Magna International Inc (MGA) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Magna International, Inc. third quarter results conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards we will conduct a question and answer session.

At that time if you have a question, please press the one followed by the four on your telephone.

As a reminder, this conference is being recorded Tuesday, November 8, 2005.

If at any time during the conference you need to reach an operator, please press the star followed by the zero on your telephone.

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

Please go ahead, sir.

Thank you and good morning and welcome to our third quarter conference call.

With me today are Vince Galifi, Magna's Executive Vice President and CFO, and Louis Tonelli, our Vice President Investor Relations.

Yesterday our board of directors met and approved our financial results for the third quarter ending September 30, 2005.

Our board also declared a quarterly dividend of $0.38 per share, payable on December 15, 2005, to shareholders of record on November 30, 2005.

We issued a press release this morning for the third 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.

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

Vince will then review our detailed financial results for the third quarter and Louis will highlight our cash flow and investment activities and comment on the signing of a recent credit agreement.

Vince will then summarize our outlook for 2005.

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

Once again, in the third quarter of 2005, we faced challenges as compared to the third quarter of 2004.

We continued to experience lower production volumes on certain of our high content platforms, leading to negative mix in sales and content per vehicle.

We paid more for commodities than we did in the comparable quarter a year ago and I will talk more about these two points later.

And given the increasingly competitive nature of the industry, we faced incremental price concessions in the third quarter of 2005 as compared to the third quarter of 2004.

Considering these ongoing challenges, we reported strong results, although lower than we had anticipated, and there were a number of other positive aspects achieved in the third quarter.

There is significant distress in the automotive supply base brought on by continued competitive pressures, commodity price increases, relatively weak automotive production in North America, particularly at GM and Ford, highly leveraged capital structures, and other factors.

As a result, a number of automotive component suppliers have sought court protection in order to restructure their businesses.

And while we have experienced some modest negative impact from the distress in the automotive supply base, the relative weakness of some of our direct competitors has provided, and we believe will continue to provide, business opportunities for us, given our strong financial position, ongoing profitability, and continued investment in technology.

In July, DaimlerChrysler, our largest customer, announced the development of a deeper relationship with a select group of key suppliers.

Magna was identified as one of DaimlerChrysler's highly integrated partnership organizations, or HI-PO's.

This improved model of cooperation with suppliers is intended to provide numerous benefits to the HI-PO's, including early involvement in the product development of future models.

As an example of this early involvement, DaimlerChrysler identified that Magna had been awarded the vehicle interior, excluding seats, for our future model of the Chrysler Group scheduled for launch in model year 2008.

Similarly, in September, Ford announced that it was entering into new long-term aligned business framework agreements with select suppliers and identified Magna and six other automotive component suppliers as the first of the strategic suppliers in the initial phase of Ford's new framework.

The framework anticipates a significant reduction over time in the number of suppliers to Ford.

We launched significant programs in newly completed production facilities in the third quarter.

Our plant in Hermosillo, Mexico began to supply various stampings for the launch of the Ford Fusion, Mercury Mylan, and Lincoln Zephyr.

And our facility in Bowling Green, Kentucky began to supply frames for the launch of the new Ford Explorer.

Next year this frame facility will also support the launch of the new Ford F-Series super duty pickup trucks.

Although we expect these facilities to be profitable as they reach full production, these facilities generated startup losses, which are normal during the launch of new programs.

We were awarded our first ever transfer case business from a major Japanese-based OEM for two vehicle programs, one of which is built in North America and the other built in Japan.

These important awards demonstrate our ability to introduce our four-wheel and all-wheel drive competence to new customers.

And the combination of our former Magna drivetrain and Tesma groups in the Magna Powertrain creates a formidable player in a vehicle area that is expected to experience significant outsourcing in future years.

Finally, in connection with our privatizations and industry conditions, our assessment of our global operating structure and footprint continues.

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

During the quarter we incurred restructuring costs associated with this assessment.

These actions have and will continue to negatively impact our short-term operating results, but will position us well for the future.

As I mentioned earlier, we continue to experience negative overall mix, which has hampered our content growth and earnings.

And following a strong summer selling season, U.S. auto sales have weakened through the fall thus far, essentially eliminating the potential for strong fourth quarter production schedules, particularly at GM and Ford.

We continue to experience inefficiencies and operating losses at Decoma's fascia, moulding and paint facility in Georgia as it launches and ramps up production on new programs.

And in Europe, Decoma continued to experience increased losses associated with under utilized paint capacity, performance issues, and program launch costs.

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

Although a significant portion of our steel, resins and other components are covered under customer resale programs or long-term contracts, increased commodity prices and reduced scrap steel prices negatively impacted our results in the third quarter of 2005 as compared to the third quarter of 2004.

And we expect this trend to continue for the balance of the year.

Despite the challenging industry conditions, we remain strong, profitable and well positioned to grow globally and to further diversify our customer base.

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

Vince?

Thank you, Mark.

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

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

I would first like to remind you of two items we brought to your attention in conference calls earlier this year.

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

And 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.

The third quarter results for 2005 and 2004 included the following unusual items.

In 2005, the receipts of $26 million, or $0.14 per share, awarded by a court in a lawsuit commenced by us in 1998 in respect to defective materials installed by suppliers in a real estate project and restructuring charges totaling $14 million, or $0.10 per share, related to a European facility and the privatization.

Both of these amounts were recorded in SG&A.

The third quarter of 2004 included $2 million, or $0.02 per share loss, on the sale of a facility in Europe, which was included in SG&A and 7 million, or $0.04 per share, in accelerated depreciation on certain program specific assets included in depreciation and amortization.

Overall, in Q3 '05 our results were positively impacted by $12 million in operating income, or $0.04 per diluted share.

They were negatively impacted in Q3 '04 by $9 million in operating income, or $0.06 per diluted share.

In the third quarter, consolidated sales increased 12% to a third quarter record of $5.4 billion.

North American production sales grew by 27% in the third quarter while North American production grew 2% from the comparable quarter to 3.7 million units.

North American content grew by 24% to $756 for the quarter.

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

Offsetting these were programs that experienced lower volumes and/or content, programs that ended production during or subsequent to the third quarter of 2004, and incremental customer price concessions.

European production sales grew to $1.2 billion, representing an increase of 7% over the third quarter of 2004, despite a 6% decline in European production volumes to 3.5 million units.

This was the result of a 14% increase in European content per vehicle to $338.

The most significant factors in this increase during the third quarter were the launch of new programs, the acquisition of NVG at the end of September, 2004 and higher volumes of certain programs.

Lower volumes of programs, incremental customer price concessions and the end of production for all MG Rover program partial offset this content growth.

Complete vehicle assembly volumes declined modestly by 3% for the third quarter of 2005 compared to Q3 of last year.

Programs accounted for on a value-added basis rose 46%, while programs accounted for a full cost basis declined 22%.

Largely as a result of this shift in mix towards value-added programs in the quarter, assembly sales declined 20% to approximately $879 million.

In summary, consolidated production and complete vehicle assembly sales increased 464 million in the third quarter with the acquisition of NVG, global content growth, and the strengthening of the Canadian dollar against the U.S. dollar, partially offset by reduced complete vehicle assembly sales being the most significant factors contributing to the increase in sales.

Tooling and other sales were 502 million for the quarter, that's up 133 million from the comparable period.

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

Gross margin as a percentage of sales declined from the comparable quarter from 13.8% in Q3 2004 to 13% this past quarter.

Gross margin as a percentage of sales was negatively impacted by an increase in commodity prices, combined with lower scrap steel prices, a decrease in production volumes for several of our high content programs, including the GMT 800 and the Ford Freestar and Mercury Monterey, inefficiencies of certain facilities, the acquisition of the NVG business, which currently operates at margins that are lower than our consolidated average gross margin, incremental customer price concessions, costs incurred at new facilities and preparation for upcoming launches or for programs that have not fully ramped up production, including a new frame facility in Kentucky for the recently launched Ford Explorer and the next generation F-Series super duty pickup trucks and the new fascia moulding and paint facility in Georgia to support the ongoing launch of the Mercedes M class and the recently launched R class, an increase in tooling, engineering and other sales that are in vogue or normal margins.

Partially offsetting these declines in gross margin as a percentage of sales were productivity improvements at certain facilities, the closure during 2004 of certain underperforming divisions in Europe, lower complete vehicle assembly sales for the BMW X3, which has a lower gross margin percentage than our consolidate average gross margin, since the cost of this vehicle assembly contract are reflected on a full cost basis and the selling price of the vehicle, and price reductions from our suppliers.

Excluding the unusual items discussed earlier, SG&A as a percentage of sales declined to 5.6% for the third quarter compared to 5.8% for Q3 2004, reflecting our continued efforts to control costs throughout the organization.

Excluding unusual items, operating margin percent for Q3 2005 declined to 4.2% from 4.8% in Q3 of 2004.

This reflects the reduced gross margin percentage discussed earlier, increased depreciation and amortization, including $7 million in amortization of fair value increments in the quarter related to the privatization, partially offset by lower SG&A percent of sales.

Excluding unusual items, our effective tax rate decreased to 32.6% in the quarter from 35.9% in the third quarter of 2004.

The decrease in the effective income tax rate is primarily the result of a decrease in income tax rate in certain jurisdictions and a reduction in losses not benefited, partially offset by change in the mix of earnings, whereby proportioning more operating income, excluding equity income, was earned in jurisdictions with higher tax rates.

Excluding unusual items, net income was 154 million in the quarter compared to 138 million in the third quarter of 2004, due to higher operating income and reduced minority interest as a result of the privatization.

On a GAAP basis, net income was $159 million in the quarter compared to $132 million in the third quarter of 2004.

Excluding unusual items, diluted EPS for the third quarter of 2005 were $1.40 compared to $1.43 for the third quarter of 2004.

On a GAAP basis, diluted EPS were 1.44 for the third quarter of 2005 compared to 1.37 in the comparable quarter of 2004.

I will now turn the call over to Louis.

Thanks, Vince.

I will review cash flows and investment activities.

During the third quarter of 2005 we generated $357 million in cash from operations and invested 482 million in working capital.

The large investments in working capital is primarily related to an increase in accounts receivable and inventory, partially offset by an increase in accounts payable.

The increase in accounts receivable is primarily due to the timing of cash receipts, whereby approximately $500 million of cash was received shortly after the end of the third quarter.

The increase in inventory is a result of increased tooling inventory on certain programs that will be launching subsequent to the third quarter of 2005, an increase in work in process at Magna Steyr as a result of a temporary supply destruction and an increase in raw materials inventory to support future production.

The increase in accounts payable and other accrued liabilities is consistent with the inventory build previously described.

For the quarter investment activities were $229 million comprised of 198 million for fixed assets and 31 million in other assets.

Finally, last month we signed a new five-year revolving term credit facility replacing our previous facilities.

This new facility has a $1.57 billion tranche in North America and a 300 million Euro tranche in Europe and will soon include an Asian tranche.

The facility, which was made possible as a result of the privatizations completed earlier this year, provides us with further financial flexibility and liquidity to support Magna as we continue to grow globally.

And now I'll pass it back over to 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 summarize, North American light vehicle production is expected to be approximately 15.7 million units, essentially level with 2004 and unchanged from our previous outlook.

We expect European production to be approximately 15.9 million units, or 4% below 2004's 16.6 million units and down from our previous outlook of 16.1 million units.

North American content per vehicle is expected to be in the $730 to $740 range.

The increase in our range reflects somewhat better than previously anticipated sales mix in the third quarter and fourth quarter, as well as the strengthening of the Canadian dollar against the U.S. dollar from the time of our previous forecast.

We expect European content per vehicle to be in the $320 to $330 range.

This is also higher than our previous outlook due to improved mix relative to previous expectations for the third and fourth quarter of this year.

Complete vehicle assembly sales are expected to be in the range of $4 to $4.1 billion for the year.

Total sales are now expected to be in the $22.3 to $22.9 billion range for 2005.

We expect our operating margin, excluding unusual items to be in the high 4% range.

This is slightly lower than our previous outlook, largely due to higher tooling sales than previously expected, continuing inefficiencies in operating losses at certain Decoma facilities, incremental price concessions, and costs associated with our social commitment in Louisiana following the Hurricane Katrina disaster.

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

We continue to expect full year diluted EPS, excluding unusual items, to be lower than 2004.

As Mark noted earlier, our continued efforts to improve our global footprint will continue to negatively impact our short-term financial results, but further increase our competitiveness going forward.

Capital expenditures are expected to be in the range of 825 to 875 million for 2005, lower than our previous outlook due to continued efforts to reduce capital spending across the organization.

Just to wrap up, clearly this has been an extremely difficult year thus far in the automotive industry.

The combination of relatively weak production and weaker sales mix for Ford and GM, higher commodity costs, and, for suppliers, intense pricing pressures, have resulted in significant turmoil in the industry.

However, as we have said before, with challenges come opportunities for strong companies.

And while we are not pleased with lower earnings in 2005, given the extent of the factors we have discussed, our results have been very good, particularly when you consider how many of our peers have fared.

As Mark noted earlier, with our continued profitability, strong financial position, and ongoing R&D emphasis, and add to that, actions we are taking to improve our operating footprint, Magna is well positioned to be a leader of the automotive supply landscape continues to change.

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 this morning'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 INSTRUCTIONS].

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

Please proceed with the question.

Thanks very much.

Three quick ones.

First, Louis, the comparison on EPS's 723 for last year?

That's right.

Secondly, I wanted to ask Mark about this transfer case business.

Mark, you alluded to the expectation for significant outsourcing here.

What were you referring to and why do you think there's going to be a lot of outsourcing of these powertrain components?

Aren't a lot of transfer cases and things like that already made by outside suppliers?

John, what I'm referring to is the powertrain business in general.

As the Big Three here at the domestic OEMs shed structural costs, they have tended to look at highly capitalized pieces of their business to offload and powertrain's a natural extension of their view in terms of structural cost reduction.

And so we've seen over the past five years a very steady trend toward outsourcing in this area.

So I'm not referring just to transfer cases, but to powertrain in general, which includes transmission and actually engine components.

Okay.

So you think it's going to go like that, sort of components get outsourced?

Do you ever foresee a day where these guys might give up transmissions or things like that?

Yes, I do see transmissions going to more of a third party kind of sourcing position and I think eventually you'll see low volume engines go the same way.

And then for any of you, on this restructuring, how long do you expect it to go on?

How much do you have to do maybe in dollar terms and does this relate-- do you feel like you have overcapacity in the Magna system, is it the wrong mix?

Or is it just the reality that in a tougher environment you're going to have to keep restructuring the Company and incurring these costs for the foreseeable future?

John, I think as we look forward to the balance of this year as the management team is focusing on our overall manufacturing footprint, one, I think it's a deal with the realities of production moving to lower cost regions in the world and we're looking at where our manufacturing footprint is.

We also have some operations that, from our perspective, are underperforming and we're looking at those operations and deciding whether we want to continue with them or whether we try to rationalize them and consolidate one facility with two to try to improve overall efficiencies.

So that will be ongoing in the fourth quarter.

I suspect before we wrap all the restructuring up, that it will flow into 2006.

But ultimately, the decisions we're making today are making Magna more leaner and position ourselves for the future.

And, Vince, what's the-- where are we on Decoma?

This seems to have been a deeper hold than you guys anticipated.

I'm just wondering if you can give us some color on how you're working through that.

Well in, Decoma, there's been several issues over a number of years.

If I go back sometime when we looked at our business in the UK, we had some issues there.

We put up a new facility in [Merkplas], as you'll recall for -- particularly for Ford and Jaguar.

Volumes haven't been there.

We have been awarded new business, but it's slow in coming.

So there is in the UK market at this point some excess capacity and we've got two fascia and painting facilities in the UK.

But those operations are stabilized.

We've also been hurting in the UK this year as a result of the MG Rover situation, which not only hurt Decoma, but also hurt our interior operation.

When you look at continental Europe, we've been having some operational inefficiencies and program launch issues at our Belplas facility.

We are seeing some improvement.

We're encouraged by what we're seeing.

However, the improvement needs to continue to accelerate for us to see some reduction in losses and we continue to experience operating losses at Belplas.

The other part of the Decoma business that has been creating some issues for us, some negative profitability, an impact on margins, we've referred to it throughout this call, is the launch of the Decostar facility.

And that is supporting, at this point in time, the M class and R class for Mercedes.

I'm happy to report that we've now stabilized the production process at Decostar.

We've been fighting fires there, but with stability, the next step is to improve overall efficiency.

So we see the light at the end of the tunnel there.

It's going take us some time to work through it, but there have been some issues there.

But on the positive note, when I look at the rest of the Decoma business, certainly it's been impacted by higher resin pricing and by higher steel pricing, but the rest of the business is doing quite well.

Thanks very much, Vince.

Our next question comes from the line of Jon Rogers, Citigroup.

Please proceed with the question.

Yes, thank you.

Vince, just to follow up on the Decoma question.

So if we look at kind of the in's and out's, if we say you're having still ongoing issues in the UK, yet Decostar has stabilized and you can actually improve the situation there, do you think we'll be able to see more favorable comps from Decoma maybe starting in the fourth quarter and then into 2006?

I think as we look at the fourth quarter for Decostar, we expect to see some sequential improvement.

With respect to the Belplas operations, I'm not going to venture to try to answer that question.

With respect to the UK, we do have some plans in place to streamline overall overheads and improve efficiencies, but we expect to see some of those improvements most likely in the first half of 2006.

And John, Decostar really just got off the ground in the fourth quarter of last year.

Okay.

And then I guess, Louis, can you give us the content per vehicle contribution of New Venture Gear this quarter?

Sure.

New Venture Gear in North America was about $76, John.

And in Europe it was about $8.

Great.

Thank you very much.

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

Please proceed with the question.

Thanks.

Good morning, everybody.

Good morning.

A few questions.

I think people tend to look at your balance sheet and, in this time in the industry, view Magna as a potential acquirer of assets.

I'm just curious, given some of the issues you've talked about and the operational inefficiencies, et cetera, are there any areas where you think you might want to take advantage of the number of buyers that are around in this industry and actually look to exit certain areas or certain areas within a geographic region or something like that?

Well, Jonathan, we look at our book of business and our relative position in each automotive supply segment and ostensibly what we want to be is either one or two in the segment.

So if we aren't able to maintain that position or have a strategy to get us to that position, we'll consider exiting that business.

We don't have anything to talk about at this point, but we do think that there's some strategic opportunities out there, as we mentioned in our remarks, and we're keeping a watchful eye.

John, with respect to overall acquisition strategy, our strategy has not changed.

Our preferred way of growing is organically, putting up a brand new facility, hiring employees and training them, basically have the plan operating under the Magna philosophy and culture from day one.

Acquisitions are difficult to integrate.

Our focus from an acquisition standpoint is to look at acquisitions where we can acquire some technology that either expands what we have or is complimentary to existing technology.

Certainly if there was an acquisition out there that accelerated our goal to diversify our customer base, it's something we would certainly be interested in.

Our third strategy from an acquisition standpoint is to look at an acquisition when we need to install new capacity in a certain jurisdiction, if there's already some capacity out there that a competitor has that's not being utilized, maybe more efficient for us to buy that capacity as opposed to installing it ourselves.

But just in terms of making an acquisition for the sake of growing what we already have is not something that we're focused on and clearly if there's a good financial transaction, we'll look at it.

I think those are far and few.

The second question has to do with Intier.

You're not the only one who had down operating income year-over-year in an interior business, but you provided a list of a number of factors in the disclosure.

Maybe if you could just highlight which one or two were the biggest and if you could elaborate on your listed incremental customer price concessions and operating inefficiencies at certain facilities, just talk a little bit more about whether those are things that have accelerated here.

Well, when I look at our interior business and, remember, we really have three business units under interior.

We have our seating business, we have our interiors business and we have our closures business.

So it's hard to compare interior with some of our peer groups.

When I look at some of the positives and negatives, certainly what's been a negative is higher commodity costs, particularly for resin and steel.

And in 2005 we experienced across the Company some price increases on the resin side.

We did lose the Dodge Ram pickups and that was a good program for us from a sales and contributed on a reasonable basis to profitability.

And some of our higher content programs have experienced some lower sales, so there's lower margins on that.

We have been launching some businesses, so there's some launch cost.

Offsetting all that, we always seem to talk about the negative, but offsetting all of that, we see some real improvements in productivity and efficiencies at a number of operations and we have had some success in this business and other business in terms of getting rebates from suppliers that supply us.

So there's a whole bunch of things that are sort of pluses and minuses, but overall, as you know, year-over-year we have experienced a decline in profitability.

Okay.

Thank you.

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

Please proceed with the question.

Thanks.

On the transfer case business that Mark talked about, I believe he said that for this Japanese OEM, you would be supplying in North America and one program in Japan.

I wanted to know how you would be supplying the program in Japan and where you would manufacture the product.

Well, the transfer case business we were talking about, Peter, is primarily out of Syracuse.

We don't anticipate having any Japanese manufacturing facilities, if that's what you're alluding to.

Eventually, we'll be able to supply both out of Europe and North America, but the primary source for those programs is Syracuse.

Okay, and on your -- going back to segmented reporting.

I noticed that your corporate and other was a little bit higher than what it had been in previous quarters and I'm just wondering if there's anything unusual in there.

Peter, we referred to this in the call.

We recorded a $26 million gain on the settlement of a lawsuit, an old real estate project, which is included in corporate.

Okay, so that-- oh, I see.

Okay.

So on the income statement that surfaced in SG&A, then.

That's correct.

Okay.

That's all I have.

Thank you.

Our next question comes from the line of John Novak, CIBC World Markets.

Please proceed with the question.

Vince, can you give us a sense of what the restructuring charges in the quarter actually related to?

The restructuring charges in the quarter related substantially all to severances.

So as we're looking at manpower throughout the organization as we restructured and we have some overlap, we've had some severance provisions.

And a big chunk of that is in Europe and we have been reorganizing one of the Magna Don facilities in Europe and this is really the second quarter where we have some severance costs.

We increased some severance cost in second quarter.

We accrued some additional cost in the third quarter.

Substantially, severance cost were a Magna Don and then there was some scattered in North America and in Europe as well.

Okay, and on the content per vehicle numbers, can you give us what the impact of currency was or what the incremental content was related to currency translation?

Sure, John.

Q2 to Q3 North America on a change was 6%, and there was actually no currency impact in Europe.

Okay.

$37, if you wanted those.

Okay, and that's sequentially, Louis?

No, that's quarter over quarter.

Year-over-year?

Yeah, Q3 to Q3.

Okay.

And were you able to figure out if there was any impact overall on net income as a result of translating the U.S. -- the Canadian dollar profits into U.S. dollars?

John, as we've talked about in the past, it is difficult to determine that.

All I can say is from a translation standpoint, there's been less movement in exchange rates this quarter compared to other quarters.

Okay.

And lastly, I just want to clarify, one of the earlier questions talked about the duration of some of the restructuring initiatives you have ongoing.

Should we think that they will be concluded by the first half of 2006?

John, I think we're going to have some restructuring to talk about next quarter as we continue to finalize our overall plans.

And some of those actions will impact 2006 and what you account for in '05 versus '06 is going to depend on the accounting rules.

But we believe substantially by the time we get to the first half of 2006, we should be complete.

But having said that, John, remember, this is a changing industry and we're constantly looking at our footprint.

We look at this as an evolution of our business to make us more competitive.

And if that means that we have to do something in the latter half of 2006 or 2007 and it makes good business sense, we'll do it as well.

Okay.

Thank you very much.

Our next question comes from the line of Himanshu Patel, J.P. Morgan.

Please proceed with the question.

Hi, good morning, guys.

You mentioned earlier, just quickly, that your content per vehicle projections were improved because of better mix expectations in both North America and Europe.

I was wondering if you could give us some color behind which products were involved there.

Well, it's really a mish-mash, Manshu.

I can't point to one single program.

There's a bunch of programs in our top 20 or 25 that we look at that are positive and there are some that are negative.

But net-net we're positive, but not getting into the specifics of the programs.

But we saw that both in North America and Europe, relative to our previous expectations.

Is that a volume increase on existing programs or just new launches?

That's typically volume increases relative to our previous expectations on existing programs.

We talk about mix, it's usually existing programs.

Okay, and then the comment earlier on how the current stress of the supply base is offering business opportunities to you guys.

I'm just wondering, have you seen contracts being sourced away from some of the bankrupt suppliers to you guys?

Or are OEMs moving towards that direction?

Are you hearing any of that right now?

Well, if they are in restructuring and they are in the courts, it's problematic whether some of that business gets moved or not.

By and large, that business tends to stay with the restructuring company, but there have been the individual instances where the OEM's been able to move product.

I think a lot of it has to do with the nature of the particular contract and who owns the tooling, et cetera, and we have been benefiting from that.

Okay, and-- but your comment, just broadly speaking, what does it refer to?

Just your ability to win new business going forward, where your conquesting away from some of these distressed suppliers?

I think we're in a strong financial position, in fact OEM's are taking a much closer look at the balance sheet of their Tier 1s, Tier 2s and Tier 3s and obviously the companies that are healthy and have a robust outlook are the ones that they are going look at.

We've also had, just to elaborate, we also have had some success on some business that's already been awarded to other suppliers that we've been able to take over.

So it's really both, but as Mark said, it's our strength and going forward, I think we're going to be in a better position.

Okay, and then you, as well as many of your peers, have seen the impact of soft western European production, both this quarter and the prior quarter.

I'm just wondering, as a lot of the production shifts to eastern Europe, or I guess the sales increases in eastern Europe, do you tend to see very significant content reductions in your business?

Or are you sort of indifferent to business in eastern Europe versus western Europe?

Well, as the western European OEMs gradually move their footprint to eastern Europe, by and large we have to be with them because our subassemblies and modules tend to be of the nature that you have to be within a 90-minute broadcast window.

So we're trying to follow them and so our content either stays at the higher level or even goes up.

It just depends on the product.

Okay.

Manshu, I would add that you know that we have a pretty big footprint in Germany and Austria, so that does have an impact.

Right, right, right.

Okay.

Thank you.

Our next question comes from the line of Chris Ceraso, Credit Suisse First Boston.

Please proceed with the question.

Thanks, good morning, everyone.

Good morning, Chris.

You rattled off a number of things that hurt the gross margin in the quarter and it sounds like a lot of those things will still be a headwind in 2006 with the exception maybe of some of the start-up costs that dented the '05 results.

Is that a fair assessment or should we expect some of these other items to moderate in 2006 as well?

Well, Chris, without giving specific guidance for '06, we've talked generally about commodities.

Commodities has been an impact in '05.

Our current thinking is that for '06, the impact of commodities will be less than the impact in '05.

Certainly we've talked throughout the year about the significant launch costs we've incurred as we're launching some huge facilities.

So we're expecting that that and in Mark's comments he alluded to them, that as programs start to ramp up, we're going to see some improvements over there.

And we've talked a little bit about the other big impact is -- we've talked Decostar and Belplas and with the production process stabilizing at Decostar and with the team now focused on taking production efficiencies to a higher level, again, we're anticipating some overall improvements there for 2006.

But we're still in the process of putting it together our business plan.

So how the picture looks for 2006 at this point in time, we're not sure.

Okay, and then second question, somewhat related, on the restructuring that you've done on the back of the privatization, is that something that we should expect to see show up in improved profitability in '06 or does this effectively get absorb by your customers through pricing and other concessions?

Are you getting ahead or are you doing this to kind of just stay afloat?

Well, there's a whole bunch of things we do to go ahead.

Part of it is improvements at existing facilities, manufacturing footprint, reducing overheads, avoid duplication of investments in capital and engineering.

But there's also a whole bunch of negatives as well.

So there will be price pressures next year, as they were in 2005, as new programs launch and which are going to contribute to earnings.

How that all balances out, we'll soon find out once our business plans by individual groups are prepared and presented to the executive management team.

Okay.

Thanks a lot.

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

Please proceed with the question.

Thanks.

Good morning, guys.

Good morning, Ron.

Just one quick question and one a little more longer term.

The gross margin by region, did you mention that, North America and Europe?

No, I didn't, Ron.

When you look at overall gross margin by region quarter over quarter, we're seeing declines in North America and improvements in Europe.

And the declines in North America, the big impacts are the consolidation of New Venture Gear in the third quarter of '05.

We didn't consolidate New Venture Gear in the third quarter of 2004, we used the Syracuse facilities.

The new facilities, I keep on talking about new facilities.

We have new facilities launching in Europe, but the substantial ones are North America.

Decostar is a North American matter.

Commodities, we have seen some more relief in Europe than we have in North America, so the impact of commodities is higher, relatively speaking, in North America, and the pricing pressure seems to be a little more intense in North America versus Europe.

And in Europe what we're seeing is some overall improvements in some of our operations and we've been talking about years and years have been focusing on efficiencies.

We're seeing that starting to come through.

And another positive impact from a European perspective was lower volumes in BMW X3.

Remember, we account for that on a full dollar basis, for everything we purchase is resold back to the customer with our value-added fee.

So as the BMW X3 are fully accounted for production comes down and value-added production increases, that has a tendency of increasing reported gross margins.

Okay.

So did the-- in North America, did the gross margin improve sequentially then from the June quarter?

I would think it was pretty low at the June quarter, right?

Well, when you're looking at third quarter to second quarter, that's always a difficult comparison because of the summer shutdowns.

So it did not.

So both in North America and in Europe sequentially margins were down.

I would say if you take into account sort of the time of the year, that both the North American and Europe margins were relatively flat if you adjust for the third quarter seasonality impacts.

Okay, and then just one other question.

Sounds like GM and, I guess, Ford, too, are contemplating some acceleration in capacity reductions.

I'm just wondering, I guess for a supplier, depending on whether your capacity is dedicated or not, I guess it could mean just headcount reductions or it could mean plant closures.

Could you guys give us some idea of how we should think about this for Magna, given your high exposure to the Big Three and, I guess, GM and Ford, as we kind of go into maybe these announcements towards the end of the year?

Well, Ron, if we've got a dedicated facility that's supplying one of these assembly plants that might close, that's obviously something that we're going have to step up to.

We don't know and haven't been communicated with relative to what their intentions are.

And I think that's, frankly, quite natural because they've got -- they have quite a few issues to resolve yet with the union and within the company themselves.

Right.

But for sure we're going to have to anticipate and step-up as quickly as we can when those decisions are made.

And I guess on facilities that are not dedicated, you just take some heads out and you try to backfill the lower capacity, try to raise the capacity with new business?

Yeah, we're trying to expand our customer base, as you know, and fill up unused capacity and that continues to be one of our key strategic objectives.

And given the, given your-- I'm not sure exactly where you guys are with the union in terms of organization in your plants, but would it be expensive to take people out even if it was just temporary?

Well, we're basically nonunion with the exception of New Venture Gear and a couple of seat plants, so basically we're flexible enough with respect to our relationships with our work force that we can move pretty expeditiously.

Okay.

All right.

Thank you very much.

Thank you.

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

Please proceed with the question.

Good morning.

I was wondering if you could quantify the impact of the operating issues in dollars, the same thing on the start-up losses.

They sound like both of them are somewhat material.

David, it's Vince.

With respect to new facilities, if we exclude Decostar because we've talked separately about Decostar, the impact of sort of the new facility costs Q3 '04 to Q3 to '05 really insignificant.

We've seen the spending slow down as we launch both at Hermosillo and in Bowling Green in Kentucky.

With respect to the operating inefficiencies at Decostar, I'm not going to qualify the dollar amount, but it is significant, David, and the operating losses that we've talked about at Belplas are also significant.

When you add up all the operating losses, though, Vince, are we talking tens of millions of dollars here, or -- like I'm just trying to get an idea of how much swing factor you have out of these operations if you get them running properly.

And the same thing on the start-ups, are we talking tens of millions switch?

You get to profitability?

David, this is a real sort of sensitive issue with -- internally as well as with respect to the customer and communications.

All I can say is that when we look at those two facilities that the amounts are large.

Okay.

On the steel contract dispute you cite in the press release, is this a one-off kind of situation or could it actually increase your cost structure going forward?

And, again, is this material?

Well, David, what we cite is actually in the MDNA, to the extent that we are having a dispute with one supplier, sort of difference of opinion, and they are requesting some price increases.

We believe our position is accurate and it is a firm position.

But certainly to the extent that we're not successful and we do need to pay more for the commodity, it will impact us going forward, depending on where commodity prices end up.

If commodity prices continue to climb, even if they are successful, the amount's not going to be significant.

So just two things that you need to consider in that.

But what the outcome of that is, at this point in time not sure.

We're positive that we're on the right side of the fence on that issue.

And do you have a timeframe for when this is resolved?

Well, we're hoping sooner rather than later.

We don't like to operate in an uncertain situation.

Hopefully it will get wrapped up early in 2006.

Okay.

And then just on the final question on the assembly side, it has come down, lower sell volumes, BMW X3.

Is this kind of the new run rate or is there -- that we saw in the quarter, obviously, adjusted for seasonal?

Well, David, I think when you look at it overall, volumes in Magna Steyr on the assembly, there was only 2000 fewer units produced in '05 versus '04.

Right.

So I would say it was relatively flat.

What's happened is that there has been a change in mix where the X3 volumes were a little lower, but there were increases with respect to the launch of the Chrysler 300 and the Jeep Grand Cherokee.

Going forward for the balance of '04, we're expecting overall production volumes for Magna Steyr to be up over 2004, but we do still anticipate, again, a overall reduction in fully accounted contracts and an increase in value-added contracts.

Okay.

Thanks very much.

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

Please proceed with the question.

Thanks, good morning, it's Mike Heifler for Rod.

Hi, Mike.

Mark, I just want to follow-up on Ron's earlier question and what proportion of your facilities are dedicated to GM and Ford in very specific next to the assembly facilities of the OEM's?

Well, we really don't have any, Mike, that are adjacent.

We do have a couple, call it a handful, that are just in time, particularly for interiors and seats, things like that.

But rather than give you a specific percentage, I would tell you that it's a small number of facilities, not a big number.

Mike, just to elaborate on that, when you think of some of the dedicated facilities, as Mark said, they are going to be more in seating, interiors, or even sequencing centers.

They are not as highly capital intensive as some of our other facilities.

And when you've got a sort of capital intensive facility, typically location of that facility is going to be something we're specifically concerned about and we're looking at ability to have business with more than just one customer.

Right.

So the more capital intensive facilities, there's more flexibility there in terms of the customer exposure?

Yeah.

That's correct.

Yeah.

Okay.

Also, Mark, you made some comments about incremental pricing concessions and what are -- what's the nature of these incremental concessions?

Is it beyond just the contractual price-downs?

Is it something special that's going on?

No, I think, Mike, the communication between ourselves and our customers is ongoing on any given product program.

And there's ups and downs with respect to the commercial arrangements and that's why we're referring to these particular commercial discussions the way we did.

And, Mike, in those ongoing discussions at times we may grant additional price concessions in exchange for resolution of certain commercial issues or incremental business as well.

So it's something that was specific to the quarter and we shouldn't really take this as a new run rate going forward?

Yeah, I would say that we're protecting our margins and trying to get as efficient as possible for ourselves and for our customers.

Okay.

And just lastly, the working capital in the quarter, was there a change in payment terms that effected the working capital this quarter?

Mike, there's a couple things that have happened.

The biggest impact was the timing of cash receipts.

When we look at the amount of cash that we received sort of three days after our month end, as we talked about in the MDNA, that was over $500 million.

Right.

If I go back to the second quarter of '05, there was over $100 million of cash we received a couple days after cutoff.

So quarter to quarter, there's a substantial amount.

If that money would have been received two days earlier, our working capital numbers would have been substantially different.

For the balance of this year, we have been spending some time on where we think working capital is going to be and subject to overall timing of receipts, we're expecting to recover the working capital in the fourth quarter.

Okay.

By a substantial amount.

I don't think we're going to erase everything we've invested in the quarter, but we should see a substantial recovery in the fourth quarter.

Okay, because some of your peers have talked about the OEM's lengthening their payment terms, but you haven't seen that?

That-- we've seen that, if I go back probably about a year, year and a half ago, but we haven't seen that as being a cause for what we have seen this quarter.

Okay.

All right.

Thanks.

Operator, we're going take two more calls.

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

Please proceed with the question.

Hi, good morning.

Just a couple quick questions.

In the press release you indicated that you're paying higher prices for purchase components.

Is that a result of workout agreements with weak Tier 2 and Tier 3 suppliers and is that causing your steel costs to be sort of sticky and not getting the benefit of declining steel costs?

I think the -- when we refer to that, the biggest impact is our suppliers have been faced with higher commodity prices on both steel and resin and we're seeing that fall through to some of the commodities they're buying.

Remember, steel prices started to move up in 2004.

We put a tremendous amount of pressure on our suppliers to contain costs, but at some point with steel prices still elevated in '05 compared to sort of where '03 is, in certain situations we've had to pay more for the components we're buying.

Just on the resin side, can you describe sort of the nature of your resin contracts, are they on pass-through, what portion, and can you comment on whether or not you have seen an increase in resin costs as a result of sort of some of the activities that are happening in southern U.S. in capacity coming off stream?

Substantially all of our resin buys is on resale, so we've got exposure to that and on full contract reset, but most of it is not on resale for resins.

We've, obviously, product ourselves through long-term contracts, they may be a year in duration, year ago longer than that, what we saw at the beginning of the year was an increase in resin pricing and we talked about that earlier in the call.

But what we have seen particularly in the last quarter as a result of what's been happening in the southern United States as a result of higher oil prices, that's translated into demand by our suppliers for increased pricing, even though we've had long-term contracts in place.

So we've had to pay more secure supply.

Okay.

And couple more quick ones.

How much of the sales guidance increase for the year is due to higher than expected tooling?

Tooling is up about, I think $200 million from where we were last time, last forecast.

Okay.

And just a question on FX rates.

Can you tell us what the average FX rate you're translating your C dollars and you're Euros at?

I know you've hedged out a portion, in the financial statement impact you're saying it's difficult to determine.

But what's the average sort of rate for those two currencies?

In terms of the average rates for the quarter, the Canadian dollars average exchange rate was $0.83 to the U.S. dollar and the Euro is 1.22.

And that's what you're translating at?

That is the income statement, so when we're looking, let's say, at our -- essentially on page 10 of the press release that we issued today.

So when you look at our Canadian operations, we take Canadian dollar sales for the quarter and multiply that by actually 0.834 to come up with the U.S. dollar sales.

Okay.

That's the average C dollars for the quarter, but you also have hedges on your books.

So would you be translating at 83 -- when you incorporate your hedges, don't you get the benefit of the hedge as well on your -- ?

Well, when you think of the hedge contract, some of that may be in sales, some of that may be in cost of sales, some of that may be in SG&A, depending on the nature of the cost and how we've hedged and whether we're hedging net exposure or gross exposures.

So it's difficult to quantify what the impact is on each line of the income statement.

Okay.

Thanks.

Our next question comes from the line of Rich Kwas, Wachovia.

Please proceed with the question.

Hi, good morning.

I just want to ask about price concessions in Europe, kind of with the upheaval going over there, Volkswagen, cost cutting and whatnot, what are you seeing over there?

Are you seeing increased magnitude of price concessions in Europe?

I know North America's pretty difficult, still pretty difficult, but if you could comment on Europe that would be helpful.

Well, there's no question that there's some pressure in Europe, as there is in North America.

I can't-- we can't detect any more significant pressure on the pricing front out of our European customers than we've gotten out of our North America customers, so I would say it's nothing extraordinary to talk about.

And then just to follow-up on the resin question.

I think I missed about what's the-- is the resin under, mostly under resale programs or long-term contracts?

What's the split on that?

It's mostly long-term.

Okay.

All right.

Thanks.

Well, we would like to thank everyone for participating this morning.

Although it's been a challenging year and quarter for us, we're pleased with the progress that we're making and as we continue to look at our overall operating structure, we're positioning the Company to be stronger in the future.

Thank you, again.

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

We thank you for your participation and ask that you please disconnect your line.