.

  • John Casesa - Analyst

  • Thanks very much.

  • Good morning, everybody.

  • Vince Galifi - EVP, CFO

  • Good morning, John.

  • John Casesa - Analyst

  • Vince, I wanted to ask you about these potential restructuring charges in the balance of the year related to this rationalization program.

  • I wanted to ask, what has changed about the North American environment that may have motivated this new plan?

  • And secondly, what -- how much of the restructuring or rationalization is related to the privatization of the subs?

  • Vince Galifi - EVP, CFO

  • Well, I think when you look at North America, John, we did rationalize one facility in the first quarter and that was unrelated to the privatization transactions.

  • It was a plant that had some smaller stampings, and when you look at our small stamping capability and our strategy to outsource more of that and invest in really larger ton presses, we came to the conclusion that we had one too many plants.

  • The rationalization that I talked about in my comments in part relate to the privatization as we look at what we're producing in which groups; and with the privatizations, we now have the ability to actually move work around and make ourselves a little more competitive.

  • The other thing we're looking at is there are a couple of underperforming divisions; and apart from the privatizations, we need to take a close look at the future of these facilities and whether we need to do a little more -- something a little more drastic rather than hang on to the plants and hope for higher pricing and new programs.

  • John Casesa - Analyst

  • That's not related to the privatization, right?

  • Vince Galifi - EVP, CFO

  • Correct.

  • John Casesa - Analyst

  • Okay.

  • So would you say the privatization is a bigger factor in this or is it just -- I mean, how much is dealing with these underperforming divisions and how much of it's related to these transactions?

  • Vince Galifi - EVP, CFO

  • John, I think it is a mixed bag.

  • We're still completing our analysis; again, we have a lot more flexibility today in that we own all our groups 100%.

  • We're taking into account the current environment, not only in North America but in Europe, where ultimately our customers are moving toward; and what we're -- we're working as a team to develop the strategy to make -- as we've talked about -- our manufacturing footprint as competitive as possible to really be able to grow in the future in a very profitable way.

  • John Casesa - Analyst

  • Okay.

  • And thanks, Vince, thanks very much.

  • I appreciate that.

  • Vince Galifi - EVP, CFO

  • Thanks, John.

  • Operator

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

  • Please proceed with your question.

  • Chris Ceraso - Analyst

  • Oh, thanks, good morning.

  • Vince Galifi - EVP, CFO

  • Good morning, Chris.

  • Chris Ceraso - Analyst

  • A couple of items.

  • I noticed on the lower CapEx guidance -- I wanted to ask you, though, one of your competitors in the interior business noted that their expectations for capital spending this year were higher because some of the difficulties that their suppliers were facing, and thus they would have to take more responsibility to own customer tooling.

  • Have you seen any of that?

  • Vince Galifi - EVP, CFO

  • We've seen that -- some of the tier 2 and tier 3 suppliers that have been supplying us, they have had some difficulties, and as a result of that, we've certainly faced some higher costs in the first quarter.

  • Looking out, we don't know whether that's going to continue, but that certainly is a risk out there.

  • But from a capital standpoint, we haven't seen that, Chris.

  • The reduction in capital from our perspective is looking at our overall spending for 2005 -- looking at what we could potentially defer or eliminate, given the tough environment we're all in today.

  • Chris Ceraso - Analyst

  • Okay.

  • And can you give us a feel of what you think the full year impact from Rover will be, both in terms of any future charges plus the loss of income from those programs?

  • Vince Galifi - EVP, CFO

  • Chris, I'm not going to quantify that for you in that it's still uncertain at this point in time.

  • It's going to depend in part whether we can redeploy some of the people that were employed on the Rover line, whether we can find some additional business on a short-term basis to sell those lines.

  • But the amount, again, is not going to be a material amount for the year for us, because Rover wasn't a substantial part of our business in any event.

  • Chris Ceraso - Analyst

  • Okay.

  • And then lastly, Louis rattled off maybe 9 or 10 headwinds that hurt the gross margin in the quarter.

  • Maybe you can just give us a little bit more color in terms of the order of magnitude of these things, which ones were the biggest -- you know, maybe wrap some numbers around some of those items?

  • Vince Galifi - EVP, CFO

  • I think there was a couple of -- two or three substantial components to overall margin change quarter over quarter.

  • They were acquisitions -- primarily, you think about New Venture Gear, they're operating a margin below Magna's margin.

  • In fact, I just want to comment a little on the New Venture Gear.

  • We are really pleased with the cooperation that we have seen so far from the Union and the employees at the Syracuse facility.

  • I would say that excluding lower GMT800 volumes that we incurred in the quarter and excluding higher steel pricing, I think we're very pleased with the performance at Syracuse.

  • However, we were negatively impacted by higher steel prices; so when you factor in NVG with the higher steel prices and the lower 800 volume, that had a negative impact on margins quarter over quarter.

  • Other substantial factors impacting margins are new facilities -- Louis talked about three facilities that will be -- or one has launched, which is the facility in Alabama.

  • Two will be launching.

  • That's had a pretty substantial impact on margin.

  • The other substantial impact on margin was just reduction in some of our major programs.

  • When you think about the GMT800 program or the Ford Freestar, the V229 program at Ford, that's had a -- quite a substantial impact on margin.

  • We've had some ups and downs throughout the rest the Company, but I've given you some color to the major items affecting gross margin percentage.

  • Chris Ceraso - Analyst

  • Okay, thank you very much.

  • Operator

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

  • Proceed with your question.

  • Unidentified Speaker - Analyst

  • Hi, this is [indiscernible] for Ron.

  • I just -- can you quantify the steel impact for the quarter, and also the risk going forward with the supplier contracts?

  • And I have another question.

  • Vince Galifi - EVP, CFO

  • The -- in terms of the steel impact in the first quarter, it was more substantial than the fourth quarter of 2004.

  • It was actually higher than we had anticipated; and you know, one of the reasons that our earnings are lower than we also had anticipated was the higher commodity costs.

  • And we did plan for higher costs, but they've been higher than we had anticipated.

  • Part of that is due to helping some of the tier 2 and tier 3 suppliers that I mentioned earlier.

  • In terms of the balance of the year, we're expecting that the commodity costs for steel will moderate somewhat.

  • The level of moderation is uncertain at this point in time.

  • There's a number of factors that will ultimately determine where steel ends up for the balance of the year, but we see some softening.

  • But when you look at '05 versus '04, certainly steel is going to be a higher cost than it was in '04.

  • We are still in discussions with a number of suppliers where we do have long-term contracts in place.

  • These suppliers are claiming that we should be paying a higher price for steel or steel products, and we are claiming that we don't want to do that.

  • So -- and we described that pretty clearly in the MD&A.

  • But to the extent that these disputes with the suppliers are settled and we're not successful, then that will have a negative impact on earnings moving forward.

  • Unidentified Speaker - Analyst

  • Okay, thanks.

  • And can you quantify the mix impact of the T800s and Explorer volumes now being down -- can you quantify the impact on sales, just like on a CPV basis or something?

  • Vince Galifi - EVP, CFO

  • In terms of content per vehicle, when you look at some of the major programs, there's the V229 and the GMT800.

  • That had an impact of almost $30 quarter over quarter negative.

  • Unidentified Speaker - Analyst

  • Okay, thank you.

  • Vince Galifi - EVP, CFO

  • You're welcome.

  • Operator

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

  • Please proceed with your question.

  • John Novak - Analyst

  • Vince, you guys did a good job in terms of detailing the launches that you're going to see in 2005.

  • Can you give us a sense of whether the launch costs in 2006 will be higher than what you're currently anticipating to experience in 2005?

  • Vince Galifi - EVP, CFO

  • You know, John, it's a bit too early to talk about 2006.

  • I think we'll wait until we get out there and provide our outlook for 2006 before we give some details.

  • John Novak - Analyst

  • Louis, can you give us just the magnitude of the tax settlement in the quarter?

  • Louis Tonelli - VP, IR

  • It's about $0.04 or $0.05, John.

  • John Novak - Analyst

  • And excluding the charges that were taken in the quarter, can you give us a sense what the operating margin was ex those charges?

  • Vince Galifi - EVP, CFO

  • If you look at the -- John, I don't have that number handy, but in terms of what the charges were, it is a total of $20 million of charges in the first quarter.

  • John Novak - Analyst

  • And that was the pretax number, Vince?

  • Vince Galifi - EVP, CFO

  • Yes.

  • John Novak - Analyst

  • Okay.

  • And lastly, what's the likelihood that your tax rate guidance ends up being conservative and the tax rate actually pushes below 30% for the year?

  • Vince Galifi - EVP, CFO

  • John, we're -- we've got a group of tax people that are focused on trying to put some strategies in place to reach our overall tax rate, and they've had a number of meetings so far -- I've sat through a couple of them -- and they've made some great progress, and there's opportunities there.

  • But at this point, I feel comfortable with the range of 31 to 32%.

  • Hopefully, we can get that below that.

  • That's obviously our target; but at 31 to 32%, I feel comfortable we can achieve that.

  • John Novak - Analyst

  • Okay, thank you very much.

  • Operator

  • The next comes from the line of Fadi Chamoun from UBS Warburg.

  • Please proceed with your question.

  • Fadi Chamoun - Analyst

  • Good morning, everyone.

  • Vince Galifi - EVP, CFO

  • Good morning.

  • Fadi Chamoun - Analyst

  • First question on -- I just want to go back to the plant rationalization strategy.

  • Does this potentially include exiting some lines of business that you are not really comfortable with the return potential, or are we just talking about plant capacity consolidation?

  • Vince Galifi - EVP, CFO

  • No, Fadi, we're not -- you know, as part of our review, what -- we're not looking at disposing of certain lines of businesses.

  • When we look at the lines of businesses we're in today, we believe that we have a very strong position in all those lines, and we have a good potential to grow the businesses, not only in North America and Europe, but also in Asia.

  • And we plan on expanding those lines.

  • What we're doing is looking at our manufacturing base, making it stronger to be more competitive, reduce our overall costs, and that should give us an advantage in working and looking at new business.

  • Some of the things we're look at, too, is do we want to locate in some lower cost countries?

  • Some of our facilities have to be very close to the customer, high cost jurisdictions.

  • We do have some flexibility in moving certain productions to lower cost countries, so that's part of our entire review as well.

  • I look at the rationalization as an unusual item -- really an investment for the future -- to improve our overall performance going forward.

  • Fadi Chamoun - Analyst

  • Okay.

  • One question on Donnelly, who -- there is -- one of your competitor's recently mentioned that they have secured an exclusive agreement to supply auto dimming mirror with GM, which would have I think some impact on your shipments to GM.

  • Can you comment on that specific contract, and also in general, are you happy with the returns that you are receiving at Donnelly?

  • Is it up to your expectation from when you bought it, and what is the general state of the business in terms of market shares and backlog there?

  • Mark Hogan - President

  • I'm very pleased with the progress that Donnelly has made.

  • In fact, I think the outlook for Donnelly is exceedingly bright.

  • They've got technology that I think is not easily replicated by their competitors.

  • And I do think that some of the statements from the competitors are not necessarily accurate, and I'd refer you back to General Motors for clarification.

  • Fadi Chamoun - Analyst

  • Okay.

  • Last question is, we have seen in the media recently that you've been able to secure some additional productivity concession at New York for the transfer case of the GMT900.

  • What does this mean for the plant that you have begun to build them in Muncie?

  • Are you planning to build there as well?

  • And if you can give us some clarifications on that?

  • Mark Hogan - President

  • Well, we've made commitments both in Indiana and New York in conjunction with the transfer case for the 900, and we're going to live up to those commitments.

  • Fadi Chamoun - Analyst

  • Okay.

  • Thank you.

  • Operator

  • The next question comes from the line of Peter Sklar from BMO Nesbitt Burns.

  • Please proceed with your question.

  • Peter Sklar - Analyst

  • Vince, what's your sense on timing as you go through this review process regarding restructuring and rationalization charges?

  • When do you think the Company would be in a position to actually take the charges, should you take any?

  • Is this something at the end of the year, or we'll see it in the quarters coming up?

  • Vince Galifi - EVP, CFO

  • Peter, just in terms of -- the most important thing in our minds is completing that review and making that determination that we're going to do something.

  • In terms of when the charges fall into the quarters, the accounting rules are going to dictate when those charges fall into the various quarters.

  • There are certain rules relating to fixed assets in terms of when you can take a charge for that, and there's other rules as it relates to if there are any severance costs when you can actually record those.

  • Peter, I would expect that starting with the second quarter, that we're going to see some -- potentially some charges impacting our operating income.

  • Peter Sklar - Analyst

  • Okay.

  • And Louis, just one question for you.

  • On the new accounting policy regarding financial instruments, does that impact the arithmetic of calculating earnings per share?

  • As you'll recall, there's some adjustments you have to make to the numerator when you're doing the calculations.

  • Does this accounting -- new accounting policy impact that at all?

  • Louis Tonelli - VP, IR

  • It does change.

  • If you think about the way the accounting used to be, we used to take that 4 or $5 million charge for preferred securities below the line, Peter --

  • Peter Sklar - Analyst

  • Yes.

  • Louis Tonelli - VP, IR

  • -- so that's why EPS is essentially unchanged.

  • Now, we're basically restating that and we're putting it into interest expense.

  • Peter Sklar - Analyst

  • So is there -- are there any adjustments left below the line?

  • Louis Tonelli - VP, IR

  • No.

  • Peter Sklar - Analyst

  • Okay.

  • That's all I have, thanks.

  • Operator

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

  • David Tyerman - Analyst

  • Yes, good morning.

  • On the rationalization program, I was wondering if you could give us some idea of the scope of returns you're hoping to get from this?

  • Is this very material in terms of future margins, or is it really more trimming up your manufacturing systems to be as efficient as possible, but it's unlikely we're going to see significant changes in the margins?

  • Vince Galifi - EVP, CFO

  • I think it's going to be more fine tuning.

  • To have a substantial change in overall margin, it's going to have to be a major restructuring, and that's not what we're planning.

  • This is, we're calling it restructuring and rationalization, it is fine tuning.

  • It is to make us more competitive.

  • Is it going to impact margins positively?

  • Yes, it will be.

  • But if you lose it in the rounding a 0.1 or 0.2% change in margin is substantial.

  • We'll see positive, but it's not going to be something that's going to jump out at you when you look at our numbers.

  • David Tyerman - Analyst

  • Fair enough, that's helpful.

  • On the -- when I look at the historicals for the operating segments and the margins for those segments -- EBIT margins -- they are a lot higher in most cases.

  • I think the only one that isn't is Intier.

  • I'm wondering if -- has something changed that there is a reason that you can't go back to those levels?

  • And if that isn't the case, or you can get partway back, can you give us some sense perhaps on some of the bigger ones like Decoma, what kind of time table you would hope to see these things start to head back toward more historic numbers?

  • Vince Galifi - EVP, CFO

  • In terms of -- if you look at the segments this quarter, if you look at both Intier and Decoma, they were negatively impacted by Rover.

  • David Tyerman - Analyst

  • Right.

  • Vince Galifi - EVP, CFO

  • The Rover business actually impacted three of our groups.

  • One was really insignificant, but the two groups that were impacted in a larger way were Intier and Decoma, with their operations in the UK.

  • The other impact to Intier was the Ford Freestar program, where volumes were low -- and you know that Intier put up a new facility in Ontario to accommodate that program.

  • The other impact at Intier and at Decoma -- let's say a bigger impact at Intier -- was commodity pricing; in particular, steel was higher than we had anticipated.

  • So are those margins going to turn around and get back to historical levels?

  • It's going to depend on a couple of things.

  • Obviously, the Rover is a one-time item so that's going to reverse.

  • If commodity pricing eases up and we're successful in attaching some of those higher costs to our customers, that will help.

  • Certainly if mix turns around, in the case of Intier, that could help.

  • And in the case, particularly of Decoma -- we haven't talked about it on this call -- but you recall over the last couple of quarters, we've been talking about an operation in Belgium called Belplas that launched in 2004.

  • We were not very happy with the performance in the fourth quarter, and we're not very happy with the performance in the first quarter.

  • I think it's going to take us some time to turn around this Belplas facility.

  • Some of the issues are pricing -- we're not going to be able to fix those overnight.

  • There are still inefficiencies at Belplas that had a negative impact on Decoma's results, and we expect that that would be the case for the balance of this year.

  • David Tyerman - Analyst

  • Do you expect sequential improvement out of that, or is it going to be longer than that?

  • Vince Galifi - EVP, CFO

  • We are expecting improvement as the year progresses, David.

  • David Tyerman - Analyst

  • Okay.

  • Fair enough.

  • Vince Galifi - EVP, CFO

  • We are not happy until it completely turns around and is earning the appropriate return for the capital we have employed there.

  • David Tyerman - Analyst

  • Right.

  • Just to sort of explore that just one little bit further.

  • If I look at the margins and I back out the Rover stuff, I look at Decoma having 2% EBIT, historically it was at 7 to 9%.

  • I could go down all of the areas, like "other" is at 6 and it was at 9 to 11, et cetera, et cetera.

  • We seem a lot lower today than we were a few years ago.

  • That's what I'm driving at.

  • It seems to me that there should be room to move these up, or maybe mix and commodity, et cetera, have taken you permanently lower?

  • Vince Galifi - EVP, CFO

  • Well, let me just comment on Decoma once again, because the other item I didn't mention, David, was the launch of the facility in Alabama.

  • That's -- that's launching -- it's launching in the first quarter and it's going to continue to launch for the M-Class program.

  • And there's a substantial amount of costs being incurred right now during the ramp up of that facility, and that's driving margins down as well in Decoma -- and Decoma was also hurt by lower production volumes in North America.

  • If you think about Decoma's business model, when you're running a paint facility, if you reduce production, it really hurts margins; and when you ramp up production, because it's a lot of fixed costs in that business, you're going to see that flowing through to the bottom line.

  • So do we anticipate improvement?

  • I think that's going to depend on a couple of things.

  • Number one is volumes and mix.

  • Number two is commodity pricing.

  • But three, as we move along the launch curve, we should see improvements in overall operating margins.

  • Our business has changed over the years, too.

  • We are purchasing more components today than we were two to three or four years ago.

  • And that's had a negative impact on gross margin, a positive impact on SG&A as a percent of sales.

  • If you go back, our SG&A was in the 6-plus range, and we're running at 5-plus today.

  • That's something we had anticipated.

  • Again, I would focus more on return on investment, return on funds employed as a better measure of how effective we are in employing our capital.

  • Louis Tonelli - VP, IR

  • If you look at the front end modules, Decoma in the last couple of years, you look at completed vehicles -- completed carriers at Intier, you see that the big modular impact is obviously affecting our operating margin.

  • David Tyerman - Analyst

  • Okay, great, thanks very much.

  • Operator

  • The next question comes from the line of Donato Sferra from TD Securities.

  • Please proceed with your question.

  • Donato Sferra - Analyst

  • Good morning.

  • Just on the taxes, I was wondering in terms of tax loss carry forwards, how much do you have outstanding, and can you break that out geographically and, you know, whether or not these other tax -- the lower tax rate, how long do you think that's sustainable?

  • Also, given, you know, the expected writedowns of facilities in North America and Europe?

  • Louis Tonelli - VP, IR

  • Donato, let me get back to you on some of the specifics of the taxes.

  • We haven't got them out at our finger tips.

  • Donato Sferra - Analyst

  • Okay.

  • And in terms of the cost savings, you said that you expect some charges in Q2.

  • When do you expect the major cost savings to start flowing through your income statement?

  • Vince Galifi - EVP, CFO

  • Donato, I said that I think with respect to the restructuring rationalization, there could be charges starting with Q2.

  • In terms of when do we start to see some of the savings, we'll start to see some of the benefits of the rationalizations starting in the second quarter.

  • If you think of it, we've already shut down one facility.

  • As part of the privatization, we've already unfortunately had to let go some people, as we look at our overhead in the various offices and where there's overlap.

  • So we'll see some savings immediately on that.

  • The offset to that is, obviously severance costs, which were -- which we will record in the second quarter for people that have already been let go; but we'll see the ongoing benefits starting in the second quarter.

  • So in terms of the tax rate, let me get back to you.

  • Louis is going to talk about the magnitude of losses and what's recorded in our financial statements to the note -- at least in the December 31 statement.

  • You asked whether the tax rate, the 31, 32% is unusually low, and is that sustainable?

  • My view, Donato, is based on the privatization and greater flexibility we have and some of the strategies that are being put in place, that the 31 to 32% tax rate is sustainable.

  • Donato Sferra - Analyst

  • Yes, I think your tax loss carry-forwards as of December were something in the neighborhood of $400 million, and you're going to be also restructuring and taking, I guess, more losses in North America and Europe.

  • So I just wanted to get clarification on whether they -- you know, when they expired and all that kind of stuff.

  • So that -- okay.

  • I'm good there.

  • And just in terms of suppliers and steel costs, you mentioned that you're paying more for steel for certain suppliers even though you have long-term contracts, and how are you currently recording that amount, you know, through the income statement?

  • Are you recording it at the contracted price, or are you building in a cushion, or can you -- do you care to comment on that?

  • Vince Galifi - EVP, CFO

  • What I'd like to say, Donato, on that is, what's been recorded in the financial statements for the first quarter is what we believe is our best estimate of what the ultimate cost of steel is going to be for those suppliers.

  • Donato Sferra - Analyst

  • Okay.

  • Vince Galifi - EVP, CFO

  • The risk is that what we expect -- what we expect may happen and what may actually happen may be different, and that's a risk that's, I think, clearly outlined in our MD&A that was attached to press release that we issued yesterday.

  • Donato Sferra - Analyst

  • Okay, and just a housekeeping question on Intier and the purchase price allocation.

  • Can you talk a little bit about the balance sheet and how much of the incremental difference was -- is going to be booked to goodwill, if that's been finalized?

  • Vince Galifi - EVP, CFO

  • Donato, actually, we haven't finalized the purchase accounting for Decoma and Tesma, which were completed in the first quarter, and we certainly haven't finalized it for Intier.

  • What we've done in the first quarter with the first two privatizations is looked at the difference between purchase price and underlying book value and put that difference all to goodwill for the time being.

  • As the year moves on and we do the necessary valuations to support purchase accounting we'll allocate goodwill as necessary.

  • Donato Sferra - Analyst

  • And so I think the accounting rules give you a year from the date of closing, is that right?

  • Or --

  • Vince Galifi - EVP, CFO

  • That's correct.

  • Donato Sferra - Analyst

  • Okay.

  • Perfect, thanks.

  • Operator

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

  • Please proceed with your question.

  • Nick Morton - Analyst

  • Good morning.

  • A couple of questions on your cash balance.

  • You've talked a lot about -- or mentioned in your press release, anyway -- the potential for acquisitions.

  • I was just wondering if you've considered doing a stock buyback, because your own stock is trading at perhaps the lowest valuation of any major auto parts company that I can find.

  • Vince Galifi - EVP, CFO

  • Nick, we've -- we actually had some monthly discussions about our balance sheet -- monthly executive team, as well as with the board; and given the opportunities that we are seeing out there and the acquisition opportunities in particular, we believe that the right thing to do from a business perspective is to hold on to that cash and redeploy it if a good and the right opportunity presents itself.

  • Nick Morton - Analyst

  • Okay.

  • On the -- so you're taking a longer term view, but initially perhaps you'd have to use cash rather than your stock at this level, is that fair?

  • Vince Galifi - EVP, CFO

  • I think if you look at the significant transaction we completed in the fourth quarter last year, New Venture Gear, we used cash to make that acquisition, and our stock at that point was trading higher than what it is today.

  • Nick Morton - Analyst

  • Okay.

  • What about the magnitude of acquisitions -- are we talking something significant that would change your debt equity relationship significantly?

  • Vince Galifi - EVP, CFO

  • It's all going to depend, Nick, on the opportunities out there.

  • If there's some good opportunities, and as a result of that, we needed to take on some debt, I think that's something we'd consider.

  • Nick Morton - Analyst

  • What sort of level of debt equity would be comfortable for you?

  • Vince Galifi - EVP, CFO

  • We don't have -- we operate our business a little different.

  • We don't those targets.

  • We look at the opportunity, and if it's a good opportunity we assess it and then determine how we finance that.

  • So we haven't established our debt equity target or things like that.

  • Nick Morton - Analyst

  • Okay, great.

  • Well, thank you very much.

  • Operator

  • The next question comes from the line of Yousef Ahoot [PH] from Westwind Partners.

  • Please proceed with your question.

  • Yousef Ahoot - Analyst

  • Good morning.

  • Vince Galifi - EVP, CFO

  • Good morning.

  • Yousef Ahoot - Analyst

  • I understand your guidance for lower operating income for this year.

  • And this is despite the acquisition of NVG.

  • I know you mentioned that NVG margins are lower compared with the average of the whole group.

  • Is NVG making money at the operating level?

  • And if this is the case, does it mean you're being hit harder at the margin level in other businesses, especially Tesma?

  • Vince Galifi - EVP, CFO

  • Well, it's difficult to hear your question, but I'll try to paraphrase.

  • I think the first question you asked, is NVG losing money?

  • Absolutely not.

  • NVG is not losing money.

  • NVG is profitable.

  • We were anticipating NVG to be more profitable, but steel had a substantial impact on operating profits, as well as lower production volumes on some programs.

  • With respect to your comments on Tesma, I didn't quite understand that.

  • Do you want to repeat that?

  • Yousef Ahoot - Analyst

  • Yes.

  • You mentioned that you guided for lower operating income this year than you had last year, and this is despite the acquisition of NVG at the end of last year.

  • So it should be -- and I guess should be earning accretion from here, but I guess it's compensated for lower operating income from other businesses?

  • Vince Galifi - EVP, CFO

  • That is correct.

  • I think when you look at our overall business for 2005, Louis actually talked about some of the impacts, and part of that is higher commodity prices.

  • Part of it is increased pricing pressures from the customers. 2005, from our view, is more difficult, has been more difficult, and we expect it to be more difficult than it was in 2004.

  • And as a result of mix -- as a result of some inefficiencies that I talked about at Decoma, at Belplas and the potential costs we're incurring for the preparation of upcoming launches at at least three major facilities -- a lot more facilities that are brand new -- that's all going to contribute to lower operating income.

  • Yousef Ahoot - Analyst

  • Okay, thank you.

  • My next question is to Mark and you came back recently from Asia.

  • I mean, are we -- is it possible that we will see any significant orders in the near term from any Japanese OEM, and what are the plan for the China expansion specifically?

  • Thank you.

  • Mark Hogan - President

  • Well, we're in discussions with all the Japanese OEMs about future business and product programs, and I won't comment on the specific product programs; but suffice to say that we have established a significant engineering presence in both Tokyo and Nagoya for the purpose of serving our OEM customers there, and that will lead to future product program business.

  • We're also working very hard with Hyundai and GM Daewoo, and making progress in that regard; and finally, in China, we have six facilities that we've established for a number of our companies, our groups.

  • And we expect to double that number within the next 12 months because of business that we've been awarded.

  • Yousef Ahoot - Analyst

  • Thank you.

  • Louis Tonelli - VP, IR

  • Operator, we're going to take one more call.

  • Operator

  • The last question comes from the line of Lorraine Gloster(ph) from McFarland Gordon (ph).

  • Please proceed with your question.

  • Lorraine Gloster - Analyst

  • Yes, I wondered if you can comment on the impact of the unusual items on operating income for Q1 '04?

  • I know you gave it for Q1 '05, but what was it last year?

  • Vince Galifi - EVP, CFO

  • Sure, there's a couple of items in the first quarter of last year, but there was some stock option expense that we booked in the first quarter as a result of modifying some stock options, which was about $12 million in net income and $0.12 per share.

  • We also had some closure costs that we incurred in the first quarter last year, a facility in Europe in the Intier group, and the cost of that was about $0.04 on an EPS perspective.

  • So when you look at the two unusual items last year was about $0.16.

  • Lorraine Gloster - Analyst

  • On the operating income, though?

  • Vince Galifi - EVP, CFO

  • Oh, operating income was $17 million.

  • Lorraine Gloster - Analyst

  • 17?

  • Vince Galifi - EVP, CFO

  • Yes, after tax was 16.

  • Lorraine Gloster - Analyst

  • After tax 16.

  • Okay.

  • And then of the 20 million for -- on the operating income, was that mostly on the cost of goods, or is that -- what was the split between SG&A and cost of goods?

  • Vince Galifi - EVP, CFO

  • The -- I don't have it in front of me, but the totals were about $20 million.

  • The closure costs and the facility fee writeoff went to SG&A, and the Rover charge was split between SG&A and margin.

  • I don't have the exact numbers in front of me.

  • Lorraine Gloster - Analyst

  • Okay.

  • And just on -- you had given some guidance that although you expect operating income to be down, you expect earnings to be up over last year.

  • What is the base earnings per share that you're using for 2004?

  • Vince Galifi - EVP, CFO

  • Well, what we talked about yesterday at the annual meeting was EPS from operations, including impairments, which was 712.

  • Lorraine Gloster - Analyst

  • Okay.

  • Vince Galifi - EVP, CFO

  • But if you also look at the various unusual items we had last year -- and we did have some unusual items -- the comparative number for last year is 723.

  • We still believe that based on our outlook for the balance of 2005, that our EPS before unusual items will exceed the comparable number and compete on the same basis for 2004.

  • Lorraine Gloster - Analyst

  • So the base is 723?

  • Vince Galifi - EVP, CFO

  • Yes.

  • Lorraine Gloster - Analyst

  • Okay, and just finally here, on your content per vehicle, you did go up a little bit on it this year in North America -- just $10.

  • I was wondering what that was, or if you had changed your foreign exchange outlook for the year?

  • Vince Galifi - EVP, CFO

  • In North America?

  • Lorraine Gloster - Analyst

  • Yes.

  • Vince Galifi - EVP, CFO

  • The change of cost per vehicle, part of that is -- a big part of that is mix.

  • Part of that is also content per vehicle in the first quarter and where we came in at versus overall expectations.

  • Lorraine Gloster - Analyst

  • So has there been any change on the -- on your currency outlook for the year, or are you maintaining what you had at the beginning?

  • Vince Galifi - EVP, CFO

  • It's roughly the same.

  • The Canadian dollar has softened over the last week or so, but it's roughly the same.

  • Lorraine Gloster - Analyst

  • Okay.

  • Thank you.

  • Mark Hogan - President

  • Well, thanks, everyone, for participating in our conference call this morning.

  • I noted earlier that we are facing a very challenging environment.

  • But we also have a strong position relative to many of our competitors, and we are intensely focused in how we can turn the challenges into opportunities.

  • Please enjoy the rest of your day.

  • Thank you.

  • Operator

  • 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.