Magna International Inc (MGA) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Magna International Inc. fourth quarter results conference call. [OPERATOR INSTRUCTIONS.] I would now like the turn the conference over to Mark Hogan, President, Magna International.

Please go ahead, sir.

Good morning and welcome to our fourth quarter 2005 conference call.

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

Yesterday, our Board of Directors met and approved our financial results for the fourth quarter and fiscal year ended December 31, 2005.

Our board also declared a quarterly dividend of $0.38 per share, payable on March 24th, 2006, to shareholders of record on March 10, 2006.

We issued a press release this morning for the fourth quarter and fiscal year ended December 31, 2005.

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, and our address is www.magna.com.

Last month we presented in Detroit in conjunction with the auto show and covered off our 2005 accomplishments, our global strategy and our 2006 outlook.

As a result this morning, we'll keep our formal comments somewhat brief to allow more time for questions and answers.

I will briefly comment on our 2005 results, some of management's recent actions and other developments.

Vince will then review in detail our fourth quarter performance and summarize our full year 2005 results, and upon completion of our formal remarks we will be pleased to answer any questions you may have.

Before we get started, and 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 and attached MD&A for a complete description of our safe harbor disclaimer.

Now, despite the challenges we faced during 2005, including negative mix on certain key high content platforms, in part attributable to the gains in market share of new domestic OEMs, significantly higher commodity costs, and continued pricing pressures from our customers, we posted strong operating results including record sales of $22.8 billion, operating income excluding unusual items of $1.1 billion, and diluted EPS excluding unusual items of $6.95.

We're able to achieve those numbers as a result of the hard work and dedication of over 82,000 employees around the world, and our unique corporate culture, which drives employees and management remains our most critical competitive advantage, and that culture will continue to serve us well in the future.

2005 was a year of transformation for Magna.

We privatized our former public subsidiaries, improving our strategic positioning and flexibility.

Following the completion of the privatizations, we completed an assessment of our global operating footprint.

That assessment resulted in the sale, closure and/or consolidation of a number of facilities around the world.

These moves were necessary to ensure that we further bolstered our competitiveness and positioned ourselves for the future.

We also wrestled with some significant operating challenges in certain of our Decoma facilities, particularly in Europe, parts of which were affected by the demise of Rover.

Some of these issues have led to significant restructuring and impairment charges during 2005.

In the case of Decostar in North America, we have stabilized some of the production issues we faced upon the launch of that facility, and have an action plan in place to improve profitibility, and in the case of our Belplas facility in Belgium, our biggest challenge remains the underutilization of assets, an issue that is difficult to overcome in the short term.

We continue to seek opportunities for new business in the facility in order to utilize the assets in place.

And the case of the rest of Decoma Europe, we are closing a facility and consolidating other facilities to take out some of the excess capacity and improve financial results.

As we stated back in January during our outlook presentation, we anticipate year-over-year improvements at some of our under performing facilities which will continue to contribute to improved operating margin and earnings.

It's important to note that we have a number of strong performers in exterior systems in Europe that generate excellent returns for us.

So we are confident that we can make the necessary improvements in our underperforming operations to allow us to grow both top and bottom line in this product area.

Next I would like to talk to you about some recent positive developments.

We announced late last year in recently completed the acquisition of CTS -- Car Top Systems.

CTS is a market leader in retractable hardtops and soft tops, a product area we believe has very good growth potential.

They have a number of patented technologies and a strong customer mix, including Porsche, Mercedes-Benz, Ferrari, Saab, TSA and General Motors.

We believe the acquisition will allow us to leverage the capabilities to exist in our complete vehicle and closure product areas.

In Graz, we recently launched the new Jeep Commander assembly program bringing the number of different vehicles produced in one of the world's most flexible assembly facilities to eight.

And we have been talking for some time about our desire to expand the capabilities in the electronics area.

We are combining the electronics capability that exists in our mirror business with our understanding of complete electronic integration, in order to seek opportunities for increased electrical content in areas such as pedestrian, driver, and passenger safety.

We'll start small, but expect to grow fast once we get traction.

We made some important breakthroughs in 2005 in terms of business with Asian based OEM's including significant interiors and stamping business in North America, our first ever Asian transfer case business for Nissan programs both in North America and Japan, seating in interior business in Korea with significant potential business in Korea as well, and a new mirrors JV in India.

And I will continue with a full court press to add to this momentum with Asian OEM's.

I want to comment on the current commodity pricing environment.

Starting with steel, we have been in a period of level prices over the past few months although we anticipate a softening in steel prices in 2006.

With respect to resin pricing, we experienced supplier pressure for higher prices in the fourth quarter of 2005 and those higher prices are being maintained through early 2006.

We continue to seek other purchasing avenues for some of our largest commodity buys.

So in summary, 2006 is shaping up to be another difficult year for the auto industry.

However, we believe our strong customer relationships, our capabilities, the steps we have taken to restructure our global business, and our solid balance sheet put us in an enviable position to not only withstand the difficulties, but to capitalize on opportunities that are brought on by these challenging times.

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

Vince.

Thanks, Mark, and good morning, everyone.

I would like to review our financial results for the fourth quarter ended December 31, 2005.

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

I would first like to discuss a number of reporting changes, two of which we have brought to your attention in conference calls earlier this year and two of which are new beginning with the fourth quarter reporting.

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

The first slide in appendix A of our slide package details the impact.

Second, beginning in 2005 European average dollar content per vehicle reflects only our European production sales.

As a result, we have revised 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.

Third, please noted that beginning with the fourth quarter of 2005 we have revised our North American and European content per vehicle to remove rest of world production sales from the calculation.

In previous years, the rest of world production sales were not significant.

However, with our growing presence in markets outside of North America and Europe, particularly in Asia, rest of world sales will continue to become more significant to our business.

The impact by quarter for 2005 and 2004 are included on slides 2 and 3 in appendix A in our slide package.

Finally, shortly after completing the privatization of Tesma, Decoma and Intier and following the appointments of Don Walker and Siegfried Wolf as our co-CEOs, we began to organize and segment our operations on a georgraphic basis between North America, Europe and rest of world.

In the fourth quarter we reported our segmented results on this basis.

This reporting reflects differences between the regions in which we operate as well as the way we now manage our business.

Before getting into the details I would like to briefly comment on the restructuring and impairment charges included in our operating -- in our reported results.

As Mark noted earlier, we completed an assessment of our global operating footprint during 2005.

As a result, we took a number of actions which resulted in restructuring charges during 2005.

Further, based on these actions, we anticipate additional restructuring charges in the range of $30 to $40 million being incurred during 2006.

From an accounting standpoint, we are not able to accrue for these charges in 2005.

In addition, as a result of our restructuring initiatives and industry conditions, impairment testing yielded impairment charges in the fourth quarter.

The restructuring and impairment charges cover 15 facilities, ten of which are in Europe, as well as certain corporate related charges which amounted to $190 million in 2005.

Nearly 60% of those charges are in respect of Decoma Europe including non-cash impairment charges of $101 million.

As Mark indicated, Decoma Europe has been a challenge, but we are confident we can turn the business around.

Appendix B in our slide package accompanying our call today includes reconciliations for the quarter and full year of 2005 and 2004 on certain key financial statement lines between reported results and results excluding unusual items.

The unusual items in 2005 amounted to $145 million expense in pre-tax income.

This resulted in $115 million reduction in net income and $1.05 reduction in diluted earnings per share.

The following quarterly and annual earnings discussions will all exclude the impact of unusual items from both 2005 and 2004.

In fourth quarter, consolidated sales increased 4% to a record $5.9 billion.

North American production sales grew by 11% in the fourth quarter as a result of a 3% increase in production from the comparable quarter with 3.9 million units, and an 8% increase in North American content to $762 for the quarter.

Key drivers of the growth in content were increased production and/or content on certain programs including Chrysler's mini vans, launch of new programs and the strengthening of the Canadian dollar against the U.S. dollar.

New launches contribute to go content growth quarter over quarter included the Chevy Cobalt,, HHR and Impala, Pontiac Pursuit and Torrent, Hummer H3, Dodge Charger, Ford Fusion and the Mercedes M and R-Class CUVs.

Offsetting these were high content programs that incurred lower volumes and/or content including the GMT800 series of trucks and sport utility vehicles, the Cadillac STS, Ford Freestar, Mercury Monterey and Ford Escape, Dodge Durango and RAM Pickup and the Jeep Grand Cherokee.

Programs that ended production during or subsequent for the fourth quarter of 2004, and incremental price concessions also negatively impacted North American content.

European production sales were $1.2 billion, relatively unchanged, down less than 1% from the fourth quarter of 2004 as both European production volumes and content per vehicle were essentially level with fourth quarter of 2004.

The positive impact from the launch in new programs including the VW Passat, Land Rover Range Rover sport, was largely offset by the weakening of the euro and British pound against the U.S. dollar.

Other programs that also contributed to content growth include the Volkswagen Transporter and Multivan, Mercedes B class and the Volvo V70 offset by programs that experienced lower volumes and/or content in the fourth quarter of 2005 including the Mini Cooper, the Mercedes E class as well as OEM price concessions.

Complete vehicle assembly volumes increased by 12% in the fourth quarter of 2005 compared to the fourth quarter of last year.

Programs accounted for on a value added basis rose 55% while programs accounted for on a full cost basis declined 5%.

Largely as a result of this shift in mix towards value added programs in the quarter, assembly sales declined 12% or $145 million to approximately $1.05 billion.

In summary, consolidated production and complete vehicle aassembly sales increased approximately 3% or $166 million in the fourth quarter.

Global content growth including the strengthening of the Canadian dollar against the U.S. dollar was partially offset by lower complete vehicle assembly sales and the weakening of the euro and British pound against the U.S. dollar.

Tooling, engineering and other sales were $533 million for the quarter, an increase of 7% or 35 million from the comparable period.

Some of the programs for which we recorded tooling, engineering and other sales in the fourth quarter were the BMW X5, the Jeep Wrangler and GM's next generation full size pickups and SUVs.

Programs driving tooling revenues in the fourth quarter of 2005 included the Ford Fusion and Explorer.

The strengthening of the Canadian dollar to the U.S. dollar contributed to the tooling and other sales in the fourth quarter of 2005.

Gross margin as a percentage of sales declined modestly from the comparable quarter.

Gross margin in the quarter was 13.1% compared to 13.2% in the fourth quarter of 2004.

Change reflects lower production on certain high content platforms including the GMT800 and the Ford Escape, operating inefficiencies of certain facilities, higher commodity costs including steel and resin relative to the fourth quarter of 2004, and customer price concessions.

These were largely offset by the strengthening of the Canadian dollar and weakening euro and British pound each against the U.S. dollar which resulted in more of Magna's consolidated gross margin being earned in North America in the fourth quarter of 2005 compared to the comparable quarter.

This had the effect of increasing Magna's overall gross margin percentage as gross margin as a percentage of sales currently higher in North America compared to Europe.

Margins earned in the new programs that launched subsequent to the fourth quarter of 2004 including the Chevy Cobalt and Pontiac Pursuit reduced costs incurred at new facilities that launched during 2005, including our new facility in Sonora, Mexico, supplying the Ford Fusion and derivatives, improved operations and productivity improvements in certain facilities, price reductions from our suppliers and the closure of an exterior systems facility during the first quarter of 2005 which improved our results as this facility incurred losses during the fourth quarter of 2004.

Magna's consolidated SG&A as a percentage of sales declined to 4.9% for the fourth quarter compared to 5.5% for the comparable quarter reflecting our continued efforts to control costs as a result of the difficult industry environment as well as lower level of profit based compensation.

Our operating margin percentage was unchanged from the fourth quarter of 2004 at 4.8%.

The slightly lower gross margin percentage plus increased depreciation were completely offset by reduced SG&A as a percent of sales.

Our effective tax rate was 28.6% in the quarter reflecting declines in income tax rates in Austria and Mexico compared to a year ago as well as a favorable adjustment to our tax accruals.

Net income was $202 million in the quarter compared to $182 million in the fourth quarter of 2004.

The increase reflects higher operating margin due to higher sales, a lower tax rate relative to the fourth quarter of 2004, and reduced minority interest due to the privatizations.

Diluted earnings per share were $1.82 compared to $1.87 in the comparable quarter in 2004.

Higher net income was more than offset by the increase in diluted shares outstanding, essentially all related to the privatizations.

I will now review our cash flows and investment activities.

During the fourth quarter of 2005 we generated $408 million cash from operations prior to changes from non-cash operating assets and liability and $750 million in non-cash operating assets and liabilities largely related to a reduction in accounts receivable due to timing of cash receipts at year end and seasonally low sales late in the year relative to the third quarter as well as a tighter matching of payments and collections.

For the quarter investment activities amounted to $367 million comprised of approximately $321 million in fixed assets, $19 million to purchase subsidiaries and $27 million in other assets.

To summarize our full year 2005 performance, consolidated sales increased 10% in 2005 to a record $22.8 billion for the year.

North American content grew 17% to $731 for the year, and European content grew to $317 representing an 11% increase over 2004.

Net income for the year was $754 million representing an increase of $51 million or 7% over 2004, and diluted EPS was $6.95 compared to $7.23 in 2004.

During 2005 we generated $1.5 billion in cash from operations prior to changes in non-cash operating assets and liabilities, and $158 million in non-cash operating assets and liabilities.

For the year investment activities amounted to $1.2 billion, comprised of $848 million fixed assets, $187 million to purchase subsidiaries, and $127 million in other assets.

In our press release issued this morning, we reaffirmed our outlook for 2006 which we initially provided in our outlook press release dated January 12, 2006.

All relevant information can be found in today's release.

Mark, Louis and I have recently met with shareholders and held discussions about a number of items impacting our share price.

Some of the factors impacting our stock price relate to industry-wide matters and some Magna-specific factors.

Some of the industry factors concerning investors include increased commodity costs, pricing pressures and the financial position of some of our customers brought on in part by market share deterioration.

Some more Magna-specific factors include our sales concentration with the Big Three, our light truck exposure and the forbearance agreement which expires in May of this year and which we will not be renewing.

Despite the ongoing market share declines of our traditional customers, we continue to target and support their key programs with new technologies, and we are excited about some of the new program launches we are involved in, including some important segments such as CUVs and passenger cars.

As Mark highlighted earlier, we continue to make strides to grow our future business with the Asian based OEMs, as well as to grow in new regions.

While higher commodity costs and pricing pressures have negatively impacted us, and the suppliers' base in general, we believe our excellence in manufacturing, our dedicated work force, our strong technology base, and continued investment in technology coupled with the strongest balance sheet in the industry puts us in a unique position to capitalize on opportunities and benefit from the weakness in our peer group.

We remain committed to a disciplined investment approach with the name to becoming the world's largest and most profitable automotive supplier.

This concludes our formal remarks.

Thank you for your attention this morning.

We will now open the call for questions.

Thank you. [OPERATOR INSTRUCTIONS.] Our first question comes from the line of Rod Lache, Deutsche Bank.

Please go ahead, sir.

Good morning, everybody.

Good morning.

I have a few questions.

First of all, can you elaborate on how much of a drag Decoma and Decostar were in '05 versus your budget and how much if you can quantify for us what would you expect in terms of the improvement in '06 from improving operational issues?

And then related to that, just elaborate a little bit more on the restructuring actions that you took this year.

How much of a benefit would you expect in '06 versus '05 and if you can maybe tell us how much of that's depreciation versus cash cost savings.

You ask a lot of questions, Rod.

I am not going to be able to answer everything you asked for -- I don't have the information handy, but let me start with the Decoma operations.

Generally when we look at our operations in North America, except for Decostar was in in launch mode, our operations in North America are performing quite well.

As you know, we launched a new a facility to support a number of Mercedes programs, and there will be a BMW program starting in Decostar as well real soon.

During the ramp up as expected we incurred start-up costs and we also had a number of operating inefficiencies.

I would say in the fourth quarter we have made some progress there.

We're still not making money, but as we move into 2006, we expect to continue to improve on our profitibility basis, and certainly when I look at our deck owe star facility and compare that to our original budget, we substantially yonder performed our original budget.

In respect to Decoma Europe, we have had some challenges.

We have been discussing our Belplas situation for quite some time.

I am happy to record we have seen some improvements in operating efficiencies, and we have a new person heading our exteriors group for Europe, and there has been some positive progress being made.

At this point in time we don't have a solution for Belplas.

It will continue to drag and continue to lose money in 2006, and our fix for Belplas is twofold.

One to continue to focus on improving operations, but more importantly securing more business for that facility.

The other negative impact for Decoma in 2005 related to our U.K. operation that impacted Decoma as well as our interiors group, and that was as a result of Rover filing for bankruptcy, they actually closed operations as you know, and that had an impact on Decoma as well as interiors operations.

As we look forward to 2006, we are expecting improvements in North America for the Decostar facility, and we are expecting improvements in Belgium for our Belplas facility.

We do expect some reduced depreciation as a result of the asset impairments that we recorded in 2005, and the total asset impairments amounted to about $110 million for the year.

If you think, I don't have the exact number in front of me.

If you think of the average age of assets being amortized somewhere in the range of 10 to 15 years you can get the impact on depreciation for 2006.

Did I answer all your questions?

Well, no.

I guess you're maybe deliberately not answering.

The restructuring benefit cash savings, can you put any kind of quantification on the operational improvement you would expect excluding depreciation '06 versus '05.

Rod, I think when you... we talked a little bit about depreciation.

In our January outlook when we talked about improvements in operating margin built into that improvement is the tush around of underperforming divisions and some of the benefits of restructuring activities we undertook in 2005.

I am hoping that you would give us some quantification of that.

Rod, I am not ready to do that at this point.

Okay.

Let me move onto another question.

Obviously have a very strong balance sheet, 1.7 billion in cash and obviously there is going to be a lot of opportunities that are going to present themselves here given what the competitors are experiencing.

Looks like mostly with Big Three suppliers that are obviously fairly distressed.

Can you talk a little bit about how you're weighing growth opportunities with some of these distressed Big Three suppliers versus are there actually opportunities that can really move the needle and expand your presence with the Asians at this point in time?

Well, Rod, we've been approached by the Big Three relative to some take over opportunities, and we're scrutinizing those, and taking a hard look at those opportunities that we think from a pricing standpoint we can protect our margins.

Many of the contracts that some of these distressed suppliers took on were actually mis-costed and as a result mis-priced, and we're staying away from those businesses unless we can reprice them.

There is clearly some opportunities for takeover business, and we're weighing those in conjunction with capacity availability for the plants that are approximate to the potential business.

You just based on the way you're answering the question, are these things relatively, sounds like they're relatively small in the context of Magna'S size today, or fairly large once and as far as acquisitions, is it just a separate issue, would it be fair to assume these would be balance sheet-levering events?

Well, I wouldn't jump to the conclusion that they're all small relatively small opportunities.

I would say it is a continuum of small to pretty significant.

As far as acquisition opportunities, we continue to evaluate them, particularly if they've got the right kind of customer picks, the right kind of complimentary technology, et cetera, and we haven't made any predisposed decision as to how we would finance those acquisitions, but we do have a strong balance sheet.

Okay.

Thank you.

Our next question comes from the line of John Murphy, Merrill Lynch.

Please go ahead, sir.

Good morning, guys.

Good morning, John.

Maybe to follow on that question about acquisitions, would you consider moving down the powertrain into axles and there is a tremendous number of -- there is quite a few axle assets out there.

Just wondering if you would consider that?

Well, the axle business is a very complicated business with very capable and entrenched tier 1's, so it is not necessarily high on our list although we do have some capability in that area from a machining and gear cutting standpoint, but I would have to say, John, it is not our highest priority.

Okay.

And then the small acquisitions that you alluded to in the press release, was that mostly takeover business where were you requiring small assets, or what was going on there?

Those referr to a couple of smaller businesses, one of which was a small stamping business in Ohio and another was a essentially an interior trim business in Europe both of which we think are quite complementary to support contract awards that we received.

And the charges that you're going take in 2006, are those still associated with Decoma?

Substantially most of the time charges relate to Decoma, but there is the other odd division that and undergoing restructuring at this point which we will be incurring in charges in 2006.

Okay.

And then two housekeeping issues, the base for earnings growth or the base for earnings in 2005 which you think are going to be up from in 2006 is 695?

Correct.

And then the tax rate of 28.6%, is that a number we should be using going forward or is that a one-timer here in the fourth quarter and we'll get back to the 31 to 32% range?

John, just with respect to your first question, I believe the response is certainly the 695 is the base, but remember our guidance talked about 2006 excluding unusual items, and the unusual items that we're anticipating is the $30 to $40 million in additional restructuring charges to clarify that point.

Yes.

Thanks.

With respect to our overall tax rate for 2006, we're expecting our tax rate to be somewhere in the range of 31 to 32%.

Again, excluding unusual items.

We did have a favorable tax accrual settlement in the fourth quarter which benefit benefitted us from a tax rate perspective.

One last one, can you comment on the ramp of the GMT 900 and your supply there or is that too far out of bounds?

You know, the ramp up of the 900 from all accounts has been very good.

We obviously have a pretty significant piece of content on that platform, but I know GM is quite pleased with the ramp up and in actually the sales momentum that they have in the first quarter as we understand for that vehicle line-up is real strong, too, so we feel good about our participation in that.

Great.

Thank you very much, guys.

You're welcome.

Our next question comes from the line of John Novak, CIBC world markets.

Please go ahead.

Good morning.

Vince, you mentioned a favorable tax adjustment.

Did you say it was a few million dollars?

I would say that the favorable, excluding the favorable tax adjustment, our tax rate would have been in the low 30%, what we would have expected for the year.

Okay.

Do you see any opportunities to benefit from additional favorable tax adjustments in 2006?

John, as we continue to integrate the various legal entities, we have substantially more flexibility from a tax planning perspective, so there is a number of initiatives under way right now to the extent that we can implement those sooner rather than later, there could be some positive upside to our tax rate in 2006.

Okay.

And the $30 to $40 million in restructuring charges, sounds like this is something that the charges will probably be taken in the first half of the year.

Are we talking first quarter '06?

John, we're actually going to that I a charge that I know about already in the first quarter of 2006 because there is additional severance charges that we were able to record and we're going to be able to record in Q1 '06 which we weren't able to record in Q4 '05.

I suspect most of those charges are going to be in the first half of the year.

Okay.

These charges, will they result in cash cost savings going forward or again, more depreciation amortization charges or savings?

Cash savings.

The charges I'm referring to are out of pocket costs and will reduce overhead and labor.

And how much in cost savings do you think in cash cost savings do you think it will amount to annually?

We're not going to get specific right now.

Okay.

That's all.

Thank you.

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

Please go ahead.

Good morning, everyone.

Good morning, Ron.

Two questions.

First on the topic of the steel, I think if I recall correct you are about 50% on the resale programs and I am wondering as you start bidding on future programs, are you being asked to share any of the historical steel price fluctuation and then equally important, are the auto makers backing off at all on the future use of the resale programs?

That's my first question.

Ron, we haven't seen OEMs backing off from the resale program at this point.

With respect to sort of new contracts where we do have resale programs, there is no evidence of customers coming back and wanting to recoup higher steel prices on historical basis.

I think as weight savings become ever more important in future vehicle product programs, that trend to use higher strength lighter steel is certainly evident, and I would say pricing for those specialty steels has not subsided at all.

If anything, its gotten a little stronger.

I think that order as well, then, for the other 50% or so of your business where you haven't been protected by the resale programs.

It implies maybe you should be able to get some pricing on those, some pricing for the steel fluctuation.

It depends on the OEM.

I would say your premise is basically right.

We're quoting new programs we're looking at our existing cost structure and what we believe costs are going to be in the future.

So, to the extent that we're seeing a cost being higher, that's what we're building into our quote model.

That makes sense.

Just one other question, you're just focusing in on the North American content per vehicle growth.

I think it was 7% or for the fourth quarter and 8% for the year.

I am just wondering, can you take a shot at how much you think the adverse mix of your top programs or customer mix may have impacted that because you guys are you talk about the out year backlogs and whatever, 10 to 12% content per vehicle growth range, but obviously this is below that.

I guess I could guess it is 3 to 5% headwind on the top programs.

I would be interested in your view.

I think you're pretty well there.

If you look at our top programs in North America, the negative mix that we talked about is in the range of sort of 3 or 4%.

Okay.

Or 3 to 5.

3 to 5.

Okay.

All right, thank you very much.

Our next question comes from the line of Chris Cesaro, Credit Suisse.

Please go ahead sir.

Thanks.

It's Chris Ceraso.

A few questions.

First on the you commented a little bit on the outlook for material.

Sounds like steel looks a little better.

Resin may be worse.

Are there any other major components you're concerned about?

We heard issues about aluminum, I am not sure how much of your buy that is, maybe other energy costs or electricity.

Can you frame some of those other energy or raw material items for '06?

I think steel and resins, Chris, are really the big ticket items as far as energy et cetera.

We constantly look for ways to improve our operations from an energy efficiency standpoint to offset whatever increases we face there.

The big ticket items we focus on are steel and resins.

Do you think that nets out negative or positive, steel is getting better and resins are getting worse?

Should be positive.

Depends on the magnitude of the changes on both steel prices and resin pricing.

Steel is substantially a bigger buy for us compared to resin.

On the Asian business, Mark, is it still the goal, do I have this right, from 5% of sales to 10% of sales by 2010 and if that is right are you ahead of pace relative to what you won over the past several months?

I would say the 10% number is right, Chris, and I would say we're on pace.

But, as we continue to grow our top line, that number becomes more challenging, but we've got maximum effort on this in this front to secure more Asian based OEM business.

Okay.

And then one question about the change in your reporting.

It would seem to me that as you guys look at the business, you would probably also want to know how stamping business is doing, interior business, that would be critical for going to customers with price decisions and assessing the business in terms of its profitability, so I would think internally you're still looking at things in a geographic and a product line format, and if that's true, then shouldn't you be presenting both ways to the investment community?

I am reminded of Johnson Controls which recently made a similar change where they're doing say North America interiors, Europe interiors, Asian interiors and three other businesses.

What are your thoughts on that and why are we just seeing the geographic numbers?

I think our structure is a little different than some of the peer group.

I did mention in my formal comments we do have co-CEO's as well as Mark and when we look at various responsibilities, Don's primary focus is North America, Siggy's is Europe and with respect to the rest of the world, amongst Mark's other duties, that falls underneath Mark.

Certainly within those three segments Don is looking at the various business units in North America on a product line basis and so is Siggy.

From an aggravation standpoint, when we look at the various segments, we have three segments and Don, Siggy and Mark are reporting up to the board, and chief operating decision maker on those segments and reporting reflects that.

Chris, we focus very specifically on each of our operating entities.

So we're not losing sight of that at all.

Does that kind of detail --- will that still appear in, say, your annual filings and 10-K or is that gone for good as far as investors and analysts are concerned.

I think it is gone for good unless we change our overall reporting structure within the organization.

OK.

Thanks a lot.

You're welcome.

Our next question comes from the line of Nick Morton, RBC Capital Markets.

Please go ahead.

Good morning.

Good morning, Nick.

At the very end you formal presentation you mentioned that you'd been in discussions with shareholders and brought up various topics.

I wonder if you can expand on the financial position of your customers General Motors and Ford and the potential risk to your balance sheet if something bad was to happen, and secondly, could you address the forbearance agreement and why you decided not to renew it?

Certainly.

Why don't we split the question.

I will have Mark deal with the first part of that question, Nick.

With respect to GM and Ford, they announced their restructuring efforts and got pretty specific about what they're doing to rightsize their capacity and take out structural costs, and I know both CEOs are very determined to make they're restructuring plans work.

We have no reservations that they are going to make those plans work, and we're obviously as a partner to General Motors and Ford working hard to support them, so from our standpoint we believe that the financial condition of GM and Ford will stabilize in the near term, and we expect to support them as best we can.

Okay.

Can you comment on Delphi situation, what plans you have if there was a strike, if there were -- was to be a strike?

Well, I mean like everybody else in the industry, if there was to be a strike at Delphi there would certainly be a disruption in the industry of some significance.

I happen to believe that given the fact that Delphi, GM and the UAW are talking proactively as a three-party solution, that there will be a good -- a workable solution without a work disruption, and we expect that to come to conclusion sometime in the third quarter.

Thank you.

With respect to the forbearance agreement, as you'll recall, the agreement was put in place I think I was1998 specifically as a result of our investment in Magna Entertainment Corporation.

The agreement expires in May of 2006, and the discussions regarding the forbearance agreement is it will not be extended.

There is no need to extend the agreement.

We have a team here that our main focus is obviously to grow the automotive business, and we've demonstrated over the last several years and decades our dedication to that, and we believe that given the fact that there are public companies out there that there is no need to have a restructuring put on the management team.

Let me remind you that we do have an overriding of the constitution that dictates how we run some of the key principals in our company, including investments in non-automotive activities and that corporate constitution is going to continue to previal.

OK.

Thank you very much.

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

Please go ahead.

First a couple of housekeeping questions.

I notice your depreciation charge was up in the fourth quarter relative to previous quarters notwithstanding the impairment charge.

Was there some unusuals in that number during the quarter?

Peter, I don't recall there being unusual items as relates to additional asset employed.

Keep in mind in the fourth quarter in terms of just privatizations alone, there's about $17 million of incremental depreciation quarter over quarter, fourth quarter '04 versus fourth quarter '05 -- which is nothing there that is unusual.

Okay.

Why is there an additional $17 million?

That's the fair market value revaluation or ---

That's correct.

It is purchase accounting for the acquisition interest in the public subsidiaries that we didn't own and we had to allocate fair value amongst depreciable assets as well.

Remember, we've done a preliminary allocation, and we still have the quarter to finalize that purchase equation.

Just for note, for the entire year, the additional depreciation from the privatization was $30 million as well as the additional $7 million in additional stock option expense from revaluating the stock options when we required the remaining interest in the subsidiaries.

Okay.

The next question is -- you said the aggregate amount of restructuring impairment charges was $145 million.

I believe that's the pre-tax amount.

Do you have the after tax impact of the charge of the unusuals?

Sure.

For 2005 the after tax amount was $115 million.

The $145 million, is that the fourth quarter or is that for all of --

That's all of 2005 with respect to just fourth quarter.

Yes.

The we had 157 million dollars of restructuring charges impacting pretax, and the impact on net income in the fourth quarter was $119 million.

Okay.

Lastly, going back to the Belplas situation you said the larger issue appears to be capacity utilization issue, and just going back, could you just review, that was I can't remember if that was a greenfield or if it was a facility that you built out, but what happens to the business that you originally anticipated was going in there, is that business, did you have some business taken from you or did customers lose share or what ultimately happened with respect to your initial intentions?

Peter, Belplas was part of the Conix joint venture.

We acquired the remaining interest of Conix we didn't own some years ago.

Belplas was already in existence, and while it was still a joint venture the decision was made to expand substantially the facility to accommodate some business from Ford, and the Ford assembly plant if,you visit our Belplas facility is just across the street.

We invested in a water based paint facility: Ford, at the time, had a solvent based paint facility and discussions surrounded about sort of environmentalconcerns with solvent based paints and the need to move to a more friendly or more environmentally friendly process.

The business was expected to be moved over to Belplas; anyway to make a long story real short, labor got involved on the Ford side and the business never came over.

We put a whole bunch of capacity in place.

We did acquire some other business.

The business we have in there today I would say is sort of lower volume type business, and Belplas was built for higher volume fascias, higher volume runs, so to really deal effectively with Belplas we need more programs, higher running programs, to overall improve the utilization of the assets at Belplas.

There was also Volkswagen business in there, Peter, that where volumes came up short of where we expected them.

Okay.

That's good.

Thanks very much.

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

I would like to come back to the D&A.

That's a pretty good jump in one quarter, up 12.6% sequentially.

Seems like an awful lot of new equipment to come on.

Is there something else in there and I guess really more to the point, what is the run rate we should be thinking of going forward?

Is that the base and we go from there?

Peter, or David, in terms of Q3 vs Q4, we going to have to do a little digging and see if we can find out and get back to you on exactly what's causing the major increase sequentially.

Okay.

Should we be thinking of the Q4 run rate, though, as what we look at going forward and then perhaps adjust it down a bit for the writedowns?

We're just looking, David, to see if we can find out.

I think if you looked at the subject sort of exchange rates movement, the fourth quarter run rate is pretty indicative of what we would be expecting of the balances or for 2006.

Okay.

Okay.

That's helpful.

Just on the raw material side, I am wondering what's factored into your guidance?

Is there a decrease in steel expected as part of the guidance and if it didn't happen, would that have material impact on your margin guidance?

David, our forecast factors in softening in steel offset by higher resin pricing.

In terms of what that means for actual results in 2006, it depends how much of a variance there is to our assumptions, so steel prices skyrocket or resins skyrocket, it will have a bigger impact or prices come down, it will have a bigger positive impact.

At this point it is hard to tell.

I guess the question is what if they stayed the same?

Is it really going to make much difference versus your assumptions?

No.

No.

Okay.

And then I think it was Mark who said something about exploring other commodity opportunities.

What does that mean?

Well, I mean, we've never really done purchasing corporate-wide basis, but we think that there are opportunities to leverage Magna's buy on at corporate-wide basis for things like fafners and common components or commodities, David, so that's what we're referring to, just more of a corporate-wide purchasing effort for those commodities that make sense.

Okay.

Fair enough.

And then on the FX side, if the Canadian dollar continues its rise this year, should we expect any particular impact from this?

Say it went over 90 cents.

The short term impact is when you look at -- as you run through all our hedging programs in Canada, and you're translating our Canadian operations, I have to believe there is going to be upside.

I guess the other question that you didn't ask is and it is going to be important is where does the euro end up relative.

Right.

To the dollar.

Depending on which way those currencies move, that could have an impact on reported sales and profit levels.

OK.

So basically, we should be thinking in terms of translation effects.

I think so.

Fair enough.

The last question I have assembly, two questions there.

One you were the subject of a rumor recently.

More generally how do you see this business moving forward over the next few years if at all and then I believe there is a rumor out there there has been for awhile you are going to lose the X3 in 2011.

Do you have any comment on that?

Well, the trend toward lower volume or niche vehicle production is continuing to grow, and that puts us in a pretty enviable position, and I think that beyond the garage assembly facility, we see opportunities for facilities in North America and perhaps Asia.

We're pretty optimistic about the growth in that business sector and perhaps we'll have something material to talk about down the road, and we don't comment on specific product programs.

That's a pretty important one, though.

It is 80 thousand units or whatever.

Like I said, we don't comment on it.

Okay.

And North American Asia, are we talking greenfielding going forward or how do you put together enough programs to greenfield is what I am wondering or build this business?

You have amalgamate a couple of product programs to get started, and typically the brownfields that might be available aren't necessarily suited to accommodate that kind of production, so more than likely if we did it, it would be a greenfield.

OK.

So stay tuned.

Correct.

Thank you.

Our next question comes from the line of Youssef Abboud, Westwind Partners.

Please go ahead.

Thank you and good morning.

Mark, you mentioned about the electronic business.

You're trying to get into, and you're doing some like some defining of activity.

Can you elaborate on that and on that business, please?

Sure.

We've got a pretty strong position relative to pedestrian protection through our Aix capability in Germany, and that's allowed us to secure some contract awards, particularly with the European OEMs.

We're also getting awards now on our video assist mirror which is essentially a camera based back-up assist system which Magna Donnelly has in their interior mirrors and we've gotten contract awards there.

And then lane departure warning capability which we built into our head lamp systems and sensor systems is resulted in some contract awards, too.

I would say in general in the safety area that's where we're starting to make our presence felt and I know the OEMs are welcoming our presence there.

In terms of contribution or content, can you give us some guidance on that front?

I would say it is still pretty small.

Perhaps down the road we'll be able to get more specific.

It is not material at this point.

Thank you very much.

You're welcome.

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

Please go ahead.

Hi guys, just a couple quick questions.

In the past you talked about the dispute with a particular steel supplier.

Can you give us an update on the dispute?

Sure, Donato.

We're in the process of arbitration proceedings.

There is disclosure in the MD&A attached to our press release this morning.

The only update in our disclosure is that obviously we believe that our position is the right position, but in the worst case we believe that our exposure at this point in time is less than $85 million.

Okay.

And just another question on the tax accrual.

Vince, can you quantify on a per share basis or in aggregate what the actual benefit was from the one-time or from the benefit and was this a result of using tax losses or was it just a reversal in the accrual because of lower experienced tax rates?

It was a reversal of the result of higher provisions in prior periods, just as part of the year end process where our fellows are doing a scrub of all the numbers.

They had over accrued taxes in prior periods, so it was reversed and I talked about the magnitude without the reversal our rate would have been in the low 30% just as we had expected in prior quarters.

Okay.

And that's it for me.

Thanks.

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

Perfect.

Our next question is from the line of Himanshu Patel, JP Morgan.

Morgan.

I wanted to get back to the safety business you mentioned a interest interest in there.

There is air bag assets out there, and I think Delphi has a little of that business, obviously Breed down in Florida.

Any thoughts on the need to be sort of in the passive safety component area of the safety world to make a big splash on some of the active safety things you'retalking about like lane departure sensing?

Well, the guys that are in that business, as you well know, the air bag business are pretty well entrenched.

Magna actually had a position in air bags ten years ago, right?

Something like that.

We sold that off.

I don't think we have much of an interest of getting back into it.

Okay.

And then the restructuring or manufacturing consolidation announced by General Motors and Ford, I am interested in knowing does that help you or hurt you in the near term and I guess there is kind of two schools of thought on that and a lot depends on how your manufacturing footprint is set up, if there is two OEM plants with say 60, 70% utilization rates, do you also, would you also have two OEM -- two Magna plants servicing those plants individually or would you right now have one plant servicing those two plants in which case the capacity reduction by the OEMs may not benefit you and may actually even hurt you?

Well, the plants that have have been announced in the restructuring, fortunately for Magna, don't affect us.

We have one seating facility that supplies Spring Hill that has been affected by some of the volume reductions there, but by and large we were fortunate enough not to be directly of affected by the plant closures announced.

Let me say that.

The restructuring steps that GM and Ford have taken are decidedly positive for the health of the North American industry, and we welcome that, and anything that we can do to support GM and Ford in their restructuring efforts so they can come out of that healthy is obviously important to us and important to the industry.

Okay.

One last question in terms of getting non-Big Three business.

It has obviously been a challenge for not just Magna but some other Detroit suppliers as well.

I am wondering how much of that would you say was due to Delphi and Visteon being overly aggressive on pricing previously in getting non-GM and non-Ford business and to the extent those companies are undergoing a restructuring process or under new management, are you seeing differences or I guess a more rational marketplace in terms of bidding for non-GM/Ford business nowadays?

I think there was clearly some irrational pricing going on particularly in the interiors part of the business driven by some competitors that obviously didn't understand the cost base, but I think with that, those companies now being restructured and some semblance of normalcy relative to pricing, we do see a stablization in that area, but by and largeI would have to say that our progression in terms of non-Big Three business has been good and is getting stronger.

I will remind you that approximately 50% of our business is with European based OEMs, and now as we grow our position with Asian based OEMs, I am pleased to say our trajectory relative to diversification of our customers is good.

Thanks a lot.

You're welcome.

Okay.

I would like to thank everybody for participating in our conference call this morning.

Despite the ongoing industry hallenges, Magna continues to perform for its shareholders and customers, and we will keep you apprised of our ongoing progress and thanks for your participation.

Ladies andgentlemen, this does conclude the conference call for today.

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