Magna International Inc (MGA) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Magna International second quarter 2006 results conference call.

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

Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Tuesday, August 8th, 2006.

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

Please go ahead, sir.

Thank you, good evening, and welcome to our second quarter 2006 conference call.

Joining me today is Vince Galifi, Executive Vice President and Chief Financial Officer; and Louis Tonelli, Vice President, Investor Relations.

Earlier today, our board of directors met and approved our financial results for the second quarter, ended June 30th, 2006.

Our board also declared a quarterly dividend of $0.38 per share payable on September 15th, 2006, to shareholders of record on August 31st, 2006.

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

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

Our address is www.magna.com.

This evening, I will start with some thoughts on the second quarter, including highlights.

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

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

But before we get started, and just as a reminder, this presentation may contain forward-looking statements within the meaning of applicable securities legislation.

Our actual results could be materially different from those expressed or implied in these forward-looking statements.

We have considered and applied certain risks, uncertainty and assumptions in making these forward-looking statements, which are discussed in detail in today's press release in attached MD&A, including by reference our most recent information form and annual report on form 40-F.

Please refer to these documents to fully understand these risks, uncertainties, and assumptions.

During the second quarter of 2006, we continued with actions necessary to further strengthen our competitiveness going forward.

We followed through on actions that we commenced in 2005 and took new steps in one additional facility, the reduced cost.

We incurred restructuring costs of $25 million related to 5 facilities, three of which are in North America and two in Europe.

Four of those facilities are or will be closed in the next year.

In addition, we disposed of two non-core power train facilities in the quarter incurring losses on sale of 12 million and 5 million on the facilities in Europe and North America respectively.

While these actions are always difficult, we believe they'd leave us better positioned for the future.

We also experienced a challenging quarter in our European interiors business.

This business accounts for a significant portion of the decline in our European reporting segment in the second quarter.

The challenges relate to a number of factors, including lower volumes on certain key programs, program launch costs, program cost overruns, and other inefficiencies.

In the UK, where much of the negative variance was generated, we recently installed new management.

And that management has completed a thorough operating and financial review of the business.

While a portion of the second quarter earnings declined in our Europe segment was a result of this financial review we do expect some of the operational issues facing our European interiors business to continue in the coming quarters.

Unfortunately, the difficulties we are experiencing in our interior's business are compounded by our inabil -- inability to immediately tax benefit the losses being incurred.

Particularly losses in the UK and in Spain.

However, we expect that with the management changes made and action plans in place, we will be able to get the business back on the right track for the longer term.

Now aside from the unusual items in the quarter, as well as the ongoing difficulty in our interiors business, we are pleased with our second quarter earnings as a number of our business units reported strong results despite relatively flat overall production volume in our key markets and lower production share by a number of our larger customers.

As always, it is the efforts of our employees that allow us to thrive despite very difficult industry conditions.

Other recent highlights of note include the following.

In April we acquired a 32% equity interest in Shin Young Metal Industries Seoul, known as Shin Young, a Korean-base supplier of major stampings, welded assemblies and tooling.

Shin Young operates five manufacturing facilities in Korea and is a tier 1 supplier to Hyundai.

Hyundai and Shin Young also jointly own a facility in Alabama.

And we anticipate that this investment may provide us opportunity or new business in Korea and elsewhere in the world as Hyundai continues to expand globally.

In May, six of our operating divisions won Ford Motor Company World Excellence Awards for exemplary performance during 2005.

The six awards were the most given to any one supplier out of a total of 60 World Excellence Awards presented to Ford suppliers globally.

And in June, our Magna Star unit was rewarded a JD Power Gold Plant Quality Award in Europe for our vehicle assembly facility in Graz, Austria.

It is the first time this award has been given to an automotive supplier.

The award recognizes that our Graz facility produces vehicles with the fewest number of defects as compared to other European assembly facilities.

This is truly a remarkable achievement considering the complexity involved in building eight different vehicles for three different customers at this one vehicle assembly location.

And last week, we announced that we had signed an agreement to acquire Porsche's North American engineering services unit, called Porsche Engineering Services, or PES.

PES will be integrated into our Magna Star North American operation.

The acquisition of PES will allow us to offer our customers a broader range of engineering services, particularly in the North American market.

Finally, late last week we entered into an agreement to acquire two facilities from Fesec (ph) for $58 million.

The facilities, which manufacture electronic components including ECU's, enhances our electronics capability.

A product area, in which we continue to invest for the future.

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

Vince?

Thanks, Mark, and good evening everyone.

I would like to review our financial results for the second quarter ended June 30th, 2006.

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

Appendix A in slide package accompanying our call today includes a reconciliation on certain key financial statement lines between reported results and results excluding unusual items for Q2 2006 and Q2 2005.

In the second quarter of 2006, we recorded unusual items related to restructuring the sale facilities and a future tax recovery as a result of a reduction in future income tax rates in Canada.

These items resulted in a $42 million reduction in operating income, a $23 million reduction in net income, and a $0.21 reduction in diluted earnings per share.

Note that we expect to incur additional restructuring charges during the balance of 2006 in the range of $5 to $10 million related to activities that were initiated in 2005.

Unusual items in the second quarter of 2005 resulted in a $20 million increase in operating income and a $16 million increase in net income or $0.13 per share.

The following second quarter earnings discussion excludes the impact of unusual items from both 2006 and 2005.

In the second quarter, consolidated sales increased 9% to a record $6.4 billion.

North American production sales grew by 12% in the second quarter to $3.3 billion.

This was the result of a 12% increase in North American content to $784 for the quarter.

North American vehicle production was essentially level at 4.1 million units.

Key drivers of the growth in content were the launch of new programs, the strengthening of the Canadian dollar against the U.S. dollar, increased production on vehicles including the Mercedes M Class and the acquisition of CTS in February of this year.

New launches contributing to content growth quarter over quarter included GMs new full-size SUVs, the Ford Fusion, the Chevy HHR and Impala, the Doge Charger, the Ford Explorer, and the Pontiac Torrent.

Partially offsetting these were high content programs that experienced lower volume and or content, including the Cadillac SCS, the Jeep Grand Cherokee, the Chrysler Pacifica, and the Ford Escape.

Programs that ended production during or subsequent to the second quarter of 2005, and incremental price concessions also negatively impacted North American content.

European production sales grew to $1.4 billion, representing an increase of 8% over the comparable quarter despite the 1% decline in European production volumes to 4.2 million units.

This was the result of a 10% increase in European content to $340.

The acquisition of CTS, the launch of the Honda Civic and Peugout 207, and increased production on the Mercedes B Class, all contributed to content growth in Europe.

These positive contributors were partially offset by programs that experienced lower volumes and or contents in the second quarter of 2006, including the Mercedes A and C Class and the Chrysler Voyager, programs that ended production during or subsequent to the quarter, second quarter of 2005 and OEM price concessions.

Rest of world production sales increased 56% to 67 million, largely due to our continued expansion in Asia, increased sales at a closure systems facility in Brazil, and the strengthening of the Chinese and the Korean currency, each against the US dollar.

These factors were partially offset by the closures of an existing facility in Brazil and an engineered glass facility in Malaysia during or subsequent to the second quarter of 2005.

Complete vehicle assembly sales increased 2% or $21 million to approximately 1.1 billion, primarily as a result of a 5% increase in programs accounted for on a value-added basis.

Particularly the Chrysler 300 that launched in the second quarter 2005, and the Jeep Commander that launched in the first quarter of 2006.

In summary, consolidated production and complete vehicle assembly sales increased approximately 10% or 513 million in the second quarter.

Global content growth, the strengthening the Canadian dollar against the U.S. dollar, the acquisition of CTS, and increase assembly sales were the most significant contributors to this growth.

Tooling, engineering, and other sales were 539 million for the quarter, essentially level with $541 million in the comparable period.

Some of the programs in which we reported tooling, engineering, and other sales in the second quarter were GM's new full-size SUVs and the next generation full-size pickups,. the Mini Cooper, the BMW Z4, the Freightliner P Class the Ford Edge, the BMW 3 series and the Suzuki X27.

Programs driving tooling revenues in the second quarter of 2005 include the Ford Fusion, the Mini Cooper, the Mercedes M Class and the Hummer H3.

The strengthening of the Canadian dollar against the US dollar also benefited tooling, engineering, and other sales in the second quarter of 2006.

Gross margin as a percentage of sales in the quarter was 13.6% compared to 13.5% in Q2 2005.

The increase in gross margin as a percent of sales was primarily -- primarily the result of productivity and efficiency improvements at certain facilities, price reductions from our suppliers, an incremental gross margin earned on program watches and production volume increases on certain program -- programs.

These were largely offset by inefficiencies of certain underperforming facilities, particularly at certain of our European interior systems facilities, a decrease in production volumes for certain programs, and incremental price concession.

Magna's consolidated SG&A as a percent of sales for the second quarter of 2006 was unchanged from the comparable quarter at 5.4%.

As a result of the gross margin percentage increase, level SG&A as a percent of sales and higher depreciation, our operating margin decreased from 5.2% in the second quarter of 2005 to 5.1% in the second quarter of 2006.

Our effective tax rate increased to 34.6% in the quarter from 31.2% in the second quarter of 2005.

This relates to an increase in losses not benefited primarily at certain interior systems facilities in Europe, partially offset by change in mix of earnings whereby proportioning more operating income was earned in jurisdictions with lower income tax rates and a reduction in income tax rates in certain jurisdictions.

Net income was 216 million in the quarter compared to 209 in the second quarter of 2005.

The increase reflects higher operating margins due to higher sales, offset partially by higher tax rates relative to the second quarter of 2005.

Diluted earnings per share were $1.96 compared to $1.93 in the comparable quarter in 2005.

The increase in diluted EPS was a result of the net income discussed previously, partially offset by a 1% increase in the weighted average shares outstanding.

The increase in the weighted average shares outstanding is primarily the result of the privatization and the exercise of stock options subsequent to the second quarter of 2005, partially offset by lower average trading price for our Class A Subordinate Voting Shares, which result in pure options becoming dilutive.

I will now review our cash flows and investment activities.

During the second quarter of 2006, we generated 415 million cash from operations prior to changes and non-cash operating assets and liabilities and invested 141 million in non-cash operating assets and liabilities.

The investment in non-cash operating assets and liabilities primarily reflects an increase in production and to on receivables.

For the quarter, investment activities amounted to 222 million compromised of approximately 179 million in fixed assets and a 43 million increase in investments and other assets.

This concludes our formal remarks.

Thank you for your attention this evening.

We will now open the call up for questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of John Murphy of Merrill Lynch.

Please go ahead, sir.

Good evening, guys.

Good evening, John.

I had a couple questions.

First just on the acquisition front.

Clearly there's a lot of assets out there that are available, but you seem to be doing some small strategic acquisitions.

I was just wondering if that's a pace that we should expect to see, and if there's a lot of these other small acquisitions out there, like the electronics and Porsche Engineering that are really attractive that might be something you want to build on as opposed going out there and buying some of these distressed assets?

I don't want to specifically comment sort of potential future acquisitions, certainly having the strength in the balance sheet that we do have, we see every opportunity out there.

Let me remind you what our overall acquisition strategy is.

One is to focus on acquisitions that either expand or complement our existing technology base and the acquisition that we announce today, the perfect acquisition is one of those where it actually expands our electronics capability., particularly, in Europe.

You know to the extent that we can make an acquisition to better diversify our customer base, that's something certainly be interested in.

Certainly, when we have a new contract and we have some full capacity to the extent that we can buy a facility or a number of facilities to eliminate our capital spending, that's certainly something we will do.

And finally we'll look at transactions that financially are attractive.

But that's been our acquisition strategy for some time.

And we'll continue to look at opportunities and if they make sense, we'll think about pursuing with them.

Okay.

And then second question, I just wanted to ask about Magna Star's potential here in North America.

Because the Porsche Engineering acquisition seems like that fits well and gives you some good engineering capability here in North America.

And there were also some comments you guys were making today about being more receptive to the UAW.

Are you getting closer -- I'm not sure if you can comment on this, but are we getting closer to a potential facility here in North America and those UAW talks that you guys commented on, are those -- have anything to do with the tier 1 contract?

Or is this a separate Mag -- would be a separate Magna contract?

Well, we took on the Toledo paint shop for DaimlerChrysler that's building the new Wrangler, and John that's -- that's really kind of a first step to getting toward a more complete assembly facility in North America, but we have not progressed yet to the point where we're ready to formalize a comment relative to a North American assembly facility.

But clearly it's in our line of sights to eventually get to that model.

And as the market continues to fragment and the growth of niche vehicles in the marketplace continues to expand, we certainly see that the opportunity for a facility like Graz in North America is forthcoming.

And your discussions with the UAW are just between, I don't know if you can comment, are just between Magna and the UAW, currently?

Well, you can include the CAW, as well.

Discussions are very preliminary in nature.

Okay, and then thirdly on the -- the interior business.

Clearly you're having some problems over in Europe.

Just wondering on your general philosophy there.

As that segment of the vehicle seems to be coming under pressure and you're having trouble there, is that a segment you want to continue to push?

Might that be something you would consider divesting going forward?

John we said we'd comment on our European interiors business in the quarter, we have a number of new program launches, including the new Mini, a couple of Honda programs and a program for -- for Toyota.

And, you know, we had anticipated some launch costs.

These costs are more than what we were expecting internally.

You know we also have some business in Spain where we're having some -- some operational inefficiencies.

We believe that once we get through the launch of the Mini and the launch of the other programs, that we've got a business that is worth maintaining in the family.

Okay and then just one last question n the management change at Dacoma (ph).

You've been --, you've been relatively successful -- or happy with that -- that change that's occurred there.

Is that kind of what you're going to see in the interior business in Europe?

Do you expect to have the same experience there?

We -- John, we actually did have a management change in part of our terior -- interiors business in Europe in the last -- in the last quarter, in the last I would say last month.

And as a result of that we've gone in and done some financial and operational review by the new management team.

So we're hoping as the year progresses that we're going to see some improvements.

But we don't expect an immediate turn around of the operations or the losses in our European interiors business.

Probably for the balance of the year.

But you made a change last year in Dacoma, is that correct in Europe?

We made a change last year in Dacoma.

That's correct.

I'm just sort of -- that's developing pretty well for you there?

In terms of the, I guess the Dacoma business in Europe, there's, some of the business is operating quite well.

We did have a number of underperforming divisions.

And I would say that we now have stabilized the operations and we've got a base to start moving forward.

And we are seeing some improvements.

So we're encouraged with what we're seeing, but we're not over the losses at this point in time in some of facilities in Dacoma, Europe.

Great, thanks a lot, guys.

Our next question comes from the line of Pat Archambault.

Please, go ahead.

Yes, hi, good evening.

Good evening.

Just wanted to follow up on John's question on acquisitions.

To be more specific, there's been a lot of speculation in the last few days that Visteon may be on the block and Magna has been clearly mentioned as a likely potential buyer.

Can you rule out that you're not looking at Visteon or a Visteon-type asset, that it might be potentially interesting to you?

It's Vince, we're not going to comment on any sort of hypothetical transaction.

That's been our policy and it will continue to be our policy.

When we have an acquisition to report, we will report on it.

Like we did today.

Okay.

And just more generally on the interior segment.

Can you tell us a little bit about the role of raw materials on margins in that business this quarter?

Or perhaps may -- maybe chemicals aren't quite as impactful as resins at this stage in the year.

Pat, I -- I'm not going to comment specifically on a subsegment of our Europe or North America.

But when you look at overall commodity costs in the quarter, sort of quarter to quarter, we've seen some increases in resins impacting our margin in a negative way.

However, the offset to that is with respect to steel, overall quarter to quarter, we've seen a reduction.

So on a net basis, commodity costs have been neutral in the second quarter.

But if you think about the balance of the year, there is volatility in -- in commodity pricing, the commodity costs are still high, so how that's going to impact us in the third or fourth quarter I don't know at this time.

Okay.

I'm sorry, but just to clarify, I guess in the seating business, it's not so much resin impact.

Right?

It's -- it's more like TDI and things like that, I guess it's more Dacoma that would feel the resin impact, is that correct?

Dacoma would be for the largest [INAUDIBLE - poor audio quality]

Okay.

All right.

And interiors, as well, Pat.

All right.

And then finally, is there any way you can -- sorry if I missed it, but can you quantify the FX impact on the CPV both in North America and -- and Europe?

Sure.

The North America, Pat, FX was about $37 or about 5% of our content growth.

And in Europe, it was minimal.

Insignificant.

Okay.

And I mean, is the -- is it fair to assume that the EBIT impact of currency at this stage is relatively minimal, as well?

Or might that have had a contribution?

Well, I think when you look at our European results and translate them back to U.S. dollars that the impact has been negligible.

We really, on an average, hasn't been much movement in the Euro versus the U.S. dollar.

The Canadian dollar continued to strengthen against the U.S. dollar in the quarter compared to a year ago.

And both -- as we said in previous calls, it's really difficult to try to assess the impact that has on the bottom line.

I've got to believe that it's contributing.

But it's hard to quantify how much that might be.

Okay.

All right.

Thank you.

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

Please go ahead.

Vince, I think you've covered it all.

Just one, small housekeeping question.

I noticed that in your segmented reporting, your operating income in the corporate and other category was down quarter-over-quarter.

I'm just wondering is there an explanation on that?

I believe that category -- does that cap -- does that capture the fees from the subsidiaries or not?

There's an easy explanation for that, Peter.

In the second quarter there was a reallocation of profit sharing for employees and it's between the North American and European segment with the offset in corporate.

The impact in Europe was negligible, the cost in the corporate segment was substantially offset with a pick up of a similar amount in the North American segment.

And roughly, Peter, that was around $20 million.

Right.

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

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

Please go ahead.

Yes, I just wanted to explore North American margins.

There was a pretty huge increase in percentage of sales from Q1 to Q2.

It sounds like a good chunk of it was out of this change in accounting.

Is that correct?

Well, it wouldn't be -- reallocation, if you will.

Not change that -- still a big chunk that's other related launch in the data but there's about 20 million that relates to the allocation to incorporate North America.

Okay, still fairly big increase though from quarter to quarter of Q1 to Q2.

What exactly is driving this?

Is it -- is it the launch is maturing, and are these sustainable?

Well, there's a -- what you have contributing is the new facilities that we have launches in.

Launches as well as we have a higher sales, as well, some of the underperforming divisions in North America have seen some improvements.

So, there's a number of things that are contributing to the growth in EBIT.

But the sales increase, that's driving the bottom line performance, especially with the new facilities and the launches.

Okay.

So it sounds like it's mostly sustainable as far as you can see.

And then on the CTS -- on the CTS, how much did that add on CPV?

CTS was $3 in North America.

And $20 in Europe.

Okay.

Great.

Thank you.

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

Please go ahead.

Thank you, just to go back to the restructuring of the European interiors division.

Is it something that looks like it's going to take until early 2006 to fix or late -- sorry early 2007 or late 2007?

Mike, it's too early to tell at this point in time, we have put in place a new management team in our interiors UK group.

But that's where a essentially all the issues arose in the quarter.

They're assessing the situation right now, developing an action plan, we've had, obviously a number of discussions with them.

So progress is taking place.

It's too early to tell whether if we're going to be out of these issues by the end of this year if it's going to start rolling into 2007 at this point in time.

We just want to give management the opportunity to make a full assessment and further reaction plans to executive management at Magma.

Okay.

So the effective tax rate in the second quarter of 34.6%, you indicated that that was partially due to the losses in Europe.

Is that a good rate to use for the rest of 2006?

Mike, we're not giving specific guidance, you know that.

So we can't give details to future tax rates or anything else future.

Mike, I think that we pointed out in some of the documentation that was sent out today was to the extent that we continue to suffer losses in some of our European interior business, that that will have a negative impact on tax provision.

So the improvements in operating performance and the tax rate are related.

So as we continue to have operating losses there, our tax rate will be higher than what it should be because we're not going to be able to immediately tax benefit those losses.

Okay.

Thank you.

The only thing, Mike, if you're looking at -- the loss is not benefited in the second quarter.

There arise a non-reoccurring loss on the disposal of one of our power train facilities in Europe.

The Ara Matel (ph) facility where we did incur a $12 million loss.

That was not tax benefited.

So that will not be recurring in the third and fourth quarter.

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

Please go ahead.

Hello.

On this interior division, would you consider selling the whole division?

Is it something that's core to Magna?

Well, with respect to the interior business, our focus right now is to work through some of the operational inefficiencies and see we have, our focus on launching the number of programs that right now are on our plate and to improve operational performance.

That -- that -- those are our priorities today, Nick.

Okay, so, are there, maybe a broader question, do you look at your business and see any divisions that might be non-core?

You don't have to identify them.

Mark, do you want to handle that one?

Nick, I don't think we've seen any -- any particular trend in terms of our other businesses that would lead us to conclude that it's non-core at this point.

In fact, we've been adding business units as we did with CTS and the electronics group.

And I think those two adds from a line of business standpoint are quite complementary to where we want to go.

Okay, second question is on GMs large SUVs, that's been a positive thing for you.

What's your outlook for that, for let's say the balance of this year?

Well, they've been pretty strong since they launched in January.

But as gasoline prices continue to rise, particularly with this recent announcement by British Petroleum, we're going to have to keep our eye on it.

And we're going to watch schedules closely in the third and fourth quarter.

But so far, the GM SUVs have done quite well.

Okay.

Any comments on the balance sheet you having so much cash, is there any potential for a stock buyback?

Well, Nick, at this point in time our focus is to keep the cash on the balance sheet for opportunities or for bad terms.

Just as over -- announced today that we're going to be using $60 million of that -- approximately $60 million in cash to make the acquisition in Europe.

So we're -- we're using our cash to continue to grow our business.

Okay.

Great.

Well, the numbers look pretty reasonable in light of what's going on.

So congratulations.

Thank you, Nick.

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

Please, go ahead.

Hi, this is Jedam Nithan.

Can you discuss kind of the pricing situation and how -- is there any change in the amount you're recovering on the commodity cost pressures?

Sorry, repeat the question again, Jedam please.

Hold on a second.

I just wondering if you could discuss the pricing situation and is there any change you're seeing in the -- in the recoveries you're getting from getting from the automakers on commodity costs or inflation?

Well, I talked about it earlier, Jedam, but the commodity costs and where we have seen some price inflation for resins a little bit of deflation on the steel side.

But more recently we've seen steel sort of move up a bit.

And with the oil pricing where it is, resins also suspect for some higher pricing.

In terms of -- I think -- was that it, Jedam, does that help you out there?

Yeah, I was also wondering if you're getting any, I guess, pricing this -- this -- this quarter wasn't a big issue, but are you getting any recoveries?

Are you kind of seeing any, you know, any less pressure on pricing from the automakers?

The -- the pressures from the customers given the -- the market situation today with market deterioration, the pressure -- the pressures are onerous.

In other years they've been easier, but they are quite onerous at this point in time.

With respect to overall relief on commodity costs, we haven't been successful in any big way in obtaining any relief.

From our perspective as we're quoting new business, we're reflecting on our quote model what our current expectations are for -- for all costs including commodity costs.

So it'll be, the commodity cost continues at this level; it'll take us some years before we work through our existing contracts to have the benefit of the higher commodity cost reinstructed hopefully in our overall price to the customer.

Okay, thanks.

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

Please go ahead.

Hi.

Good evening, guys.

Hi, Rich.

Hi, Rich.

Could you comment on launch costs here in the second half of the year given it's been a pretty aggressive launch cadence for you over the last year?

When you look at it year-over-year, should we, should it be a bit of a tail wind and meaning lower launch costs here?

If you remember, Rich, last year was pretty substantial investment in a number of new facilities and programs.

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

But I would think sort of year-over-year basis that the second half of this year the launch cost should be less than what they were last year.

Second half you start to get some sales and contribution.

And then, on the European interiors, it sounds like it's a management issue mainly.

I don't know Mark, Vince, if one of you could comment about on apples to apples basis what the environment is like over there in interiors.

Well, I think part of it is management in terms of our overall performance.

At the end of the day, some of the inefficiencies, if we had done some better planning may have not been there.

But part of it may be that our expectations were a little too aggressive on launch costs.

And they may not necessarily be due to management, and not necessarily reflecting all the costs in our internal forecast.

And Mark, I don't know if you want to comment specifically on the interiors business North America versus Europe and the environment.

Yes, Rich.

You know, the North American pricing environment for interiors, I think was quite dramatically affected by some of the companies that are essentially restructuring at this point.

And, I think, perhaps not a good understanding of their cost structure.

Compound that perhaps mispricing equation with the increase -- dramatic increase in resin prices, which affects hard trim and IPs and soft trim.

We've got -- we've got two factors that really have disrupted the margins in the North American business and it's going to take some time to stabilize that and recover.

But the European business, if you look at the European interiors business, the environment is better than North America, is that the right analysis?

Or right assumption to make?

Well, I'd say our North -- our European interiors business is by and large more developed than our North American interiors business.

We'd like to be able to extend our customer base in North America from an interior standpoint.

But I think both regions are -- and equally challenged and we described that in some detail today.

All right.

Thank you.

Our next call comes from the line of David Tyerman of Scotia Capital Markets.

Please go ahead.

Yes, I was wondering, could you give us an idea of what you're trying to do in the electronics area with this Presac acquisition?

Well, there's a number of objectives, David, that we had in mind.

First thing is we've been focusing on expanding our electronics capability and with the difficulties we had in Europe is that we didn't have any manufacturing facilities available to take the customer through and show our capabilities.

And certainly we have some -- some great products and some great technology, but no manufacturing expertise.

We do have some expertise in North America.

So by making this acquisition, we gain two facilities with an excellent management or excellent management teams.

You know, some of the products that are being produced at these two facilities are ECUs for a number of areas comfort and multi-functional controls, door locking ECUs, engine cooling with ECUs, and a number of other electronic components.

So this really gives us some real estate with some products coupled with our existing technology in North America and Europe to go to the customer and win some business awards on the electronic side.

Okay.

That's helpful.

And I had a question on the GMP 900 pickup, it is launching, I guess in the fall and winter, I was wondering if you could give us some sense of how the production ups and downs as plants go up and down could impact the results?

Is this potentially a negative along the way?

Or is it just pure gain all the way through?

Well, you know, GM has been planning this launch for several years, David, so the down time at each of the major pickup facilities will be minimized to the point where you're going to have very little down time.

Big -- big facilities like Pontiac East and Fort Wayne will eventually -- will virtually flip a switch and go from the 800 to the 900.

So I don't think you're going to see much of a -- of a decay in production that's generated by start-up.

There may be some softness at the end on the 800 just because it's a runout but not because of production change over.

And we're expecting two fold change over when it really kicks off with the 900.

And it's pretty much, pretty quickly balanced between the 800 and 900 in Q4.

And it cascades through their pickup plants through the -- through the spring of next year.

Okay.

So it doesn't sound like there's really a much mar -- volume impact here at all.

Well, we'll see how it turns out in terms of our expectations.

Sure.

Okay.

And just on the UAW - CAW.

Is this the stuff that you guys were talking about at the AGM?

Or is this something different?

The -- really the comments related to what we spoke at the AGM, and as Mark talked about just ongoing discussions.

There isn't anything at this point to report.

Okay.

So this is sort of more targeted along the lines of what Frank was talking about, not specifically to deal with assembly plant.

That's correct, David.

Okay and then last question.

D&A was up a lot.

The acquisitions, I guess, has something to do with it.

Is this kind of the new run rate to move from or was there anything unusual in the quarter?

David, there wasn't anything unusual in the quarter.

We had the full quarter consolidation of CTS where we only had one month in the first quarter.

And then translation had an impact on appreciation in the quarter.

So if exchange rates remain where the average were for the second quarter of 2006, that's going to be your best indication of D&A going forward.

Okay, great, thanks very much.

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

Okay.

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

Please go ahead.

Thanks, good evening, folks.

I guess just a few things left.

You commented quite a bit on the issues in European interiors.

Is the second quarter as bad as it gets?

Or does it stay this bad through the balance of the year?

Or do we start to get a little bit better in Q3 and then a little bit better in Q4 and then maybe by '07 we're -- we're in better shape.

Well, Chris, in our comments today, when we talked about our European interiors business, we said the results was circum -- [INAUDIBLE - poor audio - echo]. was an operational and financial review.

As part of that financial review, there were some adjustments that were recorded in the quarter that will be non-reoccurring.

So, you know, everything else being equal quarter to quarter, we should see less of an impact relatively speaking third and fourth quarter.

But there'll be a continued drag on earnings we believe at least for the balance of this year.

Okay.

The, I guess, in years past, you had given a longer term view of revenue growth and then you've kind of backed away from the near term guidance, but are you still comfortable with something in the double digit range in terms of top line growth over the next couple of years?

Chris, last quarter we -- we revoked the guidance we have given, so I'm not going to be able comment specifically on forward-looking information as it relates to revenue growth.

As we complete our business plan for [INAUDIBLE] then we'll consider whether there should be some limited guidance going forward, at least on the revenue line.

But at this point, there's nothing for us to update.

Okay.

And then lastly, it seems like maybe because of Magna's strong balance sheet and pretty solid profitability that the Company is getting maybe disproportionately hit on price.

Are you thinking about walking away from any business?

Has it gotten to that point where you're being taken advantage of by your customers because you're in good financial condition?

Chris, we have - we have a pretty disciplined approach for capital across [INAUDIBLE] similar we've had for years and years and years.

And as we're quoting on business, or we're looking at acquisitions, they need to meet certain -- certain hurdle rates.

We're not interested in just growing the top line and sort of a corresponding increase in the bottom line in relation to the capital we're trying to run the business.

Okay.

All right.

Fair enough, thanks.

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

We believe we're taking the steps necessary to further improve our competitive positioning.

We have work ahead of us in the interiors part of our business for sure, but we're confident that we have the right people in place to get back on course.

Good evening.

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.