Magna International Inc (MGA) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Magna International first quarter 2006 results conference call.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded, Wednesday, May 3rd, 2006.

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

Please go ahead, sir.

Thank you, and good morning, and welcome to our first quarter 2006 conference call.

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

On Monday, our Board of Directors met and approved our financial results for the first quarter ended March 31, 2006.

Our board also declared a quarterly dividend of $0.38 per share, payable on June 15, 2006 to shareholders of record on May 31, 2006.

We issued a press release yesterday for the first quarter.

You will find the press release, today's conference call web cast, and a slide presentation to go along with the call all in the investor relations section of our new website that we launched at the beginning of this week.

Our address is www.magna.com.

Yesterday, we held our annual shareholders' meeting in Toronto, which I'm sure many of you attended in person or via our webcast.

We provided a fairly thorough review of the industry, our positioning, and our strategy going forward.

As a result, we will keep our formal comments brief, allowing us more time for questions this morning.

This morning, I will briefly comment on our progress in Asia and with Asian based OEMs, which Siegfried Wolf discussed yesterday.

Vince will then review our detailed financial results for the first quarter.

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

Before we get started, just a reminder, that the discussion today may contain forward-looking statements within the meaning of applicable securities legislation.

Such statements involve certain risks, assumptions, and uncertainties, which may cause the company's actual or future results and performance to be materially different from those expressed or implied in these statements.

Please refer to yesterday's press release and attached MD&A for a complete description of our safe harbor disclaimer.

We highlighted yesterday some of the recent progress we have made in Asia, as well as with Asian-based OEMs, and I'd like to elaborate on a couple of points.

Part of our success in developing our Asian business has come through joint ventures with and investments in Asian suppliers.

Last month, we signed an agreement whereby we would acquire a 32% interest in Shin Young Metal.

Shin Young, a metal forming company with 5 manufacturing facilities in Korea, is a tier 1 supplier to Hyundai/Kia.

Hyundai and Shin Young jointly own a facility as well, in Alabama.

And we're excited about the opportunities that this investment will bring to our Cosma group, in Korea, and elsewhere in the world, as Hyundai continues to expand globally.

We also noted yesterday that we are working closely with another base -- Asian based OEM on an all-wheel drive system for our future product program, and this follows our previously announced transfer case award from Nissan.

Our strong competitive position in this product area, driven by leading edge technologies, has allowed us to grow our customer base in the power train area.

And I continue to spend much of my time on growing Magna's presence in Asia, and with Asian-based OEMs, and I'm very confident that our efforts will continue to be rewarded.

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

Vince.

Thanks, Mark, and good morning, everyone.

I would like to review our financial results for the first quarter ended March 31, 2006.

Just a reminder, all figures are in U.S. dollars.

Appendix A in the slide package accompanying our call today includes a reconciliation on certain key financial statement lines between reported results and results excluding unusual items for the first quarter of 2006 and the first quarter of 2005.

In Q1 2006, we recorded restructuring and rationalization charges of $10 million, including $8 million related to noncontractual termination benefits at a facility in Belgium.

The charges resulted in a $9 million reduction in net income and an $0.08 reduction in diluted earnings per share.

In total, charges in 2005 amounted to $20 million or $0.17 per share.

The following quarterly earnings discussions exclude the impact of unusual items from both 2006 and 2005.

In the first quarter, consolidated sales increased 5% to a record $6 billion.

North American production sales grew by 10% in the first quarter to $3.1 billion.

This was a result of a 4% increase in production from the comparable quarter to 4.1 million units and a 6% increase in North American content to $759 for the quarter.

Key drivers of the growth in content were the launch of new programs and the strengthening of the Canadian dollar against the U.S. dollar.

New launches contributing to content growth quarter over quarter included GM's new full size SUV, the Ford Fusion, the Chevy HHR and Impala, the Dodge Charger, the Hummer H3, the Mercedes M-Class and the Pontiac.

Partially offsetting these were high-content programs that experienced lower volumes and/or content, including the Ford Escape and Freestar, Chevy Equinox, Chrysler minivan, the Jeep Grand Cherokee, the Cadillac STS, and the GMC 800 pickup trucks.

Programs that [inaudible] production during the first quarter of 2005, and incremental price concession also negatively impacted North American content.

European production sales grew to $1.4 billion, representing an increase of 4% over the comparable quarter, despite a 3% decline in European production volumes to 4 million units.

This was a result of an 8% increase in European content to $343.

The launch of new programs, the acquisition of CTS, and increased production and/or content on certain high content programs, including the Mercedes B class, the Land Rover/Range Rover Sport, the Opel Astra, the Audi A3, and the Smart For2 all contributed to content growth in Europe.

Some of the key program launches included the Honda Civic, the Chrysler 300 and 300C, the Jeep Grand Cherokee, and the Alfa Romeo 156 and 159.

The positive contributors were largely offset by the weakening of the euro and the British pound against the U.S. dollar, programs that experienced lower volume and/or content in the first quarter of 2006, including the Mercedes A, C, and E class, programs bouncing out, including programs for MG Rover, and OEM price concessions.

Rest of world production sales increased 67% to $55 million, largely due to our continued expansion in Asia, as well as the strengthening of the Brazilian real and the Korean won, each against the U.S. dollar.

Although complete vehicle assembly volumes increased by 35%, complete vehicle assembly sales declined 8% or $86 million to approximately $1 billion.

This is primarily the result of the weakening of the euro against the U.S. dollar and a 1% decline in programs accounted for on a full-cost basis.

This was partially offset by a 214% increase in programs accounted for on a value-added basis.

In summary, consolidated production and complete vehicle assembly sales increased approximately 5% or $282 million in the first quarter.

Global content growth, the strengthening of the Canadian dollar against the U.S. dollar, and the acquisition of CTS were partially offset by the weakening of the euro and British pound against the U.S. dollar.

Tooling, engineering, and other sales were $416 million for the quarter, an increase of 5% or $19 million from the comparable period.

Some of the programs for which we recorded tooling, engineering, and other in the first quarter was the Mini Cooper, the BMW X5, GM's new full size SUV and next generation full-size pickups, and and the Ford Edge and F-series superduty pickup trucks.

Programs driving tooling revenues in the first quarter of 2005 included the Ford Fusion and the Jeep Grand Cherokee.

The strengthening of the Canadian dollar against the U.S. dollar also contributed to the increased tooling, engineering, and other sales in the first quarter of 2006.

Gross margin as a percentage of sales increased 100 basis points from the comparable quarter.

Gross margin in the quarter was 13.8% compared to 12.8% in Q1 of 2005.

The change primarily relates to incremental gross margin earned on program launches, productivity and efficiency improvements at certain underperforming facilities, the closure of certain facilities during or subsequent to the first quarter of 2005 that had incurred losses during the first quarter of 2005, and price reductions from our suppliers.

These are partially offset by a decrease in gross margins earned due to lower production of certain high-content programs, the acquisition of CTS, which currently operates at margins that are lower than our consolidated average, and incremental customer price concessions.

Magna's consolidated SG&A is a percentage of sales increased marginally to 5.3% for the first quarter compared to 5.1% for the comparable quarter, primarily as a result of higher incentive compensation due to the increase in profits quarter over quarter, and a lower proportion of assembly sales to total sales since SG&A as a percentage of assembly sales is lower than the Magna average.

As a result of the increase of gross margin percentage, partially offset by higher SG&A as a percent of sales and higher depreciation, our operating margin percentage annual increased from 4.8% in the first quarter of 2005 to 5.3% in Q1 2006.

Our effective tax rate increased to 30.9% in the quarter from 26.9% in the first quarter of 2005.

This relates primarily to favorable tax settlements in certain jurisdictions recorded in the first quarter of 2005 and a change in the mix of earnings whereby more profits were earned in higher-tax jurisfdictions Q1 2006 than in Q1 2005.

Net income was $221 million in the quarter compared to $189 million in the first quarter of 2005.

The increase reflects higher operating margins due to higher sales, a reduction in minority interest due to the privatization, offset partially by our higher tax rate in the first quarter of 2005.

Diluted earnings per share were $1.99 compared to $1.85 in the comparable quarter in 2005.

This increase in diluted EPS was a result of the net income discussed previously, partially offset by 9% increase in the weighted average shares outstanding, primarily as a result of the privatization.

I will now review our cash flow and investment activities.

During the first quarter of 2006, we generated $427 million in cash from operations, prior to changes in noncash operating assets and liabilities, and invested $225 million in noncash operating assets and liabilities.

The investment in noncash operating assets and liabilities reflects an increase in accounts receivable, due to higher sales, particularly for the month of March, relative to December, as well as the timing of cash collections from customers in the quarter.

Partially offsetting the increase in receivables was an increase in accounts payable and accrual.

For the quarter, investment activities amounted to $379 million, comprised of approximately $167 million, $203 million to purchase CTS, and a $9 million increase in other assets.

I would like to discuss the recent decision regarding our 2006 outlook.

In the past few years, there's been much discussion amongst our management and board regarding the issuance of guidance in general, as well as the guidance to be provided.

Prior to 2004, we provided quarterly and full-year guidance included gross margin percentage, SG&A percentage, and specific EPS ranges among other measures.

Early in 2004, Magna's management and board made a decision to reduce the level of guidance provided to the investment community, and we began to provide only full-year guidance on selected items.

Discussions on guidance have continued at the board level.

Based on the risks and uncertainties affecting the current automotive industry, particularly in North America, we decided not to provide an outlook for the balance of 2006. effectively withdrawing our earlier outlook provided on February 28, 2006.

Finally, we also want to make you aware of our pending changes to stock symbols on the Toronto Stock Exchange.

Commencing May 8, 2006, the Magna class A subordinate voting shares will revert back and trade under the stock symbol MG.A and the Magna class B shares will once again trade under the stock symbol MG.B; these changes result from the TSX discontinuing its symbol extension program.

The stock symbol MGA for the classic subordinate voting shares on the New York stock exchange is not affected by these changes.

This concludes our formal remarks.

Thank you for your attention this morning.

We will now open the call for questions.

I'd just like to point out that both Don Walker and Siggy Wolf, our Co-CEOs, have also just joined us for the Q&A session.

Thank you.

[OPERATOR INSTRUCTIONS.]

Our first question comes from the line of Patrick Archambault of Goldman Sachs, please proceed.

Hi, yes.

Could you just elaborate a little bit what has changed on the margin regarding some of the items in your, in your outlook that caused you to withdraw your guidance.

What I mean specifically, things like resin cost, production, it seems like there were uncertainties in those items before, when you issued guidance in February, and I was wondering, incrementally, what changed to make you guys decide to withdraw that?

There were a number of factors, including the recent discussion concerning the relationships between Delphi and its employees, Tower and the UAW, and GM in general, so the decision,was made based on the uncertainties and risks that everyone in the industry faces.

We would discontinue providing guidance for the balance of 2006.

Okay.

But -- didn't those sort of situations, you know, preexist before February?

Well, I think it's the situation continues to develop, Patrick, and particularly Tower and Delphi come to some kind of resolution.

It's becoming clear in terms of what the relative risks are.

And that's why we've chosen to take this action.

Okay.

Could you just delve into a little bit more detail in terms of the operational improvements that you saw at specific facilities which you highlighted as behind your gross margin expansion?

Sure.

I think if you look at what's happen on a year over year basis, in 2005, we talked about the substantial investment in a number of new facilities.

We talked about our facilities in Mexico, the Sonora facility supplying the Ford Fusion, we talked about our Bowling Green facility, supplying the Explorer and in tune to supply the frames for the F250 and F350, superduty pickup trucks, as well as a facility in France supplying Peugeot.

The other launch that we had last year, we're making substantial investments, is for the launch of a couple of Mercedes programs, the M class and the G class.

As those programs have ramped up from a revenue perspective, our launch costs obviously have come down, and that's contributed to operating profit and gross margin on a year over year basis.

Some of the other things that have impacted margin is improvement at underperforming divisions, we've been talking about for some time, we have been focusing on underperforming divisions to make them more efficient.

Generally, across the organization, we've seen some improvement.

Offsetting some of that is some of our major program, our high-content programs, particularly the GMC800, the U204 and the Chrysler minivan, where production was lower relatively speaking in this quarter compared to a year ago, that had a negative impact on margin.

And just overall higher volume in a number of other matters resulted in higher margin for the quarter.

Okay.

Thank you.

And finally, is there any update to the, you know, outlook and potential timing of a new assembly facility for Magna Steyr?

You know, we continue to talk to various OEMs about the possibility, not just here in North America, but the rest of the world, but no specifics relative to timing or products.

So we'll obviously be keeping you informed.

But I think at last, sort of contact it seemed like you, North America was where the likely site would be, am I correct in thinking that?

I wouldn't pin it down just to North America.

I think there's opportunities in the rest of the world too.

All right.

Thank you.

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

Good morning, everybody.

Good morning, Rod.

Couple questions.

Can you give us what the acquisition contribution was to the CPV?

Or to sales?

Sure.

And turning to North America, the impact on content per vehicle was $2.

CTS has a small facility in the southern United States, in Kentucky; there was a bigger impact in Europe where the content from the acquisition was about $12.

Okay.

And is this acquisition still expected to be, you know, sort of a small contribution this year?

Bottom line?

Yeah.

It's going to be a pretty small contribution.

We think that the reasons for taking on CTS, you know, we believe that convertible tops are going to continue to penetrate the marketplace, and with our complete vehicle expertise at Magna Steyr, and our experience in closure systems with our closures group, bringing in CTS to the family certainly gives us the substantial advantage in marketing a complete vehicle competency.

What was the currency impact of North America and European CPV?

And how did that currency affect the margin?

the, from a CPV standpoint, in North America, I'll just run through the reconciliation of content growth.

Our content last year in North America was $718.

We had content growth of $16 and CTS was $2 that I talked about earlier, translation accounted about $23 of content growth.

That bring us to content to $759 for the quarter.

The overall impact on bottom line as we talked about in the past, Rod, it's really difficult to come to grips with.

And the reason for that is, there are a number of foreign exchange contracts in place, and how you translate, how you have a translation impact affect the bottom line.

We're not quite sure, so we haven't talked about the impact of translation, either positively or negatively, for years on the income statement.

And European CPV?

In Europe, last year our content was $319 in the quarter.

We had some very strong organic growth, excluding translation of $38.

The -- the net acquisitions was about $12 because we also made another acquisition of a company called [Burke], that added about $1, but we also disposed of something, so net acquisitions was $12.

But translation was a negative impact of $26 per vehicle.

So some of the real good growth and content in Europe is being hidden by the translation impact.

Is there any reason just lastly that you would expect the CPV growth you're seeing here, this organic growth to moderate just based on what you're looking out at in terms of production mix or your exposure to various platforms?

Well, I can't comment since we've -- we're not going to give guidance without the 2006.

I cannot specifically comment on what we believe content per vehicle is going to head towards.

I think you need to make your own assessment on a couple things.

Number one, overall historic performance and what we've done on a content per vehicle standpoint, and number two, we've talked about the various programs that we're involved in, the new launches in some of our key platforms, I think you could probably come up with a good guess on coming up with your on conclusion.

Okay.

One last thing, did you mention what the raw material impact was for the quarter?

No, I didn't, but overall it was quarter over quarter insignificant impact.

We've seen a little bit of moderation in steel pricing quarter over quarter offset by increased revenue pricing.

Great.

Thank you.

Our next question comes from the line of Ron Tadross from Bank of America Securities, please proceed.

Good morning, everyone, can you hear me okay?

Yes.

Can you just go through, if you don't mind the content on some of your top programs, specifically, the Chrysler minivan, the GMT900, the Ford F150.

Vince is just pulling out some background material.

And --

All right.

Maybe as he's doing that.

I guess, you know, you guys have, you've expressed some dissatisfaction with the multiple on your stock.

I was just wondering, have you considered in the context of pulling guidance, maybe sending the message that the predictability that the earnings is not as good, and maybe that could hurt the multiple?

Ron, as you know, we're not very happy with our multiple based on our performance, but the reason we we're not providing guidance as we discussed earlier, given the risk and uncertainties that exist today, particularly in North America, the decision was made to pull guidance.

All right.

So you're, okay, and I mean, do you think -- all right -- well.

So you considered that.

Do you have those numbers, Louis?

Yes, I do.

If you look at our top 5 in North America, the GMT900 is going to come over at just over $1200, Chrysler Minivan at about $1900, Ford escape contributes about $1800.

Okay so the F-150 is not a big one?

It's about 6th or 7th -- the F150, we're about [$850], Ron.

Okay.

All right.

And then just one other thing, I mean, on some of the other calls we've been on, you know, it seems like GM and Ford, I'm sorry Ford and Chrysler, at least, are being more understanding about commodity costs and some suppliers are showing better performance from restructuring.

Do you guys kind of see it that way?

It seems like in that regard, the predictability of earnings is actually getting a little better.

Well, you've seen the results of incentives in the first quarter, Ron, the pricing pressure is still out there.

And so we haven't seen a great willingness on the part of those OEMs to give us some relief on raw material increases.

I'd say that the environment is a touch warmer than it was last year, but we haven't seen anything discernible from a relief standpoint.

Okay.

So you think it might be they're helping out some of the suppliers that are in more distress, more so than the guys like yourself that are doing better?

Without knowing the specifics, you could make that assumption.

Okay.

Thanks a lot.

Our next question comes from the line of Michael Willemse from CIBC World Markets.

Please proceed.

Good morning.

Good morning, Mike.

Just wanted to get your color on takeover business opportunities and does it continue to increase the opportunities?

Or you starting to see some of the other suppliers starting to get their house in order?

Or if you could comment on that.

Well, I think it's the companies that are closing out their restructuring, such as the Towers and the Collins & Aikmans, here in North America and Delphis, we're finding it a clear path on some of the potential takeover business.

You know, a lot of this, a lot of the businesses tied up in the legal proceedings, associated with those restructuring.

So as they head toward resolution, it becomes clearer what the path is for potential takeover business.

Would you say that opportunities are generally continuing to increase?

I'd say modestly.

Okay.

And this Shin Young Metals, how much was the investment?

For the 32% interest?

The -- the total investment was approximately $20 million, U.S.

Okay.

And what's the annual sales of company?

Of Shin Young?

It's a private company, we're going to be equity accounting, so we're not privileged to disclose that information.

Okay.

That's fine, thank you.

Thanks.

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

Please proceed.

Thanks, good morning, everyone.

Good morning, Chris.

A few items.

First, was there anything, Vince, in the first quarter that was unusually stronger than normal or kind of abnormal from a seasonal standpoint that would suggest the first quarter was maybe better than it should have been for any reason?

No, there isn't anything out there that sort of pops up, that there was any good things.

There was some things that I look back that we've done a little better than expected.

There's some things we've done not as well as we expected.

You know, we had a solid quarter in terms of sales, and I think, what if you sort of step back from 50,000 feet away, what's happening, generally, is the investments we've been making over the last couple of years, we've been investing in capital and new facilities are starting to generate some returns.

Okay.

Mark, in previous quarters, you had spoken what seem to be very pretty confidently about your opinion that GM and Delphi would work things out.

Do you still feel comfortable that these guys would come to terms?

Or has your view on this topic changed at all?

It hasn't changed, Chris, but I think you're going to see more rhetoric just because of the timing of union elections and things like that.

But, you know, the timetable still late summer, early fall that they've got to resolve, and I think certainly the understanding of the importance of a settlement without a production disruption is well understood by the three parties as well as the industry.

Okay.

And then, lastly, I think, Vince you mentioned in your comments about some of the -- some of the negative factors in North America that included lower volume on some programs, but also some programs where content was lower, can you give us some examples of where you've lost content, or what were you referencing with that comment?

There's always a few programs here and there, Chris, where content might decline, but there aren't any in our top programs that we can highlight for you.

Okay, thanks, everybody.

Our next question comes from the line of from Nick Morton from RBC Capitalmarkets.

Please proceed.

Good morning.

Good morning, Nick.

In today's Toronto newspaper, there's an article dealing with conversations with the UAW, and I guess the CAW, and Magna's willingness to accept the union into your plants, and I was wondering if you could elaborate on that.

It's Don Walker here, and I'll answer that.

Frank briefly touched on that at the end of the annual meeting in the press conference, he was asked a couple of questions, and what he explained was we've been having some philosophical discussions which UAW and the CAW in their different stages; what Frank is interested in doing is coming up with a different model, where industry and the unions can work together.

And we've had a number of facilities unionize for the past number of years, specifically in the States, with a very progressive contract, which has worked out fairly well, and Frank was having discussions of taking it to the next step.

Something he believes to protect what we've got and our plans, but have the better working relationship, less adversarial, no strikes no lockout, something all of our customers would be comfortable with, and we think would be a win-win.

So at this point in time, the discussion's probably a bit premature; before we did anything we'd obviously have to make sure we're comfortable, the union would have to make sure they're comfortable.

We'd discuss it with our customers, and ultimately our employees, but that's what we would have done anyway.

So philosophical discussions, must say, there have been fairly congenial on both sides, we'll see what comes of it.

But that's the discussion was about.

Thank you.

Just following up on that with the Delphi situation going to the courts, I guess, next week again.

What impact might that have on your company?

How are you planning?

Well, I think the court proceedings are on a certain timetable, and my personal view is that the judge will, assuming that there is a final agreement between Delphi, GM, and the UAW, will probably grant another extension.

I don't see the judge making a precipitous decision at this point.

If there was a disruption, the impact of Magna at this point, it's hard to determine.

It really depends what programs are impacted, how long the disruption lasts, whether it's just one customer or two customers, and truthfully, that's one of the reasons we made the decision not to provide guidance.

It's not determinable if certain events take place.

Thank you very much.

You're welcome.

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

Please proceed.

Good morning, in the chairman's message in the annual report, there was some discussion on diversification at Magna, and I understand at the press conference following the annual meeting yesterday, there were some -- that question was discussed.

I was just wondering if you could provide for us your thoughts and intentions with respect to this particular topic.

Well, Peter, why don't I just reiterate what Frank said at the press conference, and what Frank said at this time, there are no plans to make an investment in MEC, and there aren't any plans at this time to look at any other nonautomotive activities, that was his statement.

Okay, I understand there was some further discussion, though, you were thinking of introducing Magna branded parts into the aftermarket.

And I believe he's made further comments on applying the particular technologies that you have at Magna that may have applications in other industries.

Yeah, there was a brief discussion that we are entering the after market, a couple of Magna branded products, we are in the aftermarket in a small way right now.

We're actually in a small way selling some of our products into nonautomotive applications, like tiles and speakers, things like that, so a brief discussion about a couple of new products, which we are bringing into the market and aftermarket, but they're automotive products.

We didn't discuss, as I recall, anything else automotive.

But we have in the past, and very generically touched on the fact that we do have a lot of technologies, a lot of program management engineering expertise, would be applicable to other industries, manufacturing industries, however at this point in time, we're sort of just exploring opportunities for good return on investment.

We're not making any major moves anywhere

Okay.

And just one other question, you closed one North American plant during the quarter, can you say what plant that is?

You're referring to the restructuring charge, Peter?

Yes.

And I forget where it is, somewhere you mentioned that you did close a facility.

What we did, Peter, is we vacated one of the offices that was being occupied by a former public subsidiary, and we've got a commitment there to lease the facility for a couple of years.

We took a write down for the difference, the present value of the difference between the rents we need to pay our landlord, and what we're going to receive from subletting the property.

And that amounted to $2 million U.S.

Okay.

Is the landlord MI Development?

Yes.

Okay, that's all I have, thank you.

Our next question comes from the line of David Tyerman from Scotia Capital; please proceed.

Good morning.

Good morning, David.

Question on the European margins, they saw a pretty considerable sequential increase, but we're only up modestly year over year; is this the seasonal pattern we should see in that particular segment?

David, we actually saw some pretty nice improvements out of our Tacoma Europe business.

Okay.

Big driver of our growth there.

Sequentially.

Okay.

So it sounds sustainable, then?

Do you think there's more there to be had?

David, we -- we're focussed on increasing margin across the company every day.

Right.

But aside from the generic do you think that there's -- that's a huge increase sequentially.

David, we're not going to specifically comment on the second or third or fourth quarters, based on our decisions not to provide guidance.

Okay, fair enough.

And then North America on the reverse, you had a sequential decline, any particular reasons there?

That we should be thinking about going forward?

Just looking at the North American numbers.

Yes, well, it's 6.9 in Q4, and 6.5 Q1, I think I've got the adjustments right.

I can't off the top of my head, David, think about why margins sequentially declined.

Okay.

Different question on FX: the C-dollar is flying right now, and I guess just about everything is flying against the euro.

Any thoughts on how this affects you going forward.

I would think that a couple that could happen here.

You might get margin compression, many of your competitors don't necessarily have plants in Canada, so that could be a factor, and then, obviously, you can get translation gains going forward, any thoughts on these factors?

I guess with respect to the euro to U.S. dollar, if that does continue to strengthen, we're going to have some translation weighing on the revenue side as well as P&L side, that's fairly straightforward.

With respect to North America and Canada, if the Canadian dollar continues to strengthen or stays at the level it's at, that will have a positive impact on sales.

How that translates from a bottom line, David, as I talked about earlier, it's really difficult to come to a conclusion on that.

What we're focused more -- when currency start to move, are we still competitive in Canada?

That's the bigger question, and when you sit back and think about our input to products we produce in Canada and ship to the United States, the biggest input is commodities or raw materials, you know, roughly about 50%.

So we're paying both prices for those.

The only component really impacted by foreign exchange movements is labor.

Labor is a smaller component, and utilities.

But over time, utilities gets a little pricy.

We believe we're still competitive in Canada with their plant.

I remember a lot of our plants are adjacent to some pretty huge OEM facilities, so transportation costs do become a penalty if we start to ship over larger distance.

This is Don Walker.

I think that one of the big issues that the long-term "new projects", where do we think the Canadian dollar is going to be, and not directly impacts "typically ongoing" contracts.

As Mark touched on earlier, as we see some of our competitors going into restructuring, they are protected, they get short-term price increases as they come out of court protection, the customers have the ability to move business around.

So on takeover business, the increased dollar have a immediate impact on what we're quoting for takeover business.

We have plans for the States, as well, long-term.

I don't think that's going to be healthy for Canada if the dollar stays up there, since we're a manufacturing company, but we have facilities all over the place.

But this is the thing that we would call other areas if the dollar stays strong.

David, just in terms of European margins sequentially, the other thing is that our production sales increased and we do see declines in both tooling and assembly sales, the current lower margin percentages, so that mix overall in our sales is going to be one of the reasons for our increase.

Right.

Okay.

That's helpful.

Last question.

There's the discussion floating around in the investment community, at least, and perhaps elsewhere that the BMW X3 is going to be pulled out of Steyr -- can you comment on that?

Yes, with this contract, no decision about BMW is made at the time being.

We have still, let's say about 14-15 months waiting for such a decision, but I think that is speculation, we do a great job and I think there are enough opportunities out either go for this or BMW has other programs, as well.

And nobody in the industry has a right to get the lifetime contract, there are new contracts which we get, there are contracts which might run out, but not seem to be, how should I say, nervous about it.

Okay, just one other comment on margins in North America and Europe sequentially.

Beginning in 2006, we changed the basis of charging out the Magna affiliation fee.

Right.

We moved from sort of a sales-based fee to more of a value-added fee to make the fee more equitable across the groups.

The impact of that, three impacts.

Number one, when you look at the corporate segment, bunch of fees being paid to Magna Corporate, and there's also been a rebouncing a little bit between North America and Europe with a reduction in the overall fee in Europe and an increase in the overall fee in North America.

So that's -- also will have positive or negative impact on gross margins and operating margins by region.

And that will continue too for the balance of this year.

Right.

That's helpful, thank you.

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

Please proceed.

Vince, just on the forbearance agreement, I know it's 20% of equity can be invested in non-automotives, but, so just a little clarification, if Magna decides to purchase 100% of a nonautomotive business, is the investment calculated on an enterprise basis or on the equity purchased?

It will be -- got to get our lawyers to check, I believe it would be our net investment so the cash that goes out the door.

Okay.

Secondly, there was a related party transaction note in your financials about a transaction with MEC, can you just talk about what that was?

It was a purchase of some vacant property in the United States that we're thinking of putting up a research and development center.

It's a pretty nice parcel of land.

We did receive third party evaluations, this was brought up to our board and management recommended the purchase and the independent members of the board concurred with management's recommendation.

Okay.

And Don, just -- you brought up competitiveness, and I'm just wondering, Magna's enjoyed competitiveness for a couple -- or a few reasons.

One is a 60-cent dollar for a long time and the other one is no unions.

We're now with a 90-cent Canadian dollar plus, and you guys are talking about allowing unions to come into your plant.

This seems like a major change in philosophy for Magna and other part suppliers seem to be trying to terminate union agreements.

I'm just wondering, you know, can you explain a little more to the rationale on that.

We have in the past, the Canadian dollar first of all, We've got plants in the States, plants in Canada, a number of plants in Mexico, as well.

And Vince mentioned earlier, a lot of our plants are geographically close to assembly plants, those really are, you've got to be competitive obviously, but those sort of dictate what your produce in those plants.

The core manufacturing plants we'll quote, we always have quoted against each other internally, and if a plant in Mexico is more competitive from Canada and the States or vice versa, then that's the one that wins the business.

So over long-term if any currency gets a lot stronger, you would expect a tendency that they would win less future business, and it would go to where the plants are most competitive, and the dollar can have an impact on that.

It may change in the future, where we invest our new plants, but we'll have to wait and see how competitive each plant can quote.

On unions, we've had a couple of unionized facilities that got decertified, we've got 3 unionized facilities now in Canada, [indiscernible] the most of our competitors are unionized, as well.

We've got 8 facilities are unionized in the States, we've got a huge one in the [indiscernible] -- but the other facilities where we brought the union in under what we call a model contract, they've been quite successful and quite competitive, and the working relationship has been quite good.

So we're not going to bring in the union with the traditional collective bargaining agreement.

What we're contemplating is sort of taking our model of contract a step or a few steps further.

And if we can come to an agreement on both sides, that really protect everything we've got in our company today and to keep the people fully engaged, then we would consider it.

And whatever we do, we'd have to go to our employees and make sure they feel comfortable; they'd have to vote on it anyway.

At this stage, we're not going to do anything to make ourselves uncompetitive on a go forward basis.

But, Don, isn't there a risk, you're trying to break new ground with a new model.

Isn't there a risk that the deal doesn't get done for whatever reason? and employees wondering, maybe we should reconsider, you know, our current -- the current structure.

I don't think so.

We have very good relationships and very open communications with our employees and all of the divisions.

And if we go forward and as we go forward in any discussion, we'll keep everybody apprised to what's going on.

We have a lot of people who say even if we recommend it, they don't want to have an outside party in the plant.

That could be a hurdle even if we wanted to go ahead with a new model.

I don't think we're going to be confusing employees.

Employees are very aware of what companies are being successful and if you have an adversarial condition in the plant, it means anything but job security.

Whatever we do, it has be something we agree with, and our employees have to agree with as well, and we go through an education process and also a discussion with them.

Okay.

And thanks, Don.

And, Louis, a couple of quick housekeeping questions.

What's the content per vehicle on the Fusion and the derivatives.

$1,000. $1,000 in total.

And the X3 when is that set to expire? the current contract?

Which contract? the fusion contract?

I'm sorry, the X3, the assembly contract in Graz?

When does the X3 expire?

2009.

Okay.

Thank you very much.

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

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

Please proceed.

Good morning, guys.

I got on the call a little bit late here, but I was wondering if you could talk about the stress in tier 2 and 3 supply base, and on the flip side and more importantly, the opportunity to outsource more of your lower value add products and focus more on your product where you have a technology advantage.

Okay I'll comment on that.

It's Don Walker.

Tier 2 and 3, I think are going through a lot of stress, raw materials put pressure on them.

A lot of the tier 1 suppliers, the big tier 1 suppliers going into court protection are obviously putting stress on them, as well.

We're producting our subsuppliers as best as we can.

We've had a number of cases where tier 2 or tier 3 have gone under and we've had to go in and move tools, or go in and bail them out, which has been a painful process.

It's not just us, everybody in industry has seen that and some are tier 2 to us and tier 1 to the car companies.

I think we'll see a shakeup in the lower tiers like we have been in tier 1 business.

On a go-forward basis, we always take a look and make-buy decisions and our strategy has been over the last couple of years to, to move subcomponents into either outsource them or move them to areas where we can get the best price on a global basis, if we don't do that, then quite frankly our major products and modules we supply to customers become uncompetitive.

That's why we've seen over the last decade, movement down into Mexico, and the last 5 years have moved some of it to be produced over in Asia; typically, the general managers make a decision of what they're producing in-house, and typically, they're aware of world car prices, and it doesn't make to produce internally, and we already outsource it.

So it means we may be moving some of our outsource business globally.

We've also started a Magna-wide purchasing initiative, which is the first time ever, really that Magna has had the ability to figure out what we're buying from all of our different facilities and figure out the lowest costs.

And we're seeing some good opportunities to reduce cost and help offset some of our pricing reduction requests.

So it's an ongoing process.

It will continue for the next decade and beyond, and we have to watch our subsuppliers to make sure as we source them, they are healthy so they don't go under and we don't have to go and bail them out.

So I think there was a last question I couldn't understand the last part of the question.

It sort of -- is there an opportunity to get ahead of the curve with this outsourcing and maybe outsource more of the lower tech stuff and focus more on your higher tech products?

Specifically in your core competency of vehicle assembly, you've done this stuff before.

I wondered for there was future margin opportunity there?

I think it's business as usual.

This is nothing new, we've been doing it for years, and we'll continue to do it and we watch new emerging markets, and are they competitive, will they be competitive long-term?

We have a number of factors we look at from foreign exchange to inflation, to skill.

It's an ongoing process.

Thank you very much.

Okay.

Well, we'd like to thank everyone for participating in our conference call this morning.

These are uncertain times for our industry.

But we're continuing to focus on driving costs out of the business, improving our underperforming divisions, and launching new programs flawlessly.

So we'll talk to you next quarter.

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 lines, have a great day, everybody.