Magna International Inc (MGA) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Magna International Inc. second-quarter 2005 results conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Wednesday, August 10, 2005.

I would now like to turn the conference over to Mr. Vincent Galifi, Executive Vice President and Chief Executive Officer at Magna International Inc.

Please go ahead, sir.

Thank you.

Good morning to those of you joining us on the call from North America.

Good afternoon to those of you listening in from Europe.

Welcome to our second-quarter conference call.

I'm on the call here from our European corporate office in Austria today, while Louis Tonelli, our Vice President, Investor Relations, joins me from our head office in Aurora, Canada.

Mark Hogan is traveling in Asia this week and could not join us today.

Yesterday our Board of Directors met and approved our financial results for the second quarter ended June 30, 2005.

Our Board also declared a quarterly dividend of $0.38 per share, payable on September 15, 2005, to shareholders of record on August 31, 2005.

We issued a press release this morning for the second quarter.

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

Our address is www.magna.com.

Today I will briefly comment on the current industry environment and its impact on our business.

Louis will then review our detailed financial results for the second quarter, and then I will summarize our outlook for 2005.

Upon completion of our formal remarks, we will be pleased to answer any questions.

The second quarter of 2005 was another challenging quarter for Magna.

Vehicle production in North America and Europe declined 1% and 3% respectively from the second quarter of fiscal 2004.

By comparison, in the North American market GM and Ford production volumes declined by 11% and 6% respectively.

In particular production volumes on certain of our high content platforms continued to experience significant declines.

I will talk more about that later.

We continue to pay more for commodity costs than we did in the comparable quarter a year ago.

Given the increasingly competitive nature of the industry, we face increased price concessions and the pricing pressures from our customers continue.

And the tough automotive environment that we are faced with every day has taking its toll on the Tier 2 supply base.

Despite these issues we posted solid results for the quarter, including record sales.

Our results are thanks to the resiliency of our operations which accept the ongoing industry challenges and still maintain strong performance.

There are a number of positive and negative points associated with the second quarter.

On the positive side, we continue to invest in new and existing production facilities to support our continued growth, including a new stamping facility in Sonora, Mexico to support the current launch of the Ford Fusion, Mercury Milan, and Lincoln Zephyr.

In Georgia our new fascia molding and paint facility supported the launch of the Mercedes M-Class and the upcoming launch of the R-Class continues to ramp.

And in Kentucky a new frame facility is just launching for the new Ford Explorer and next year's F-Series Super Duty Pickup Trucks.

Although in the short-term our operating profits are negatively impacted by these investments as startup costs that we incur are not capitalized, we expect these programs to be positive contributors to profit once they ramp up.

The second quarter was a strong quarter in business awards from our customers, in particular with the Asian-based OEMs.

We have been focusing for sometime upon diversifying our customer base and we have recently been rewarded for our efforts.

Of the $1 billion plus in new and replacement business awards in the second quarter, more than $150 million was from Asian-based OEMs.

We continue to make progress in the Asia-Pacific region.

We recently signed a joint venture agreement in India to supply mirrors in the growing Indian market.

Just last week DaimlerChrysler announced a new model for a long-term supplier relationship and highlighted Magna as one of DCX's highly-integrated partnership organizations.

Based on our performance against Chrysler Group's objective measurements we were awarded a complete interior contract, excluding seats, for a future vehicle model scheduled for 2008.

This recognition from a long time customer results from our commitment to providing our customers with high-quality, innovative products at competitive prices.

During the quarter we successfully launched the assembly of the Chrysler 300 at our Magna Steyr facility in Graz, Austria.

Yesterday myself and other members of our management visited the facility with our Board of Directors.

We now assemble seven different vehicles, including three on one assembly line, one of the world's most flexible assembly plants.

We believe niche vehicle assembly will continue to provide growth opportunities for Magna as OEMs continue to focus on vehicle differentiation and as vehicle segments continue to grow.

With the completion of the privatizations in the quarter we began the realignment of some of our groups.

We merged much of our Tesma Group with Magna Drivetrain to create Magna Powertrain, a significant player in the global powertrain market.

Tesma's former fuel systems business was moved into Magna Steyr (indiscernible) alternative fuel systems technologies under development.

Herbert Demel has joined us from Fiat to become President of Magna Powertrain, and we hired a long-term GM powertrain executive to be Magna Powertrain's North American President.

Also with respect to the privatization, we consolidated certain corporate functions at our groups, and we are streamlining our marketing functions across the Company to most effectively sell to our customers.

Finally, recall last quarter we indicated that in connection with our privatizations and changing industry conditions, we had begun a thorough assessment of our global operating footprint.

That process continues.

Our plant rationalization strategy includes plant consolidations, sales and/or closures.

During the quarter we incurred restructuring costs and impairment charges associated with three European facilities and sold a non-core seating component facility in North America.

While these actions will have a short-term negative impact on our 2005 results, they are necessary to ensure that we remain globally competitive.

On the negative side we continue to experience unfavorable mix with respect to our high-content platforms.

With North American production down 1% in the quarter, the Ford Freestar and Mercury Monterey were down 60%, the Ford Explorer and Mercury Mountaineer were down 30%, the Dodge Ram Pickup was down 21%, the Ford Escape and Mazda Tribute were down 11%, and the GMT800 was down 6%.

Our expectation is that mix on many of our key platforms will continue to be weak in the second half of the year.

However, strong US automotive sales in June and July have reduced the high inventory levels that existed for many vehicles earlier in the year which should improve the production outlook in the coming quarters.

In addition, the launch of such programs as the new Ford Explorer and F-Series Super Duty Pickups and new GM full-sized trucks all in the coming 12 months should improve our mix in 2006.

During the quarter we continued to pay more for raw materials, including purchased components used in our production, compared to the second quarter of 2004.

Although fuel costs have recently begun to decline following a period of significant price increases and a significant portion of our steel, resins and other components are covered under customer (indiscernible) programs for long-term contracts, increased commodity prices negatively impacted Magna's results in the second quarter of 2005 as compared to the second quarter of 2004.

In turn, challenges of our industry, including weak production, high commodity costs, and a constant need for cost reductions, have negatively impacted many Tier 2 suppliers.

This issue has cost us some money and a great deal of time in 2005 as we take all actions necessary to avoid disrupting our customers' production.

Finally, we are highly focused on improving certain under-performing operations which continue to hamper our financial results.

Despite the challenging industry conditions, we remain one of the most well-positioned and well-capitalized auto suppliers which should ultimately lead to continued growth.

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

Thanks Vince.

I would like to review our financial results for the second quarter ended June 30, 2005.

Please note that all figures are in US dollars.

I would first like to remind you of two items we brought to your attention in our first-quarter conference call.

Our quarterly figures for 2004 have been restated to reflect the adoption of the Canadian Institute of Chartered Accountants amended recommendation on the disclosure and presentation of financial instruments.

Secondly, 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.

Prior to the first quarter of 2005 we included both European production sales and complete vehicle assembly sales in European content.

In the second quarter consolidated sales increased 15% to a record 5.9 billion.

North American production sales grew by 18% in the second quarter despite a 1% decline in production from the comparable quarter to 4.1 million units.

North American content grew by 19% to $709 for the quarter.

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

New launches contributing to content growth quarter over quarter included the Chevrolet Cobalt and Pontiac Pursuit, the Cadillac STS, Ford Mustang and the Mercury Mariner, all of which launched during 2004.

Also contributing to the growth were launches in the second quarter of 2005, including the Hummer H3 and the Dodge Charger.

Programs that experienced higher volumes included the Chrysler Minivan, Chrysler Pacifica, Chrysler 300 and 300C and the Ford F-150.

Offsetting these were programs that experienced lower volumes and/or content, including the Ford Freestar and Mercury Monterey, the Dodge Ram Pickup, the Ford Escape and Mazda Tribute, the GMC 800 and the Ford Explorer and Mercury Mountaineer.

In addition, programs that ended production during or subsequent to the second quarter of 2004 and OEM price concessions negatively impacted content in North America.

European production sales grew to $1.3 billion, representing an increase of 12% over Q2 2004, despite a 3% decline in European production volumes to 4.3 million units.

This was the results of a 16% increase in European content per vehicle to $313.

The most significant factors in this increase during the second quarter were the launch of new programs, the strengthening of European currencies against the US dollar, in particular the euro, the acquisition of New Venture Gear at the end of September 2004 and higher volumes on certain programs.

New production programs that launched during or subsequent to the second quarter of '04 include the land Rover Discovery, the Mercedes A and B-Class, and the BMW 1-Series.

Lower volumes on programs including Mercedes E-Class, incremental customer price concessions, and the end of production for all MG Rover programs partially offset this content growth.

Complete vehicle assembly volumes increased modestly by 2% for the second quarter of 2005 compared to Q2 of last year.

Programs accounted for on a value-added basis rose 35%, largely on higher volumes for the Chrysler Voyager, as well as the launches of the new Jeep Grand Cherokee and the Chrysler 300.

Assemblies volumes declined on the Mercedes E-Class 4MATIC and the BMW X3, partially offset by increased assembly of the Saab 93 convertible, all accounted for on a full cost basis.

Largely as a result of this shift in mix in assembly programs towards value-added programs in the quarter, assembly sales declined 8% to approximately $1.1 billion.

In summary, consolidated production and complete vehicle assembly sales increased $501 million in the second quarter with the acquisition of New Venture Gear, the movement of currencies against the US dollar, and global content growth partially offset by reduced complete vehicle assembly sales being the most significant factors contributing to our increase in sales.

Tooling and other sales were 541 million for the quarter, up $244 million for the comparable period.

The increase was primarily the result of tooling and engineering for programs launched in 2005 or for upcoming program launches, in addition to an increase in reported US dollar sales due to the strengthening of the Canadian dollar and euro each against the US dollar.

Tooling and engineering revenue recorded in the second quarter of 2005 relates to a number of programs, including the Ford Fusion, Mercury Milan, Lincoln Zephyr, the Mercedes M-Class, the Mini Cooper and the Hummer H3.

Gross margin as a percentage of sales declined from the comparable quarter from 15.2% in Q2 of '04 to 13.5% 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 Ford Freestar and Monterey, the Ford Escape and Mazda Tribute, the GMT800 and the Ford Explorer and Mercury Mountaineer; continued inefficiencies at certain under-performing 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 fully ramped up production, including a new frame facility in Kentucky for the next generation Ford Explorer and F-Series Super Duty Pickup trucks, 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 and the upcoming launch of the R-Class.

In addition, the strengthening of the euro and British pound each against the US dollar since proportionally more of our consolidated gross margin was earned in Europe during the second quarter of 2005 than in the second quarter of 2004, and on average our European operations operate at margins that are currently lower than our consolidated average margin; an increase in tooling, engineering and other sales that earned low or no margins; and lower vehicle production volumes in both North America and Europe.

Partially offsetting these decreases in gross margin as a percentage of sales were operational improvements at certain facilities; the closure during 2004 of certain under-performing divisions in Europe; lower complete vehicle assembly sales for the BMW X3 and E-Class 4MATIC, which has a low gross margin percentage since the costs of these vehicle assembly contracts are reflected on a full-cost basis in the selling price of the vehicle; and incremental gross margin earned on new program launches.

SG&A as a percentage of sales declined to 5% for the second quarter compared to 5.8% for the comparable quarter.

In the second quarter of '05 we recorded the following unusual items -- a $16 million gain on disposal of a non-core seat component facility in North America; an $18 million foreign exchange gain on the repatriation of funds from Europe; and $9 million of restructuring charges related to two facilities in Europe and the privatizations of Decoma, Intier and Tesma.

Excluding these items, SG&A as a percentage of sales declined to 5.4% for the second quarter compared to 5.8% in Q2 of '04, reflecting our continued efforts to control costs throughout the organization.

Excluding unusual items in all relevant quarters, operating margin percent for Q2 2005 declined to 5.2% from 6.5% in Q2 of '04.

However, the 5.2% this past quarter exceeds the 4.8% that we reported in the first quarter of '05, reflecting, among other things, some improvement in certain under-performing operations and improved earnings related to launches and despite $8 million in amortization of fair value increments in the quarter related privatization compared to none in the first quarter.

Our effective tax rate decreased to 30.5% in the quarter from 35.4% in the second quarter of '04.

In the second quarter of '05 we benefited from the realization of the foreign currency gain discussed previously, partially offset by the impairment charge recorded at European facilities.

Neither item was fully tax affected.

Excluding these items, the effective income tax rate was 31.8% for the second quarter of 2005 and 35.4% for the second 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, an increase in utilization of losses not previously benefited, and a reduction in losses not benefited.

Net income was 225 million in the quarter compared to 188 million in the second quarter of '04.

The lower operating income was more than offset by a lower tax rate and reduced minority interest as a result of the privatizations.

Diluted EPS was $2.06 compared to $1.93 in the comparable quarter in 2004.

The $2.06 for the quarter includes the foreign currency gain for $0.16, the gain on disposal of a non-core seat component facility for $0.09, and restructuring costs and impairment charges totaling $0.12 related substantially to three European facilities.

Excluding these unusual items in each year, diluted EPS for the second quarter of 2005 and 2004 were each $1.93.

I will now review our cash flows and investment activities.

During the second quarter of 2005 we generated a record $401 million in cash from operations and invested $272 million in working capital.

The large investment in working capital is mainly related to the increased tooling sales in the quarter which generally have extended payment terms relative to production sales.

For the quarter investment activities were $260 million, comprised of 205 million for fixed assets, 33 million to purchase subsidiaries, and 22 million in other assets.

I'd like to pass the call back to Vince to discuss our outlook.

Vince?

Thanks Louis.

In our press release issued earlier today, we revised our outlook for 2005.

Please note that our outlook excludes the impact of any future acquisitions.

To recap, North American light vehicle production is expected to be approximately 15.7 million, essentially level with 2004 and unchanged from our previous outlook.

We expect European production to be approximately 16.1 million (inaudible) or 3% below 2004's 16.6 million units, and down from our previous outlook of 16.2 million.

North American content per vehicle is expected to be in the 710 to $730 range.

The lowering of the top end of our range reflects continued caution about mix in the second half of the year.

We expect European content per vehicle to be in the 305 to $325 range.

The decline from our previous outlook is substantially all related to the decline in the value of the euro relative to the US dollar.

Complete vehicle assembly sales are expected to be 4 to 4.2 billion for the first -- for the year, down from our previous outlook.

Once again, the decline in the euro against the US dollar explains essentially all of the decline from our last outlook.

Total sales are expected to be in the 21.6 to $22.6 billion range for 2005, lower than our previous outlook.

We expect our operating margin, excluding unusual items, to be approximately 5%.

This is lower than our previous outlook due to continued weak program mix, lower sales, higher launch costs associated with new programs, and certain under-performing facilities that are expected to lose more than we had anticipated.

The unusual items that have impacted or are expected to impact our results include charges related to our MG Rover business, charges associated with our facility rationalization strategy as we make our global footprint more competitive, and restructuring charges arising from the privatizations.

Our tax rate is expected to be in the 31 to 32% range, in line with our previous outlook.

We now expect full-year diluted EPS, excluding the unusual items, to be lower than 2004 and lower than our previous outlook as a result of the reduction in our sales outlook for the year, expectations of continued weak mix, higher than anticipated launch costs and certain under-performing divisions.

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

Just to wrap up, given our outlook for 2005 sales, we are expecting second-half sales to be between 550 million and $1.5 billion lower than the first half of the year.

This is due to seasonal production patterns, weak mix, and a lower euro than the first half, partially offset by higher sales (inaudible).

Despite this anticipated decline in sales, we expect operating margin percent excluding unusual items to remain approximately level with the first half of 2005.

This reflects some reduction in steel costs, better anticipated results at our launch facility, and the anticipated improvement in certain under-performing operations relative to the first half of the year.

Our continued efforts to focus on launches and under-performers are paying off and are expected to continue to do so going forward.

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 today's press release for a complete description of our Safe Harbor disclaimer.

Thank you for your attention today.

We will now open the call for questions.

(OPERATOR INSTRUCTIONS) John Casesa, Merrill Lynch.

This is actually John Murphy.

John stepped out for a second here.

Just had a quick question on the consolidation of the subs.

I was just wondering if you're seeing any benefits here in the short-term as far as any contract wins or synergies that you haven't discussed yet, and if there are any more charges we are expecting going forward.

John, I think you have got three questions over there.

With respect to the privatizations, we have certainly realized (inaudible) already in the second quarter.

However, we did have some costs as we did let go a number of people in the second quarter.

For the balance of the year we will most likely also have some additional severance costs as we continue to consolidate a number of corporate office functions, but that will immediately reduce obviously compensation costs and other costs going forward.

With respect to restructuring costs, as I outlined in my comments, we have begun a review of our competitive footprint globally.

We have announced some restructuring costs in the second quarter, and we anticipate that there will be some other restructuring costs for the balance of the year.

Some of those restructuring costs, John, they push into 2006.

It really depends on how quickly we can formulate a plan with our plant, our employees, as well as the customer.

Vince, could you quantify any of the savings that you had from synergies in the second quarter from the consolidation of the subs?

John, no, I'm not going to attempt to quantify them.

I know that we've done some real good things.

One of the benefits you can see immediately is on the tax line.

If you think about our overall tax rate, we've talked about the lower tax rates in Austria and Mexico.

But another reason our tax rate is lower is that we now have a more efficient organized legal structure, so we're better able to utilize profits and (inaudible) in the second quarter.

And we expect that to continue for the foreseeable future.

Vince, this is John Casesa.

Can I just follow up in terms of can you just talk about your view on consolidation of the supply base?

It seems like we're in an unusually different period here; a lot of bankruptcies.

Are you seeing more takeover business?

Is it changing your M&A strategy?

Or is this any change at all in the environment?

John, we are seeing a changing environment.

There's a tremendous amount of pressure on Tier 1 and Tier 2 suppliers.

We are seeing more opportunity for some takeover business, and that's encouraging for us.

With production volumes coming down we do have the ability take on some additional work.

With respect to our overall M&A strategy, John, it hasn't changed.

We're quite focused on what (inaudible) perspective.

Our goal from an acquisition standpoint is to look for technology that is either new to us that is additive or complements what we have today.

We will look for acquisitions that potentially diversify our customer base, particularly with the new domestic OEMs.

Another part of our strategy is we look for capacity.

When we have a contract to put up a new plant and there is full capacity already in place and we can buy that at a reasonable price, then we'd rather do that than put up our own facility.

Finally, we look for something that is reasonably priced, and maybe we can take that on.

Those are hard to find.

I would say that our acquisition strategy, which is focused on technology and (inaudible) our customer base, hasn't changed as a result of the current environment.

Chris Ceraso, Credit Suisse First Boston.

Thanks.

Good morning, everyone.

A few items.

First, is there anything that you can do to help mitigate the troubles on the Freestar?

Can you put other business in there, try to use some of the capacity?

The program obviously is not one of the better ones that you're on; probably not going to change, at least in the real near-term.

Is there anything you can do to help cushion that?

In the short-term there is really not a lot we can do.

We have capital tied up in and invested in engineering and startup costs for the Freestar.

Obviously we can look at our variable costs and we can try to reduce our fixed costs as much as we can, but short-term there's not a whole lot you can do.

However, the one opportunity that we have, first of all, is for takeover work, particularly on the interior side, because we do have an interior facility that is dedicated currently to the Freestar program.

We have also been successful in the being awarded (inaudible) business that we can put into some of the (inaudible) Freestar capacity.

So medium to long-term we've got a plan.

Short-term we have an action plan, but the impact on the bottom line is not going to be significantly to positive.

Okay, that's fair.

Can you just give us a rundown of among those three other items that you outlined -- the asset sale, the FX gain and the restructuring -- where does that break down a segment basis?

The asset sale I would assume is all Intier.

Is the FX gain in corporate/other?

And the restructuring, is that Tacoma?

Can you outline that?

(indiscernible), you're right.

That's in the Intier segment.

The currency translation adjustment or the gain on repatriating funds from Europe, that's in the corporate segment.

Also included in the corporate segment is some restructuring costs from the privatizations; a couple of million dollars.

With respect to the other two restructuring charges, about 6 million of that rests with the Tacoma segment and 6 million rests with the other segment (indiscernible).

And then I guess just to make sure that we're clear on this, can you just reiterate for us what number it is that you're basing the guidance on as far as lower than 2004 excluding unusual items?

And these latest three items, are those included in that, just to make sure we're operating on the same page?

This is Louis.

Those numbers are excluded, and the number that we're using as our base for 2004 is 723.

So 723.

And then for this year you're looking at $1.93 as the second quarter result?

Right.

That's helpful, thanks.

Rod Lache, Deutsche Bank.

It's Mike Heifler.

Vince, can we go through the rationale for the change in the outlook and some of the drivers that are affecting you guys in the second half?

I think you mentioned higher launch costs and worse than expected performance at some of these under-performing divisions.

Can we just review what's driving the lower guidance here?

I guess the first thing at just the sort of top-level, we have brought down our revenue (inaudible) and that's going to have an impact overall on profitability.

What's driving some of the decline in revenues, from a European perspective part of that is just pure translation.

When we look at where the euro was at the end of the first quarter compared to where the euro is (inaudible) there's been a depreciation in that currency.

We're also, as we look forward and look at mix, particularly in some of our key programs, (inaudible) a better mix (inaudible) we're going to experience as the next few quarters unfold.

With respect to our launch (inaudible) talked over and over about three substantial launches.

When we look at the cost that we're expected to incur in those facilities and have incurred the first half of the year, they are a little higher than we had anticipated.

With respect to under-performing divisions, (inaudible) talked the last couple of quarters about a European facility in Decoma having some operating inefficiencies.

We have an action plan in place.

However, progress is being made, which is positive, but isn't being made at the rate that we had anticipated.

Did I miss anything else, Louis?

No, I think that's it.

When we look out prospectively beyond the second half of this year on the launch cost issue and the under-performing divisions, can you give us a sense of what the outlook is beyond that timeframe?

As we move into 2006, if we want to move into next year, obviously with the three facilities, one in Decoma and two in (indiscernible) and the three bigger launches are ramping up and generating sales, that is going to have a positive impact on sales.

And we expect that those divisions will positively contribute to earnings and not take away for earnings (inaudible).

With respect to overall mix, again with the launch of these key programs (indiscernible) for example the Ford Explorer, we are expecting a better mix versus the mix we've experienced so far in 2005.

I would just point out in one of the facilities that we have in Kentucky we are going to be launching the F-250/350 next year.

So there will be some costs related to that.

But clearly right now we have got nothing but costs in that one facility until we get that Ford Explorer launched.

On the plastics business, because some of the issues are in Decoma here, some of your competitors are pointing out a lot of difficulties in that business.

Is this really something that's temporary related to resin prices?

Or is this more of a structural change in that business?

From our perspective I think when we look at our overall Decoma business in North America other than for negative mix and the launch of the (inaudible) operations (inaudible) are doing as expected.

In Europe Decoma has had some operating inefficiencies in a number of facilities for quite some time.

We have seen some improvements there.

We're not absolutely pleased with where we are today, but we do see some positive improvements.

So that's encouraging.

Just one last one on cash flow.

The use of cash from tooling, what are you guys expecting for the full year in terms of working capital in tooling?

As you know, with tooling receivables, the (inaudible) normal process that (inaudible) follows that customers (inaudible).

So we expect that we will have a recovery of part of or all of (inaudible) by the end of the year.

But we won't have that all recovered, I don't expect, by the end of next quarter.

So it should be neutral for the full year?

Tooling?

Yes.

Or working capital?

Working capital (indiscernible)

I suspect that we are probably going to invest a little bit of money in working capital by the time we are all said and done.

Okay, thanks.

John Novak, CIBC World Markets.

Vince, can you give us a sense of why your outlook for X3 and 4MATIC production in Europe might be off slightly in the second half?

What we're -- we're looking.

I don't have the -- Louis, you might the volumes right in front of your there for the balance of the year.

I'm just trying to find it here in my papers.

As to what we're doing from an overall forecast perspective is relying on (inaudible) information that we have where believe it is accurate.

But I see the bigger change when I think about Europe is actually foreign exchange (inaudible) programs with the euro depreciating against the US dollars.

We expect that to continue for sort of the balance of this year.

Okay.

What was the rationale for not including the amortization of the purchase accounting charges for Intier out of the normalized EPS number?

Isn't there basically another $0.05 of charges that are still buried in the $1.93?

We're going to have that going forward as well each quarter (multiple speakers) fair value increments each quarter as part of the nonrecurring.

It's recurring every quarter.

As part of the purchase accounting for the public subsidiaries including Intier, the underlying book value of the assets we acquire and the consideration we paid was different.

The consideration we paid was higher than (inaudible) value.

That excess purchase price will be allocated between appreciable (inaudible) and non-depreciable and goodwill.

We made a preliminary allocation of the purchase price in the second quarter which resulted in an allocation to fixed assets, and we depreciated those fixed assets over the estimated remaining (inaudible) which resulted in (inaudible) charge.

So Louis is right, that's going to continue for some time.

The only thing I would mention (inaudible) exact adjustment was, but in the first quarter even though (inaudible) completed the Tesma privatization and the Decoma privatization, we didn't book any additional depreciation (inaudible) those acquisitions.

Part of the $8 million in the second quarter is a catch up for the first quarter, but that won't be a significant amount.

I think (inaudible) additional depreciation (inaudible) million dollars a quarter that would be appropriate.

And they're non cash, Vince?

That's correct, John.

Overall with the startup costs, do they decrease in the second half of the year versus the first half, or do they continue at the same level until you see the launches?

We expect that the startup costs are going to decrease as we move to the end of the year.

So they would have been higher in the first half compared to the second half.

Just to put things into perspective in terms of the number of the new facilities that are in the startup phase, (inaudible) 13 facilities in the startup phase at the end of the quarter.

We had 23 facilities in sort of startup -- new facilities in startup phase a year ago.

However, even though we had fewer new facilities in the second quarter of 2005, the cost of those total facilities was $10 million higher than (inaudible) so our second-quarter results (inaudible) impacted by about an additional $10 million related to new facility startup costs.

That's relative to the first quarter?

Relative to the second quarter of 2004.

Lastly, can you just give us the organic content in North America and Europe ex-NVG?

Go ahead, Louis.

If we look at North America, John, and exclude New Venture Gear, our --

Organic content growth in North America (inaudible) $15.

New Venture Gear added about $69 of content and translation accounted for the balance.

But keep in mind in the organic content growth there is really two things taking place.

We did launch a number of programs in '04 and '05 that contributed to content growth, and that was around $80 of content.

But we had negative mix of probably about $60 plus, which if we add the pluses and the minuses it comes to $15.

So great growth in content offset by negative (inaudible)

(multiple speakers) in Europe, if you look at our content growth we grew about $26 organically.

Acquisitions and New Venture Gear in Europe was about $6.

And translation was about $12 of that amount.

Thank you very much, Louis and Vince.

Scott Merlis, Thomas Weisel Partners.

Just to follow up, can you just go over the European organic content growth again?

It was $26.

Was that the organic growth?

That's organic growth, and that's 10% of the growth.

10% of the 16% growth?

Correct.

How does it break down by a NVG and currency again?

NVG was $6; currency was 12.

When you look at -- could you go over what is going on with resins?

You have longer-term contracts.

It's a very different dynamic than steel.

Would the long-term contracts just push out the increases more?

What is the dynamic with resin compared to spot prices and stuff?

I think when you look at resins, we do have long-term contracts in place.

The contracts that we have in place are not of the same duration (inaudible) steel contracts.

In the first quarter of 2005 we are already experienced increases in resin pricing under our long-term contracts.

Oil prices (inaudible) at the leverage we are today most likely are going to continue to expect increases in resin pricing for quarters to come.

And have you previously disclosed how big your resin exposure and steel exposure and raw material exposure in either conceptual terms or metrics?

The only thing we've talked about -- a couple of things we've talked about.

Number one, if you think about our overall steel buy, just over 50% of our steel buy is either under customer -- sorry, over 50% of our steel buy is under customer resale programs.

About 25% to 30% of our steel buy is typically under long-term contracts.

And the balance is either spot pricing or short-term contracts, the majority being short-term contracts.

In terms of the magnitude of steel versus (indiscernible) steel is a commodity that is a larger buy for us compared to resin.

And that is the extent of the discussion we've had on the commodities.

Looking at some of the plants that are below target and have inefficiencies, including some of the Decoma plants, to what extent can some of those be fixed by first half of '06 by either -- assuming constant volume, do you really need more -- to what extent do you really need more volume to fix the inefficiencies in some of those plants?

Or to what extent does it -- will it just be consolidation, sales or closing?

From our perspective when we refer to inefficiencies, we're looking at a plant given a certain level of actual volumes, and we're benchmarking to see if that plant is operating at a very efficient state.

That plant may be operating in an efficient state, but there might be low volumes.

That plant may be losing money (inaudible) not necessarily consider that an under-performing division.

And under-performing division for us is a division that is not operating at standards that we believe the is appropriate.

In terms of progress that we're going to make with under-performing divisions, we have over 200 operating divisions and we're launching program.

I believe we're always going to have under-performing divisions.

It is just part of the business.

However, what our strength is is to invest in launches upfront, invest in engineering, invest heavily in process before program launches to minimize the cost of inefficiencies.

So we see constant improvement in a number of the under-performing divisions.

Unfortunately, we also have the odd one that wasn't an under-performing division becomes an under-performing division.

So it's a constant task and our objective as a management teams is to reduce to proportion of under-performers compared to the good performing divisions.

Did you say that launch costs could be a little bit lower next year, or is that not so?

I specifically talked about the cost (inaudible) first half and second half of 2006, but I really didn't refer to launch costs.

We're not yet ready to talk about 2006.

We still need to complete our overall business planning process.

Finally, are you seeing -- when you look at your three-year backlog, are you seeing -- you did mention the new domestics before.

Is there a certain year where your business with the new domestics really can more significantly drive your content to improve vehicle growth?

Is it kind of a -- is it linear or is there more a step function as you look out over the next three years?

Or is it a hockey stick?

Our target that we talked about before is to have approximately 10 to 15% of the production sales by 2010 be represented by the new domestic OEMs.

And to get there obviously we're going to be -- each and every year we're hoping that our business with the new domestics is going to form a bigger percentage of (inaudible) sales, and that's been the case for the last two or three years.

But I would view it more as a linear accelerating curve as opposed to big step functions in any particular year.

Got you.

Thank you very much.

Ron Tadross, Banc of America Securities.

This is Chen Ong here.

I just had two questions.

When you look at the new business bookings, is that -- does that put you on track for (indiscernible) CPV (ph) growth?

We're not going to really comment about next three-year content (inaudible).

We did that when we gave our guidance (inaudible).

We need to do a couple of things.

One, we have to really consider our business (indiscernible) where it's a bottom-up process.

We distribute assumptions on production volumes, because mix is a big factor in terms of overall content per vehicle growth or declined as we see in the quarter with negative mix in some of our key platforms.

So I'm not in a position at this point to let you know whether we're on track to exceed or be below that.

In the risk sections you discussed potential for further warranty sharing with customers.

Is this new?

Has it increased (multiple speakers)

I think that risk factor has been there for a number of quarters.

Certainly if I go back over the last two year, three years, four years, it probably moved up a bit.

But there hasn't been a substantial change over the last two to three years (multiple speakers) complete vehicle assembly, our constructions volumes on complete vehicle assembly has gone up.

We do take on a limited amount of warranty risk with those programs.

All right, thanks.

Nick Morton, RBC Capital Markets.

I wondered if you could try and quantify a little bit the exposure to Rover and the roughly -- perhaps a range of the cost of restructuring your current organization.

With respect to our overall exposure to Rover, we actually took a provision in the first quarter to deal with our Rover exposure assets, as well as the exposure to potential Tier 2 suppliers.

The impact of Rover in the second quarter and moving forward is going to be reduced sales and reduced profits on (inaudible) exposure on the balance sheet.

So that's taken care of (multiple speakers)

(multiple speakers) the magnitude of the potential restructuring trends for 2005, we're still completing our overall analysis.

We expect that there will be some restructuring charges.

The magnitude of these restructuring charges are not yet known.

We really need to complete our analysis.

And also the timing of those charges are unknown.

There might be some charges that we may take depending on the situation '05.

Some of those charges may be pushed forward to the beginning of 2006.

And depending on how far along we are with our time to consolidate or rationalize particular operating facility.

With General Motors's situation against (ph) Ford's situation do you have any credit concerns?

Is there any way of reducing your risk?

GM and Ford represent two of our substantial customers, and we have other substantial customers.

I'm really not in a position to commentate on the position of any one of our customers.

Thank you very much.

David Tyerman, Scotia Capital.

On the Magna Steyr, how large was the cost recovery on the canceled engineering program?

We recovered some of our costs that we had incurred on that program.

It wasn't a full recovery.

I would look at it as sort of being nothing that is going to stand out; just a whole bunch of pluses and minuses (inaudible) quarter.

So if you wanted sort of an exact reconciliation (inaudible) this quarter.

So it is nothing in my mind that sticks out as being significant.

Sorry Vince.

You sort of faded out.

But I guess the question basically is when I look at an EBIT margin of 4.5% in Steyr in the quarter, was there something boosting it there, or is that pretty much the normal performance level?

I would say that's pretty much a normal performance level for second-quarter sales.

Just sort of related to that, the mix changed in the unit.

You've got a lot more value-added in now and full cost.

Is that the kind of mix we're going to look at going forward, or is this going to bounce around a lot?

It's going to vary quarter by quarter.

Remember, we did launch the 300 program for DaimlerChrysler and that is a value-added program, so that's something new (inaudible).

It's going to depend on (inaudible) E-Class volumes were weaker in the second quarter.

If they improve that will have an impact on overall mix.

Again, when we look at Magna Steyr, you talk about operating margins which is a key measure (inaudible) focused on (inaudible) value-added at that operation or what is the return on the investment.

And we always -- at least we can see it.

We look through the different types of sales (inaudible) true operating performance.

And we're pleased with Magna Steyr's performance and we expect that that performance will continue.

Just to reiterate, in the short-term if you look at a program there's a brand new Jeep Grand Cherokee out there, so you would expect that to be stronger.

There's the new -- the Chrysler 300 is brand-new, so that's going to obviously swing on the value-added side.

And the full Chrysler (ph) programs are all now a couple of years older so that's going to notch down a little bit from where it's been.

So it sounds like the higher margin level is going to be sustainable for some time over --

I said in the short-term because things change from time to time.

But if you are looking at the back half of the year, naturally there is going to be some related to value-added -- higher value-added of the total.

That's what I'm driving it.

On the Tesma, there was a comment in the text about higher operating losses at certain facilities.

Is the Tesma issue growing?

I thought there was only one facility in particular.

Are there more now and is this becoming a fairly material part of the reason why Tesma's margins are down a lot from a few years ago?

There's a couple things that are taking place at Tesma.

A big impact in the quarter was weak GM production.

As you know, Tesma had a substantial amount of business with General Motors.

That definitely hurt us in a big way in the second quarter.

With respect to under-performing divisions, Tesma has more than one under-performing division.

The management at Magna Powertrain is focusing on that.

There is some focus as well from Magna corporate office on some of the under-performing divisions of Tesma.

But other parts of the Tesma business are (inaudible) extremely well (inaudible) pleased with the progress that is being made there.

Aside from the GM side, which will correct itself in time as their volumes come back, is there a material upside potential here from fixing some of those?

Or is this kind of a situation you're talking about where you're always going to have a few things not working right?

I think if we're successful in our (indiscernible) plants there will be, I would say, a pretty significant improvement and Tesma's operating performance, assuming volumes normalize once again.

Fair enough.

Is that like kind of a one year type of exercise?

I hope it happens next week.

We continue to work on -- some of the plans, the action plans do take some time to integrate in the manufacturing process.

It goes right back to when you first are awarded the program, how the program is engineered, how you set up your assembly line, how you train your employees.

Some of that it, if it is not done correctly, will take some time to correct after the fact.

Fair enough.

Then on the corporate and other you indicated that the compensation expense was up because of lumping in the Decoma, Intier and Tesma stock option plans.

How much was that, and is it a onetime item?

The stock option is a onetime item in terms of privatization transactions.

There will be ongoing stock option expense (inaudible) 2006 as the options vest.

The other -- there was another cost as well in the corporate segment that (inaudible) some restructuring costs that we incurred to downsize some of our corporate offices across North America.

Right.

I think you mention that was several million.

But the compensation, how big is that?

I don't have the number in front of me.

There's just a whole number of things as we look back at the quarter in the corporate segment.

There were some positive things that we talked about.

And there was a number of smaller items that usually what (indiscernible) corporate is you have some positives and negatives (inaudible) corporate this quarter all of them had negative sign in front of them.

Except for the big gain on FX.

And I guess the question in the end is should we really be seeing that number in a normal world be the affiliation fee of 1 or 1.5%?

The affiliation fee -- the biggest items are affiliation fees, that's always the corporate office expenses.

Fair enough.

And then on the plant rationalizations, are you expecting material improvements out of this rationalization process?

And if so, what kind of timeframe are we looking at?

Is it really an '06 kind of thing?

We're looking at overall rationalization (inaudible) obviously (inaudible).

So that will certainly create value.

But that's going to be gradual and it is going to take some time to put in place.

It's ongoing.

The restructuring (inaudible) have, but really it's setting our footprint for the future.

And that will be baked into our results (inaudible) quarters progress.

Fair enough.

Last question, how much of the awards that you indicated, the 1 billion and the 150 million, is new versus replacement?

Most is new.

Sorry?

Most is new.

Most is new.

Okay great.

Thank you.

Sorry, I just want to add to that.

With respect to the Asian business (inaudible) substantially all of that business is new business.

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

Peter Sklar, BMO Nesbitt Burns.

Just getting back to this $1.93 number that you calculate before unusual items, you just talked about it a little bit, but it's not clear to me why you did not also incorporate these onetime charges related to the privatizations, specifically the stock compensation expense and also the restructuring charges of the three subsidiaries.

Let me just first clarify what we included between sort of the $2.06 to GAAP reported EPS of $1.93 normalized.

There is a currency translation under repatriation of funds from Europe.

That was about $0.16.

There was a gain on disposal of assets at Intier of $0.09.

And there was restructuring charges at Decoma, at Donnelly, as well as some group office restructuring costs.

All of that totaled $0.12.

That came up with $1.93.

With respect to the stock option expense, we debated whether we could put that in or not.

We truthfully wanted to keep our numbers as (indiscernible) as possible.

There is rationale to include stock option expense.

We just didn't do that.

Part of that is a onetimer, but part of it is going to continue because we have to revalue the stock options and you'll continue to have stock option expense as those options vest.

But on the restructuring charge, though, related to the privatization, I would think that's clearly onetime.

Part of it is included as a onetimer, about $2 million of operating income.

But we didn't factor in (inaudible) stock options which could be reflected in that (indiscernible).

We just chose not to.

Sorry, I'm confused.

You're saying that the restructuring charge related to the privatization is --

We've got that in the back (ph).

Okay.

And Louis, when you were talking about the context of the EPS guidance, you gave a base number.

I don't have it at the tip of my fingers here that you gave.

But can you reconcile how you got to that base EPS number?

I couldn't get to it.

(multiple speakers) 723.

And that's from last year.

If you look at -- we had reported earnings of 695.

There was a tax recovery for $0.06.

We had impairment charges of $0.23.

We had a gain on a pension curtailment of $0.18 income.

We had total closure costs of $0.17 last year.

And we have stock options expense in the first quarter of $0.12.

Okay, that's all I have.

Thank you.

Thank you, everyone, for participating in our conference call today.

We appreciate your continued interest in Magna.

Please enjoy the rest of your day.

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

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