Magna International Inc (MGA) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the third 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, November 7, 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 with welcome to our third quarter 2006 conference call.

Joining me on the line today from Vienna is Vince Galifi, Executive Vice President and Chief Financial Officer.

And joining me here in Troy, Michigan, is Louis Tonelli, Vice President, Investor Relations.

Earlier today, our Board of Directors met and approved our financial results for the third quarter, ended September 30, 2006.

Our Board also declared a quarterly dividend of $0.38 per share which is payable on December 15, 2006, to shareholders of record on November 30, 2006.

We issued a press release earlier this morning for the third 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 web site.

Our address is www.Magna.com.

This morning, I will start with some thoughts on the third quarter, discuss the status of our Interiors business, and briefly discuss takeover opportunities.

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

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

Before we get started, just as a reminder, that 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, uncertainties and assumptions in making these forward-looking statements which are discussed in detail in today's press release, and attached MD&A, including by reference to our most recent annual information form and annual report on form 40-F.

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

The third quarter was a very difficult one for Magna and for many of our peers.

North American vehicle production was down 7% year-over-year.

With GM, Ford, and Chrysler combined down 12%.

Declining market share for these, our largest customers in North America, as well as high inventory levels, were key contributors to these production declines.

Perhaps even more relevant is that the big three light trucks, excluding CUVs, were down 22% year-over-year.

Big three CUV production was actually up 3%, and big three car production was up 1%.

In recent years we have been successful in gaining additional content on CUVs and cars.

This has allowed us to diversify our vehicle segment mix somewhat.

However, we continue to have above Magna average content on big three suvs, pickups, and minivans.

The third quarter significant production decline in North America, especially on some of our key programs, resulted in a large negative mix impact in North American content.

We managed to largely offset the negative mix through our continued new program launch activity, as well as growth with non-big three OEMs, particularly the European based OEMs.

And we continue to work with the Asian based OEMs to gain content on their next generation vehicles which will benefit sales in the coming years.

I want to make an observation about where we stand in terms of vehicle launch activity.

We are currently launching content on the all new Ford Edge and Lincoln MKX.

The all new Saturn Outlook and GMC Acadia, which are the first two of three vehicles of GM's [Lambda ] platform that will replace large volume on GM's mid-sized suvs, the new Suzuki XL7 and the new BMW X5.

All of these platforms are CUVs, a segment that continues to gain share in North America.

And all of these have well above average Magna content.

Annual volumes for these volumes for these programs combined are expected to be approximately 450,000 units.

In addition, we have begun to launch additional content on GM's new full-sized pickups, still the market leader in this segment and a vehicle that many believe will sell well and regain share.

Finally, earlier -- early in the new year, we launched additional Magna content on Ford's F Series Super Duty Pickup, a high volume vehicle that will also benefit from being a new model.

Next, I would like to comment briefly on our Global Interiors business.

As with all the major players in this product area, we have faced serious challenges.

Many of those challenges are associated with external factors such as rising commodity costs, the inability of tier one suppliers to recoup on higher commodity costs, very aggressive quoting activity in recent years, from many suppliers which are now in financial difficulty, and further OEM pricing pressures and in some cases declining vehicle volumes.

We continue to believe that while these factors may take some time to be resolved, ultimately there will be opportunities for those that have strong engineering, good technologies, strong financial resources, excellent quality, efficient and low cost manufacturing capabilities, and a disciplined quoting process.

We must accept that some of our difficulties in our Interiors business have been self inflicted.

Fortunately, more accurate quoting, better communication between team members, a stronger product development process, and improved launch readiness are areas in which we can effect change.

We believe that we have the right people in place to improve our operating and financial performance in our Interiors business.

A final comment on the impacts of recent industry turmoil.

To date this year, we haven't been awarded much in terms of takeover business, as compared to prior years.

However, as a result of the ongoing troubles in the supply base, which has been hit hard recently by the production cuts in the second half of this year, we are seeing strong opportunities for takeover work in the near term.

Much of which we can absorb into our current capacity without significant additional capital.

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

Vince?

Thank you, Mark.

And good morning to those of you listening in from North America.

Before I get into the details, I will provide a high level summary of the year-over-year variance in our results by segment.

There are always a number of pluses and minuses in a quarter, and our MD&A issued earlier this morning provides some detail on these.

However, I would like to focus on the bigger picture.

Overall, sales are relatively flat, growing by 1% on a consolidated basis, and EBIT excluding unusual items, was down 33%.

In North America, the key drivers of the decline in EBIT were lost contributions on reduced sales, driven by the production cuts Mark described earlier, incremental price concessions, and under performance in our Interiors business.

In Europe, the key drivers of our overall EBIT growth were a favorable revaluation to warranty accruals and additional contribution associated with higher production and assembly sales.

Note that contribution margins on production sales in Europe are currently lower than in North America, and contribution margins on assembly sales, particularly on full cost assembly programs, are significantly lower than our production sales.

As a result, the traditional contribution was not enough to offset the North American contribution short fall in EBIT.

Partially offsetting these items in Europe was the under performance of our European interiors business.

I would now like to review in detail our financial results for the third quarter ended September 30, 2006.

Just as 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 Q3 2006, and Q3 2005.

In the third quarter of 2006, we recorded unusual items related to restructuring and rationalization charges which resulted in a $5 million reduction in operating income, of $4 million reduction in net income, and a $0.04 reduction in diluted earnings per share.

Unusual items in the third quarter of 2005 resulted in a $12 million increase in operating income, and a 5 million increase in net income or $0.04 per share.

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

In the third quarter, consolidated sales increased 1% to $5.4 billion.

As I just noted, this higher sales level reflects increases in our European production and assembly sales, partially offset by reductions in North American production sales, as well as lower tooling and other sales.

North American production sales declined by 6% in the third quarter, to $2.6 billion.

This was the result of a 7% decline in North American vehicle production, partially offset by a 1% increase in North American content.

The launch of new programs, the strengthening of the Canadian dollar against the U.S. dollar, increased production and/or content on vehicles, including the Chevy HHR and Impala, the Pontiac G6, and the acquisition of CTS in February, 2006, all aided content growth.

New launches contributed to content growth quarter-over-quarter, including GM's New Full-sized Suvs, the Ford Fusion, the Dodge Caliber, and the Mercedes GL Class.

However, largely offsetting these were high content programs that experienced lower volumes and/or content including the Chrysler Minivan, the Ford F Series Super Duty Pickup, the Hummer H3, the Ford Escape, the Chrysler Pacifica, the Ford Free -- Free Star, Dodge Durango, and Chevy Envoy.

Programs that ended production during or subsequent to the third quarter of 2005, incremental OEM price concessions, and the sale of certain underperforming divisions this year, also negatively impacted North American content.

European production sales grew $1.3 billion, representing an increase of 12% over the comparable quarter, despite a 5% decline in European production volumes to 3.3 million units.

This was the result of an 18% increase in European content to $394.

The acquisition of CTS, the strengthening of the Euro and British pound against the U.S. dollar, and increased production and/or content on vehicles including the BMW X3, Mercedes B Class, and the VW Transporter Multivan and the launch of the Honda Civic and Peugeot 207 all contributed to content growth in Europe.

These positive contributors were partially offset by programs that experienced lower volumes and/or content in the third quarter of 2006, including the Mercedes A and C Class, and incremental OEM price concessions.

Rest of world production sales increased 45% to 68 million, largely due to our continued expansion in Asia, particularly China, the strengthening of the Chinese and the Korean currencies each against the U.S. dollar, increased sales at a closure system facility in Brazil, the acquisition of a mirrors facility in south Africa, and increased production sales at our power train facilities in Korea.

Complete vehicle assembly sales increased 16% or 138 million, to approximately $1 billion.

Primarily as a result of a 12% increase in programs accounted for on a full cost basis, particularly the BMW X3, the strengthening of the Euro against the U.S. dollar, the launch of the Jeep Commander earlier this year, and higher volumes for the Chrysler 300, which launched in the second quarter of 2005.

These were partially offset by a decline in production for the Jeep Grand Cherokee, the Chrysler Voyager, the Mercedes G Class, and the Saab 93 convertible.

Tooling, engineering and other sales were 414 million for the quarter, down 18% from 502 million, in the comparable period.

Some of the programs for which we recorded tooling, engineering and other sales in the third quarter were GM's Next Generation Full-sized Suvs and Pickups, the Mini Cooper, the Land Rover Range Rover, Orlando platform, the Freightliner P class and the BMW X3.

Programs driving tooling revenues in the third quarter of 2005 included the BMW X5, GM's Next Generation Full-sized Suvs and Pickups, Dodge Durango, the Ford F Series Super Duty and Cadillac SGS.

The strengthening of the Canadian dollar, Euro and British pound each against the U.S. dollar benefited tooling, engineering and other sales in the third quarter of 2006.

Gross margin as a percentage of sales in the quarter was 11.8%, compared to 13% in Q3 2005.

The decrease in gross margin as a percent of sales was primarily the result of lower production sales in North America, operational inefficiencies and other costs at certain underperforming facilities, particularly at certain of our Interior systems facilities, an increase in complete vehicle assembly sales for the BMW X3, which is a lower gross margin than a consolidated average gross margin because the costs of this vehicle assembly program are reflected on a full-cost basis in the selling price of the vehicle, and incremental customer price concessions.

These factors were partially offset by a favorable revaluation to warranty -- warranty accruals substantially in Europe, productivity and efficiency improvements at certain divisions, lower employee profit sharing as a result of the decrease in our consolidated earnings, and price reductions from our suppliers.

Magna's consolidated SG&A as a percentage of sales was relatively unchanged from the comparable quarter at 5.5% for the third quarter of 2006, compared to 5.6% for Q3, 2005.

As a result of the lower gross margin percentage and higher depreciation, partially offset by lower SG&A as a percent of sales, our operating margin percentage decreased from 4.2% in the third quarter of 2005, to 2.9% in Q3, 2006.

Our effective tax rate increased to 39.7% in the quarter, from 32.6% in the third quarter of 2005.

This is primarily the result of an unfavorable Supreme Court of Canada ruling against the Canadian taxpayer which restricts deductibility of certain foreign exchange losses.

As a result, we recorded a 23 million tax expense substantially related to the write-off of the tax asset.

The impact of this ruling was partially offset by a change in mix of earnings whereby proportionally more income was earned in jurisdictions with lower income tax rates, and a decrease in losses not benefited as a result of income tax planning strategies.

Net income was 98 million in the quarter, compared to 154 million in the third quarter of 2005.

The decrease reflects a decline in operating income, offset partially by lower income taxes relative to third -- to the third quarter of 2005.

Diluted earnings per share were $0.90, compared to $1.40 in the comparable quarter in 2005, reflecting the decrease in net income discussed above.

I will now review our cash flows and investment activities.

During the third quarter of 2006, we generated 273 million in cash from operations prior to changes in non-cash operating assets and liabilities, and generated 49 million in non-cash operating assets and liabilities.

The improvement in non-cash operating assets and liabilities primarily reflects the reduction in North American production and tooling receivables, partially offset by lower North American payables, reflecting the lower production sales and payments of tooling-related payables.

For the quarter, investment activities amounted to $255 million, comprised of approximately 198 million in fixed assets, a 6 million increase in investments and other assets, and 51 million to purchase subsidiaries.

I just wanted to reiterate what Mark said earlier.

This past quarter was a very difficult one for Magna.

One of the most difficult in a number of years.

And as you all know, expected fourth quarter production in North America will present continued challenges.

However, we are in the midst of a significant new program launch activity, and we have action plans in place to deal with underperforming businesses, particularly in Interiors.

And across the organization, we are focused on reducing overhead and cutting back discretionary spending in response to the difficult environment that we find ourselves in.

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 Mr. John Murphy from Merrill Lynch.

Please proceed with your question.

Good morning, guys.

Good morning, John.

Just had a question on Interiors.

The actions that you're alluding to, are you talking about a wholesale restructuring or significant restructuring here in Interiors?

And was there anything done in the quarter that was restructuring-like, that further depressed your earnings in the quarter?

Well, we've talked about Interiors in the past, John, and let me start with Europe.

We talked about quarter events and substantial launches that are under way right now in Europe.

And as a result, we faced a number of launch costs, and the launch costs have exceeded what we were expecting, and there has been a number of inefficiencies during the launch, and that is going to continue.

But we have seen, in Europe, if we look at Q3, '06 versus Q2, '06 some improvement, and as we look forward, we expect continued improvement in our Interiors operations in Europe.

But it is going to take some time before we can make our interiors business in Europe profitable.

There was some small restructuring costs in the third quarter, but they weren't of a substantial nature in our European segment, in our Interiors group.

In North America, we're challenged with a number of things.

Certainly commodity costs continue to increase quarter over quarter.

We do have a number of launches.

We did have some restructuring in the quarter in Interiors as part of the unusual item has we recorded in the quarter, related to an Interiors operation.

I guess that was in Europe, not North America.

But we're focusing right now on program management and launch costs.

But again, based on commodity costs, based on some existing pricing that we have on these programs, it is going to take us some time before we can turn our interiors operations in North America to a profitable level again.

Would you guys consider being a consolidator in this segment, given, you know, the opp -- you know, the opportunities that are out there and a lot of assets?

Well, John, as you know, there's just parties out there that are consolidating in this industry.

From our perspective, our approach to growth is certainly to continue to focus on taking over either existing business or conquering new business at reasonable pricing levels, so that we generate a sufficient return for the dollars that we're investing in our program.

When you -- when you think about the Interiors businesses, globally, and it is in trouble, throughout -- Mark in his comments talked about some aggressive pricing, talked about commodity cost, talked about the decline in some -- some key programs.

There's, as a result of of the decline in production, there is open capacity.

But our view of the Interiors business that we have some great technologies.

Although we are having some insufficiencies, we believe that we have some great manufacturing strengths.

And it is a business we think that one day will be very profitable for us.

And then if we just step over to the body and structural business, if we think of -- I mean what is really the delta on your content per vehicle from the GMT360 versus the GM Lambda?

And maybe how should we think about the profitability there?

Well [inaudible] to deal with content.

If you have that information with you.

Yes.

The Lambda program for us is about $1,500, so that is pretty substantial, and if you look at the old mid-sized suvs for GM, we're about $650 there.

So without commenting on profitability, that is where we are on content.

Pretty substantial upshift in content.

That's a good pickup, yes.

And then just one last question, you mentioned price concessions in North America, I mean is there anything unusual there, you know, how do you -- how do you see the pressure ramping up or is it just same as usual?

Well, John, I wish that the pricing pressures would stop but they're ongoing, and given the fact that our traditional big three have continued to lose market share, and that there is a troubled supply base, customers tend to look at companies that are profitable so those pressures continue.

We do our best to certainly work with our customer and focus on reducing costs, whether that's through purchasing or through DAV or other means.

Okay.

Thank you very much.

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

Please proceed with your question.

Thanks.

Good morning, everyone.

Hi, Jonathan.

Hi.

Vince, just a question on the warranty accrual that you mentioned.

In footnote three, it looks like you had a $39 million benefit to income versus a $14 million expense last year.

Can you just talk about specifically what was involved in that unwind and do you expect to see more of this or is the balance in that account about 67 million about where it needs to be?

You're right, Jonathan, in the quarter, we did, to revalue our warranty accruals based on recent information that we received in the quarter, from customers, and that's resulted in an income inclusion for the quarter.

So based on certainly where we stand today, the $67 million is our best estimate of the warranty exposure that we have for vehicles that we've produced and for products that we've produced.

So certainly, you know, with the warranty, you continuously look at all -- all of the estimates in our balance sheet, including the warranty accruals.

So as we have new information, we will have to revalue that accrual and it may mean that it moves up or moves down based on the information at hand at the time that we -- we look at the accrual.

And next we we are going to formally look at accruals it will be the fourth quarter of 2006.

Okay.

Would this benefit more in the niche vehicle assembly or more in the rest of the Company?

Jonathan, I'm going to tell you that -- that substantially all the -- the warranty accrual -- was in the European segment.

But I'm not going to get specific as to which particular operation in Europe benefited from that warranty revaluation.

You talked in terms of what you're trying to do about some of these head winds about reducing discretionary spending.

How much do you think there is to reduce there on an annualized basis?

In other words, what could you cut back next year, for instance, on a run rate that you had in this year?

Well, Jonathan, it will depend a lot on production levels, and you know, do they -- do they stay flat, do they increase, do they come down, and things that we think are important today, production volume is really coming down, we're going to take a real hard look at overall spending.

I would rather turn to sort of actual numbers, and if you look at SG&A in the second quarter of 2006, versus the third quarter of 2006, either the decline roughly of about $68 million, and now there is about 25 million of the decline related to unusual items, in the second quarter, but we did actually have a decline in SG&A,.

Part of that was due to reduced incentive compensation from reduced profits.

But a big chunk of that came from some of the activities that we're doing throughout the Company.

We have let some people go, and we are reducing overhead, we have reduced discretionary spending and we're seeing some of that benefit in the third quarter of 2006.

Okay.

And in your comments, you guys spoke about more accurate quoting in the Interiors business.

Can you just elaborate?

The implication is you haven't been quoting as accurately as you'd like.

And where have you been going wrong and sort of where is the opportunity in that?

Well, Jonathan, when you think about some of the Interior programs that we've been quoting on, they're pretty complex, highly engineered products.

There's, a whole bunch of integration that is required, so when we look at some of these assumptions we've made, part of it has been on commodity costs, part of it has been on sort of the supply base, but we've had some trouble with suppliers, and some weak suppliers where we had to go in and unfortunately pay more for something that we thought we were going to get a little cheaper.

And I think also internally in some of the quotes, because of the complexity that we've underquoted some of the business.

So we're taking a different approach, we're being a little bit more cautious, in our quoting activities, to make sure that when we put a quote in, it is as accurate as possible from a cost perspective, so we understand what we're doing a little bit better.

Okay.

Thank you very much.

Thank you.

Our next question comes from the line of Peter Sklar from BMO Capital Markets.

Please proceed with your question.

Vince, just a couple of additional questions on the reversal of the warranty accrual.

What is a typical quarterly experience?

Are you typically building up your accrual as you proceed through the quarters taking a charge or does it kind of -- is it volatile, some quarters positive, some quarters negative?

Well, in terms of warranty accruals, there is a number of our operating divisions that have warranty accruals on their balance sheet based on the programs that they have with the customer.

And on a quarterly basis, there are a number of things that happen with warranties.

One is you have to accrue for production in the quarter what you think ultimately your warranty exposure is going to be.

You also have made -- may have made some payments so that results in a reduction of the liability on the balance sheet, which is what happened as well in the third quarter of 2006.

And you also revisit what you have on your balance sheet, and determine whether that accrual is appropriate or needs to be revised upwards or downwards.

In the quarter, we did receive some -- some revised warranty experience from a customer, and that resulted in a re-evaluation of a warranty accrual.

I wouldn't assume, Peter that that is going to be an ongoing event.

So we're going to have ups and downs in the quarter.

If I look throughout the rest of the Company, there was ups and downs in the quarter as well.

But typically, if we have perfect vision of the future, what we accrue in the quarter will be eventually a one-day paid out to the warranty plan.

Can you tell us, you know, assuming that you don't have any adjustments to the -- to the quarter, what -- what a normal run rate quarterly accrual is for warranty?

Peter, if you turn to the press release this morning, and the financial statements that were attached, I believe it is note three, to the statements, if you look at sort of -- there is --

The 38 -- I see it.

There are nine quarters of history there.

And you know, in 2006, for example, first quarter, we -- for the $7 million expense, $7 million expense in the second quarter, and you see last year, in the first and second quarter, the expense was 13 million, 24 million, and 14 million in the third quarter.

So it is going to vary quarter by quarter.

Right.

And the 39 million reversal, is that -- is that tax effected?

Does that get tax effected?

Yes.

Your provision?

It si.

I mean a big part of that is going to be just a deferred taxes, it's not going to necessarily impact current taxes payable.

Depending on what jurisdiction it is in.

Okay.

And what rate would we apply to that, do you think?

Would it be about 35%?

Peter, I would look at -- if you think about what we've been running in the course of the year, approximately 30%, I think that gives you sort of a good feel of what it would be on an after-tax basis.

I don't have the exact rate in front of me.

Okay that's good.

Just one other question if I may, it seems to me that over the last couple of years, if you're looking at North America, you had some big plants, you know, some substantial big plants ramping, you know, the ones that come to mind are bowling green, and the facility you have in Mexico, the stamping facility for the fusion, and also the Exteriors facility in Georgia, it seems to me that you don't have any big plants ramping in 2007.

And I'm just wondering what the implications are for -- if that's true, for, you know, your content growth and also in terms of you know, will ramp costs diminish as you move into 2007?

I'm wondering if you could comment on that?

We have a number of launches that Mark talked about in his formal remarks.

Peter.

And you're right, we did have some substantial new facilities being brought on, but there are new facilities coming on, there are a number of facilities that we expect are going to be down-sized or closed down, as our footprint continues to change to meet our customer requirements.

And I sort of net number for 2007, I'm not at liberty at this point to really focus on 2007, Peter.

Okay.

Peter -- Peter, we have facilities obviously in China that are ramping up.

We have facilities like an interiors facility in Spartanburg for BMW.

We have facilities for Mercedes for Europe.

So you're right, closures, here in North America nothing huge but there are a bunch of small ones that do add up.

Thanks very much.

That's all I have.

And our next question comes from the line of Mr. John Rogers from Citigroup.

Please proceed with your question.

Yes, thank you.

I was wondering if you could just elaborate on the under performance in the Interiors business.

And I know you've talked about it.

But I mean is there something specific that's going on with Magna's Interiors business?

Or are you just talking about the state of the business generally?

Well, specifically, from Magna's perspective, we're not happy with the performance of our Interiors group and it is not generating appropriate returns today.

But I think when you look at the entire industry, the Interiors operation, any interior supplier is having difficulties and substantial challenges.

And I'm not going to mention any of our competitors, but I'm sure you're familiar with them.

So yes, there's problems throughout the industry but more importantly from our perspective, we're not happy with the performance and we're going to make things better.

But I guess Vincent and you probably answered this but there isn't a specific facility that is dramatically under-performing, you're just talking about your guys having an interiors business and the industry is under-performing?

Well I would say that generally as a result of commodity costs and raw material pricing that all of our businesses are under-performing from that respect.

But we do have one or the other division, whether that's in North America or Europe that is substantially under-performing.

Okay.

And then over the past I think two or three months, you've announced two acquisitions for small acquisitions for golf course properties, from MEC.

Can you -- can you just elaborate on -- I mean should we expect -- should we expect more of that?

And are these just special -- special situations?

John, we don't -- we don't have any intention of getting into the golf course business.

So we're not going to go out and buy more golf courses if that's your question.

There is some history as it relates to this two golf courses we did purchase from MEC.

The two golf courses that we purchased, one was in Aurora, next to our world headquarters, and the other was in Oberwaltersdorf, again adjacent to our European headquarters.And the history with the golf courses, they were developed while -- developed within Magna Internationally when we created MEC and spun out MEC, the golf courses were included in the MEC assets and spun out and we've had access to both golf courses, via an [ax] agreement, with MEC, and we were paying in Canada the C$5 million per year for access and in Europe about 2.5 million EUR per year.

MEC had made their intentions clear for some time that they were going to sell both golf courses, and for various reasons, primarily the golf courses are required in our operations in our business dealings, we decided that it would be best if we had direct control of the golf courses.

Not through an access fee but through an ownership.

So we concluded on the Aurora golf course in the third quarter, the purchase of that golf course and we concluded on the purchase the golf course in Austria, I think it was last week.

So that was just kind of a net present value of the fees that you were paying anyway?

We looked at the net present value -- we ended up -- you know, there was an independent committee of the Board that was established, and financial advisors were retain and we ended up paying fair value based on valuation work done by third parties.

Great.

Thank you.

Thank you.

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

Please proceed with your question.

Thank you.

Mark, when you talked about takeover business, I was just wondering if you might be able to quantify it.

When you say the takeover business this year has been minimal, are we talking less than 100 million?

And when you talk about takeover business in the future, are we talking as much as 500 million?

Well, we haven't quantified it, Michael.

But now that the restructuring is becoming clear in some of these tier ones that have been in restructuring, there is a clear line of sight on our ability to absorb some of this business in our own facilities without expending a lot of capital.

So that's the distinction that we were trying to draw.

And what would you guess your capacity utilization in North America is right now?

Mike, it is going to vary across groups.

And it is going to vary by plant.

That's a difficult question to answer.

All I can say is that it is our takeover opportunities, our general manager somehow has managed to if need be create some capacity.

Just one more question.

On a complete vehicle assembly operation there was talk that Magna would be looking at one in North America and in the press there has been talk about an assembly operation in Russia.

Just wondering what the latest developments are there?

Well, we continue to have discussions in both regions.

Nothing that we can comment on specifically.

But we've been very clear on our intention to expand our assembly operations when we have the appropriate number of product programs to justify the investment in a new facility.

Mike, I just wanted to add, with respect to our activities in Russia, our Magna [shire] group did sign a concept engineering contract with [AutoVas] for their C segment vehicle.

And we're close to signing an MOU with [Gaz] with a comprehensive cooperation.

So that's the sort of activities that we've undertaken on the complete vehicle side in Europe.

Great.

Thank you.

Thank you.

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

Please proceed with your question.

Thanks, good morning, folks.

Good morning, Chris.

Just a few items left.

Can you just remind us the rough break down within your Interior business, if you were to categorize it, between seating, electronics, and then some of the interior trim, plastics content?

Chris, I guess when we talk about our Interiors business, that doesn't include Seating or Electronics.

It is just interiors.

Our seating operation we view as a separate group and the same with electronics.

So just a comment on those three operations, with respect to Electronics, we are making an investment in electronics.

And in the quarter, we did invest dollars, we took a P&L hit both in North America and Europe as we continue to gain presence in our electronics area.

With respect to Seating, we don't have certainly the issues that we're facing in our Interior business, Seating performs as we expect, so we're not -- we're not focused on that.

We are focused on our Interiors business.

But if I think about the old Interior business, when you used to break that out, it was 5 plus billion in revenues, and that would have included all three businesses, right?

And if that's true, how much of that was Interior business?

Well, just to -- Chris, just to go back and Interior also includes our Enclosures group, Seating, Enclosures and Interiors and at that time, the Interiors was about a third, but I'm not going to specifically comment on any of the sales for any one of our groups today.

Okay.

That's fair enough.

What , given the downshift in volume in North America, do you anticipate maybe more meaningful or concerted efforts to shrink your footprint or reduce head count?

There have been actions at a number of your peer companies that have been relatively aggressive toward that end and should we expect something like that from Magna in the next couple of quarters?

Chris, we've been refining our footprint for sometime, and you know, we did quite a bit of it last year.

Our footprint is going to -- we're going to continue to look at our footprint to deal with current production volumes and trends, and I would expect that over time, we're going to move away from higher cost jurisdictions and move into lower cost jurisdictions in North America and that will include Mexico and the southern United States and in Europe.

That's going to include eastern Europe and potentially the Russian market as well as growing our manufacturing presence in Asia.

So it is sort of become a normal life for us, but there is -- has -- there has been some ongoing restructuring activities.

There has been some in the third quarter which we have not specifically identified as an unusual item.

But those costs are going to continue.

Okay.

And then the last one, it looks like you do have quite a bit of new business ramping up.

Should we expect any increase or decrease in the level of launch costs from Q3 to Q4?

Chris, you know, we've talked about in the past, it is really hard to measure launch costs in any absolute way.

It is pretty easy when have you a brand new facility because they're all launch costs but when there is a number of launches in a different facility, it is hard to determine.

All I can say is we're constantly launching products and we have always launch costs.

I think Q4 is going to depend more on overall correction volumes rather than the [quantum] of launch costs.

Thanks.

That's helpful.

Thank you.

Our next question comes from the line of Mr. Ron Tadross from Bank of America Securities.

Please proceed with your question.

Good morning, everyone.

How are you guys doing?

Hi, Ron.

Not too bad, Ron.

How are you?

Good, thanks.

A couple -- just maybe following up on that last comment you made, Vince, you said it will depend more on fourth quarter production.

I mean are you -- are the fourth quarter schedules set or are they changing?

Mark, do you want to comment on that?

Fourth quarter, is pretty much set, Ron.

And what we've seen, at least with the Detroit three is that GM is ramping up particularly in the 900 and Lambda.

And Ford and Chrysler's schedules, as reported, are down.

So we characterize GM as being slightly up, and Ford and Chrysler being slightly down, and it is hard to say what the first quarter and the first half of next year is going to look like.

So we're just going to kind of wait and see on that.

Okay.

And in the fourth quarter, I mean sorry, in this last quarter, it looked like your contribution margin in North America may be was in like the 35% range.

Does that sound about right?

We didn't disclose that number, Ron.

What we've all disclosed for the segments was operating income.

Well, I mean I guess, where do you think it could be?

I mean the question is then, where was -- was it where was it in the third quarter?

I don't know if that is a word.

If the level that it was at in the third quarter worse than you think it can be on a run rate basis?

Ron, in any sort of -- in any given year, third quarter typically when you look at operating margins, is typically the lowest, because of the summer shut down, both in North America and Europe.

Right.

with that, that operating margin and gross margin, I'm not going to comment specifically on contribution margin.

Okay.

All right.

Then just one thing on the Interiors, are you -- can just talk to the repricing?

I think [Jobs] control said at one point a good portion of their contracts will be repriced on the Interiors side by 2008 or 9.

Can you talk to whether you guys are doing that too, or at least trying to?

And then maybe ment -- comment on escalators, if you're getting escalators in contracts for the future?

Well, we're quoting on 2008 and 2009.

And we have, and that reflected the higher commodity costs, particularly in resins, Ron.

The launches that are going on in 2007 were substantially quoted before the rapid increase in resins, so when -- when our competitors talk about repricing, I think they're just referring to the fact that they've -- they've reacted to the sharp increase in commodity prices particularly resins for the quotations for 2008 and 2009 programs.

Okay, but no escalators, or not many?

The escalators are really hard to get.

Okay.

Good.

Thanks a lot.

Thank you.

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

Please proceed with your question.

Yes, I'm trying to follow up on the previous questioner, on the impact of the sense -- or the sensitivity of earnings to volume, you had a 75% sequential decline in EBIT and 20% year-over-year in North America.

And on the sales side, it was 6 and 20%.

So not nearly -- sorry, 6 -- yes 6 and 20%.

So not nearly as big.

I guess the question I have is, is there something unusual in the quarter?

Were there very large unusual items in the quarter, either launch costs, or problems in plants, unusually depressed?

Or is this the kind of sensitivity that we normally would see?

Well, David, we think about -- we need to really think about the segments.

And you start looking at consolidated basis, it really becomes too general.

In North America, there was production volumes at times of 7% from last year to this year.

And as Mark indicated in his formal comments, a big part of the production declines impacted trucks, and we have a lot of content on trucks.

And trucks were down 22% quarter-over-quarter.

So that can have a substantial impact on overall contribution.

So with -- with production down, and production sales being down, there is going to be a negative impact, just with sales.

There are two other factors, if you think about Q3, '05 to Q3, '06, one is our insurance business in North America which we've talked about over and over on this call.

And the other, which we haven't really talked about, is -- is our power train operations in particular Syracuse.

As you recall, last quarter, we did have a restructuring in Syracuse where the number of employees that were offered retirement packages and left the organization, and we expected that there will be a pretty quick pay back on those severance costs of a couple of quarters.

However, what hit us in the third quarter in Syracuse is that some of these people were being let go.

There were some inefficiencies as we sort of down sized to a smaller work force.

But the GM volumes declined quite substantially and that has a negative impact, especially in Syracuse, with the high fixed costs base in that operation.

In Europe, when you think about sort of quarter-over-quarter, I'm happy to report that we're making progress in some business areas.

And last year, we talked about some of the issues at Tacoma.

Tacoma is not out of the water yet, it is still in the red, but there have been some improvements.

Those improvements continue.

So we're really pleased with the progress there.

However, we're not so happy with the performance in our Interiors segment.

So you know, to sum it up, quarter-over-quarter, it is Interiors, globally, it;s, you know, Syracuse again, which is production volumes primarily in North America, and reduced production volumes in North America, that have resulted in decline in EBIT quarter-over-quarter.

Is there any way you can quantify this, because some of this sounds like it is going to go way over time, and some of it sounds like it's just very temporary volume-driven.

Well, I think the under-performers certainly, it is our expectation that that is going to go away over time.

And we're here to work on the -- on those under-performers to improve overall profitability.

You know, with respect to production, I mean you have your own assumptions you can make on overall production.

Where the production volumes -- for some of our key programs, at very low levels, that's going to have an impact.

Offsetting that is going to be some of the new launches that we have, especially on some of the exciting crossover utility vehicles.

So it's going to depend a whole bunch on mix, too David where we end up.

Right.

I mean but that's the key then just trying to figure out how much of this is the volume side and how much is not, and is the other items.

And I don't really have a sense of one versus the other in size.

Well, they were both -- they both have negative impact in the quarter, David.

I mean I really can't elaborate any further at this time.

Okay.

Just one last question.

The European content per vehicle skyrocketed in the quarter.

What happened and is that sustainable?

I'm just turning to it, David.

Are you looking sequentially, David?

Yes, and year -- both.

Well, I think when you look at year-over-year, David, a couple of things.

The acquisitions of CTS that we completed in 2006 and [birds] that we completed, I believe at the end of last year, added about $20 of contents.

Translation was about $14.

Divestitures was a negative two.

So net acquisitions is 18.

The other is content growth of $27 in the quarter.

And some of it is the volumes and take rates such as the BMW X3, the [BCX B Class] or the VW Transporter Multivan.

And some of the programs that launched sort of over the year is the Honda Civic which added to overall content as well as the Peugeot 207 series vehicle.

So we were pleased with the growth in overall content in Europe.

And with respect to the third quarter, I don't think there is anything unusual in in there.

I'm not going to comment specifically about the fourth quarter but there isn't anything unusual about content in the third quarter of 2006.

All right.

And if you look at it sequentially, David, mix was actually pretty positive for us.

In like a lot of the programs that we have, pretty good content on, where we're all going the right direction, so that is looking at it sequentially, that's a factor.

That's helpful.

Thank you.

Thank you.

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

Please proceed with your question.

Good day.

I wondered if you could talk about your balance sheet.

You still have a very large cash position.

And I wondered what the environment that you've been describing, whether you intend to keep your cash position at high level?

Nick, I think you need to look at a couple of things when you look at the balance sheet and we're more focused on what our net cash position is as opposed to what our gross cash is.

In the quarter, bank indebtedness went up, the growth cash went up, but our net cash position set at about $660 million at the end of the third quarter, given where the state of the industry is today, given the opportunity for takeover work, given that there is a number of troubled suppliers, you know, we want to be in a position to have a very strong balance sheet to take advantage of opportunities.

Whether that is new programs, whether it is being able to look at acquisitions and buy some assets at a very good price.

So we want that flexibility today.

So we don't have any present intention at this time to do a stock buyback or increase our dividend in any substantial way.

Okay.

Could you talk about your lines of credit and what you have available?

Sure.

I think when you look at our overall sort of capabilities, finance capabilities, our bank [lines] about $2.5 billion, and now, some of that is going to be drawn because we do have some bank indebtedness, we do have some LT's outstanding.

But I'm trying to find a number in the -- just give me one second, our overall availability of resources are about $3.3 billion when you think about our overall unused lines, and available net cash on the balance sheet.

Okay.

That's great.

Well, thank you very much.

Thank you.

Our next question comes from the line of Pat Archambault.

Please proceed with your question.

Pat?

I apologize.

Good morning.

I wanted to just follow up on trying to think about some of the big pieces that might impact you guys as you walk from Q3 to Q4.

I think we all have our own sort of opinion on how volume might shake out.

But it sounds like launch costs will be the same.

You know, probably like materials similar, but there may be some operating improvements I guess, you know, in some of these facilities, like in Syracuse, for instance, that could be a positive -- positive.

Is there anything else that I'm missing here that -- that could impact it?

Well, Pat, I'm not going to -- unfortunately, we've made a decision to not give guidance so I'm not going to comment on the fourth quarter.

I think you're going to have to draw your own conclusions, based on our comments so far on the call.

Okay.

But let me just be more specific then on the operating efficiencies.

I guess there is a combination of, you know, genuine operating inefficiencies and then maybe just a capacity utilization issue there, that may not go away as fast.

Is it safe to at least assume that in some of these facilities, sequentially, at least some of those problems are going to go away as we move forward?

Clearly, Pat, we -- we do have action plans in place in our under-performing operations.

And even from Q2 to Q3, we have made improvements in a number of those areas.

If those plans materialize, obviously we continue that those operations are going to improve.

But some of it is the -- the big under performance that we talked about in Interiors for example, that is not going to go away overnight.

But certainly, with all of the focus and effort of the entire team, we're expecting obviously continued improvement.

But keep in mind that for there are a number of unknowns, and commodity costs.

When you think about the entire quarter, for Magna, the impact of commodity costs, Q3, '05 to Q3, '06, was relatively flat.

And you know, you feel for [inaudible] when you look at resins, and they were up.

What happened in the fourth quarter, I don't know.

Oil -- oil pricing is pretty volatile.

And we continue to face pricing pressures.

And hopefully all of the pricing pressures have been resolved for the balance of 2006.

But you just don't know.

And Pat, if you look at some of the programs that we talked about, CUVs, the volume is going to be up, right, X5 is starting up.

The Wrangler in terms of volume, the Edge, even the Outlook, Acadia the Lambda platforms are going to get going so obviously that's going to have an impact on revenues and contributions.

Okay and let me just actually just backtrack on the -- on the commodities question.

So overall commodities are slightly favorable year-on-year.

I guess is that sort of -- benefits from lower -- re -- I guess I thought you might have said resins actually went up.

Pat, what I said was overall year-over-year, that commodity costs were flat.

Or we did benefit on the -- on the steel side, but we had additional costs on resins, and some of the base metals were up as well.

So overall, it was flat in the quarter.

Okay.

Okay.

All right.

And I guess just on, you know, some of these -- some of the takeover business, it is probably safe to say that you know, when you take these contracts out, or take over these contracts, right, that they are repriced and repriced in a way that is incrementally favorable to your overall margins.

Is that sort of a correct assumption to -- to make?

Pat, I would say that if it's a takeover business, we're not going to take it on if it doesn't add incrementally to bottom line.

Okay, but and it is safe to say then that if, as you guys expect, this -- you know, these opportunities are only going to increase in the near term, we could see, you know, an improving margins in the Interiors space, just based on the fact that, you know, a higher proportion of your business is actually sort of recent takeover business, right?

Could be the case.

It really depends -- Pat, it is going to depend on what opportunities there, are which plants to go in, and certainly in the Interiors group, if we're losing money today, and we take on a profitable program, it is certainly going to help bottom line, because we are losing money there today.

If you look at one of our profitable groups today, depending on the type of work we take over, maybe it has an overall negative impact on -- on margins but adds to the bottom line.

It is all going to depend.

We have such a diversified organization operating in so many parts of the world, it's difficult to just make a generalization.

Okay.

Have you been seeing, you know, with I guess some of the troubles at CKC and that that organization literally starting to unwind, you know, it seems that there's -- there's obviously at least less and less capacity and supply, I mean do you -- do you see at least material benefits from that?

Pat, I think when we look at sort of some of the opportunities that we've been quoting on, I think we have more opportunities today as a result of the troubled supply base, and the lack of financial resources at a number of our suppliers.

But certainly, as the capacity industry starts to come down, and as suppliers start to quote a little more reasonable that should -- should result in some better things for us.

Again, in terms of taking over work from troubled suppliers, it depends on a whole bunch of things, including the overall court process, it depends on the customer, and what options that they have.

Certainly we're out there every day.

To the extent we have the opportunity to take on some work that is increment to the bottom line and we have open capacity, it is something that we would certainly like to do.

Okay.

Great.

Thank you very much.

Operator, we are going to take one more call.

Thank you.

Our final question comes from the line of Scott Merlis from Thomas Weisel Partners.

Please proceed with your question.

Can you think of any general comments on cash flow going into the fourth quarter and into next year, any changes in capital spending, also any thoughts on the non-cash items in the third quarter?

Does capital spending go down a little bit in the fourth quarter?

Or any general thoughts on cash flow for this year and next?

Sure, Scott.

I think when you -- if you look at prior years, what you will notice is that in the fourth quarter, CapEx typically is going to spike up.

And the reason for that is with the Christmas shut down, a lot of capital is put in place to get ready for -- for the new year.

And that will typically happen in any normal quarter.

Specifically with working capital, you know, last year, in the fourth quarter, we did receive substantial cash receipts at the end of the quarter which reduced our working capital.

And then we paid the price in the first quarter where we had a huge investment.

If you're doing any sort of modeling on working capital, I would just make the assumption that between the third quarter and the fourth quarter, that working capital is going to be flat.

Okay.

And just some final questions on the Interior business, did I hear correctly before that on the old spun-off Interior numbers, the Interior portion segment was about 1 billion out of the 5?

Or one-third, it was about one-third out of five?

That's right, Scott.

Okay.

And is there any scenario where you can move Interior business into seat plants, or is that a logistic -- is that just not feasible?

In other words, when you restructure your footprint, can you better utilize seat plants by moving interior business?

Scott, I would look at it a little differently.

If you think about Interior, a lot of it is pla -- or part of it is pla -- injection molding, plastic injection molding.

And if you think about Tacoma, and what they do, and they do trim, exterior trim, but they also do a whole bunch of injection molding.

So what we think is an opportunity for us is actually look at sharing facilities and sharing equipment between our interiors group and our Tacoma group.

Sort of seating Interior there isn't a natural fit as there is with Interiors and Tacoma.

That's interesting.

And is there a certain year where a lot of low price contracts just go away?

Is it more '09 than '08?

Because the commodity, the resin shock kind of started a year ago, 18 months ago, so, you know, the newer contracts have some commodity shock in there, right?

Right.

I mean there's a couple of things to keep in mind.

I mean it is not only resins but steel, too.

If you remember, steel started to move up two or three years ago, before resins started to move up.

So certainly, as we're quoting a new programs, and programs are going to last, you know, four or five years typically, depending on where you were in the product -- in the program life, and we're starting to see some of that, you know, roll over.

But, you know, hopefully, specifically on the interiors side, as there is some capacity rationalization, with some of the weaker suppliers being taken out, that that will give us an opportunity.

You know, whether it is '09 or '08, or '010 to improve our pricing on our -- on a more appropriate level.

Right.

Thank you very much.

Okay.

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

I will end by just saying that we continue to take a long-term view of the automotive business.

We see opportunities for strong players, with solid financial positions, with leading edge technological capability, deep engineering resources and competitive manufacturing footprints to succeed in this industry.

We're experiencing some short-term setbacks, but we remain well structured for the medium and for the longer term.

Thank you for your attention.

And have a great day.

Thank you.

Ladies and gentlemen, that does conclude today's conference call.

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