Magna International Inc (MGA) 2007 Q2 法說會逐字稿

Welcome to the Magna International Incorporated second quarter 2007 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 Thursday, August 9, 2007.

I would now like to turn the conference over to Mr.

Don Walker, Co-Chief Executive Officer.

Please go ahead, sir.

Thank you.

Good morning.

And welcome to our second quarter 2007 conference call.

Joining me today are Vince Galifi, our Executive Vice President and CFO, Louis Tonelli, Vice President of Investor Relations, and Mark Hogan, President.

Mark is in Traverse City and will have to drop off the call in order to give a speech which is scheduled for 9:00 AM this morning.

Yesterday, our board of directors met and approved our financial results for the second quarter ended June 30, 2007.

Our board also increased our quarterly dividend to $0.36 per share, payable on September 14, '07 to shareholders of record on August 31st.

I will have more on that about the dividend increase in a minute.

Our press release was issued this morning for the second quarter of 2007.

You will find the press release, today's conference call webcast, and a slide presentation to go along with the call all on the Investor Relations section of our website at www.Magna.com.

This morning, I will start with some thoughts in the second quarter and then discuss our dividend policy.

Finally, I will briefly comment on the proposed transaction with Russian Machines, and some of our initiatives in Russia.

Vince will then review our financial results for the quarter and discuss the outlook for 2007.

Upon completion of our formal remarks we will be pleased to answer any questions.

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

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

Please refer to the attached press release and attached [MNE] a complete description of our Safe Harbor disclaimer.

I would like to start by saying we are pleased with the results for the second quarter particularly given the challenges that continue to exist in the North American automotive markets.

While we still have significant work to do, significant improvements in certain underperforming businesses, we have benefited from some of our recent restructuring actions and from our efforts to improve some of our underperformers.

Many of the businesses we continue to perform well, and we have been able to launch on many new programs without major issues which have contributed to our results.

However, we will remain cautious about the automotive industry, particularly in North America.

The seasonally adjusted annual rate of the U.S.

auto sales has been well below the 16 million units for the past two months.

And inventory levels, which had been below normal this spring, as a result of production cuts in the first half of 2007, are now creeping back up relative to normal, particularly for certain of our high content vehicles.

Depending on how sales progress through the coming months, this weakness may have implications on production in the second half of 2007.

Many of our largest customers in North America continue to lose market share in a fiercely competitive marketplace and exert pressure on the near supplies base to reduce costs.

Next, I would like to discuss our dividend policy.

The dividend policy in our corporate constitution entitles Magna shareholders to dividends equal to 10% of Magna's after-tax profits for any financial year, and on average, at least 20% of Magna's after-tax profits on a rolling three-year basis.

Magna has complied with this requirement since 1992 and intends to continue to fully comply with this requirement.

In April, consistent with our dividend policy, we put in place a dividend formula which maintained a constant dividend amount in each of the first three quarters based on the prior year's results.

And provided for an adjustment in the fourth quarter to achieve a 20% payout of after-tax profits for the year.

We have heard from a number of shareholders regarding our dividend policy, in discussions at the board management level continue about the dividend formula.

Yesterday, the board rescinded the previously-announced dividend formula and re-established a quarterly dividend in line with our past practices.

In light of this decision, and considering our financial results for the six month period ended June 30, 2007, we raised our quarterly dividend to $0.36 from the $0.24 that was declared in respect to the first quarter of 2007.

The board reserves the right to further modify the dividend at any time and for any reason, subject to the requirements of the corporate constitution, particularly in response to financial operating or any relevant circumstances.

Finally, I would like to bring you up to date on the status of our proposed transaction involving Russian Machines investment in Magna.

Our management information circular and proxy statement was mailed to shareholders last week, and our specialist shareholders meeting is scheduled for Tuesday, August 28th.

The circular provides detailed information about the transaction.

That includes a discussion of our intention to complete, subject to the approval of the plan of arrangement, a substantial issuer bid, to purchase up to 20 million of our class A shares, at an aggregate price of not more than [$1.5.4 million].

Being the amount received from Russian Machines in connection with this transaction.

As we have indicated to you previously, the Russian automotive market continues to experience significant growth, and we're seeing opportunities aboard both the local Russian OEMs as well as our traditional customers, as they are expanding their presence in Russia.

With respect to the Graz group, we are supporting the launch of a new vehicle program scheduled for 2008.

As we have previously disclosed, our Magna star unit is working closely with [Autobus] to develop a new family of C segment cars.

Once again, numerous Magna operating groups are courting business for these vehicles and we are courting numerous opportunities across a broad range of Magna products with many of our traditional customers in Russia.

Magna's management has also the management of the operating group, are excited about the business opportunities in Russia.

We believe that Russian Machines proposed investment in Magna will allow us to accelerate our growth in this new market, while minimizing the risks of entry.

We look forward to receiving your support in the transaction.

I would now like to turn the call over to Vince Galifi.

Thanks, Don.

And good morning, everyone.

I would like to review our financial results for the second quarter ended June 30, 2007.

Please keep in mind that all figures are in U.S.

dollars.

Appendix A in the slide package accompanying our call today includes a reconciliation of certain key financial statement lines between reported results and results excluding unusual items for the second quarter of 2007 and 2006 respectively.

In the second quarter of 2007, we recorded restructuring and impairment charges resulting in a $36 million reduction in operating income, a $24 million reduction in net income, and a $0.21 reduction in diluted earnings per share.

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

The following quarterly earnings discussion excludes the impact of unusual items.

In the second quarter, consolidated sales increased 6% to $6.7 billion.

North America production sales grew by 5% in the first quarter, to $3.4 billion, despite a 2% decline in vehicle production from the comparable quarter to 4.1 million units.

North American content was strong, increasing 7%, to $840 in the quarter.

The key driver of the growth in content was the launch of new vehicle programs.

An increase in reported U.S.

dollars sales due to the strengthening of the Canadian dollar against the U.S.

dollar also helped content growth.

New launches contributed to content growth quarter over quarter, included some of the new CUVs in the marketplace, the Ford Edge, GM's Land Rover platform, and the BMW X5, as well as GM's new full-sized pickup, the Jeep Wrangler and Patriot, the Ford F-Series SuperDuty and the Dodge Nitro and Avenger.

Partially offsetting these increases were vehicles in the middle of program changeovers.

The Chrysler minivan and the Jeep Liberty, both of which are launching the next generation.

Also impacting content negatively were high content programs that experienced lower volumes and/or content, including the Chrysler Pacifica and PT Cruiser, Ford Fusion, Hummer H3, GM's minivans and full-sized SUVs, and the Chevy HHR and Malibu.

Programs that ended production during or subsequent to the second quarter of 2006, in particular the Ford free style, the sale of certain facilities, and incremental price concessions, also negatively impacted North American content.

European production sales grew to $1.7 billion, representing an increase of 20% over the comparable quarter despite a modest 1% increase in European vehicle production, to about 4.3 million units.

European content was strong increasing 19% to $405.

The launch of new programs including the Mini Cooper, Mercedes C-class, and smart fortwo, the strengthening of the Euro and British pound, each against the U.S.

dollar, the acquisition of two electronics facilities from Pressac in January, 2007, and increased production and/or content on certain programs, including the BMW 3 series, all contributed to content growth in Europe.

These positive contributors were partially offset by programs that experienced lower volumes and/or content in the second quarter of 2007, including the Mercedes E-class, and the Nissan Micra, to the sales certain facilities and incremental OEM price concessions.

The rest of world production sales increased 49% to $100 million, primarily as a result of increased production sales and/or content on certain programs in Korea, China, and Brazil, the launch of new programs, as well as the strengthening of the Korean and Chinese currencies, each against the U.S.

dollar.

Complete vehicle assembly volumes declined 12% over the comparable quarter, while assembly sales declined only 1% or $11 million, to approximately $1.1 billion.

The sales decline was primarily as a result of the end of production of the Mercedes E-class 4MATIC at our Graz facilities in the fourth quarter of 2006, as Daimler/Chrysler started assembling this vehicle inhouse.

As well as lower assembly volumes for the Saab 93 convertible and all vehicles accounted for on a value-added basis.

Partially offsetting the declines were the impact of the strengthening of the Euro against the U.S.

dollar, and higher assembly volumes for the BMW X3 and Mercedes G-class.

In summary, consolidated production and complete vehicle assembly sales increased approximately 8%, or $465 million in the second quarter.

Global costs in growth, and the strengthening the Euro, British pound, and the Canadian dollar, each against the U.S.

dollar, were the primary reasons for the increase.

Tooling, engineering, and other sales were $436 million for the quarter, a decline of $103 million from the comparable period.

Some of the programs for which we recorded tooling, engineering, and other sales in the second quarter were the Ford Flex, Chrysler's minivan, GM's full-sized pickup, the Cadillac STS and the Mazda 6.

Programs that drove tooling revenues in the second quarter of 2006 including GM's full-sized pickups and suvs, the Mini Cooper, BMW S4, and Freightliner P-Class, the Ford Edge, BMW 3-series, and the Suzuki XL7.

The strengthening of the Euro, British pound, and Canadian dollar, each against the U.S.

dollar, also positively impacted tooling, engineering, and other sales in the second quarter of 2007.

Gross margin in the quarter was 14.6%, compared to 13.6% in the second quarter of 2006.

The change primarily relates to incremental gross margin earned on new program launches, and as a result of increased production volumes on certain programs.

Productivity and efficiency improvements at certain facilities, including underperforming divisions, and a decrease in tooling sales that are low or no margins.

These factors were partially offset by costs incurred in new facilities and preparation for upcoming launches, or for programs that have not fully ramped up production, operational inefficiencies, and other costs, as certain facilities, in particular, at our Syracuse powertrain facility, and at an interior facility in the United States.

The gross margin earned as a result of the decline in the production volume for certain program, higher employee profit sharing, and incremental customer price concessions.

Magna's consolidated SG&A as a percentage of sales increased to 5.6% in Q2, 2007, from 5.4% in the comparable quarter.

Excluding the stock compensation costs in the second quarter of 2007, SG&A as a percentage of sales in the current quarter was essentially in line with the second quarter of 2006.

As a result of the higher gross margin percentage, and higher interest income earned, offset partially by higher SG&A as a percentage of sales, lower equity income, and higher depreciation expense, our operating margin percentage increased to 6.1% in the second quarter of 2007, from 5.1% in the second quarter of 2006.

Our effective tax rate declined to 30.9% in the quarter from 34.6% in the second quarter of 2006.

This is the result of a decline in losses not benefited, partially offset by a change in the mix of earnings, whereby more profits were earned in jurisdictions with higher income tax rates.

Net income was $286 million in the quarter, a 32% increase from $216 million in the second quarter of 2006.

Diluted earnings per share were $2.56, a 31% increase over $1.96 reported in the comparable quarter in 2006.

This increase in diluted EPS was as a result of the increase in net income partially offset by slightly higher number of weighted average shares outstanding during the quarter.

I will now review our cash flows and investment activities.

During the second quarter of 2007, we generated $522 million in cash from operations, prior to changes in noncash operating assets and liabilities, and we invested $240 million in noncash operating assets and liabilities.

The investment in noncash operating assets and liabilities reflects an increase in accounts receivable primarily due to higher production sales, and a decrease in accounts payable and accruals, primarily due to the timing of payments to suppliers.

For the quarter, investment activities amounted to $147 million, comprised of $137 million in fixed assets, and a $10 million increase in other assets.

Next, I would like to turn to our 2007 full-year outlook.

We have lowered our vehicle production expectation in North America to 15.2 million units primarily related to softening U.S.

auto sales, as Don mentioned earlier.

We have increased our European vehicle production expectations to 15.7 million units, largely stronger than anticipated production in the second quarter of 2007.

We increased our range for expected North American content per vehicle in 2007.

North American content is now expected to be between $820 and $850 for 2007.

The increase largely reflects the strengthening of the Canadian dollar against our U.S.

dollar reporting currency, as well as better than expected content growth in the second quarter of 2007.

We also increased our range for expected 2007 content in Europe.

Content per vehicle in Europe is now expected to be in the range of $400 to $425.

The increase mainly reflects the strengthening of the Euro and British pound relative to our U.S.

dollar reporting currency, and better-than-expected content growth in the second quarter of 2007.

We expect complete vehicle assembly sales to be between $3.7 billion, and $4.0 billion, unchanged from our previous outlook.

We now expect total sales to be in the range of $24.3 billion to $25.6 billion, up from our previous outlook.

This reflects the increased ranges for North American and European content per vehicle, as well as increased expectations for European vehicle production, partially offset by our lowering of expected production volumes in North America.

For the full year 2007, we expect fixed asset spending to be in the range of $800 million to $850 million, in line with our previous outlook.

This concludes our formal remarks.

Thank you for your attention this morning.

We will now open the call for questions.

Thank you.

(OPERATOR INSTRUCTIONS) One moment please for our first question.

The first question coming from the line of Chris Ceraso from Credit Suisse.

Please proceed with your question.

Thanks.

Good morning.

Good morning, Chris.

It looks like most of the strength or the upside at least versus our expectation came from North America.

Maybe you can give us a bit more detail as to how much of that came from some of the restructuring actions that you've done over the past year, how much came from volume and mix, because there was a pretty long list of platforms that with were down, in addition to the ones that were up, and maybe how much came from the Canadian dollar.

Chris, do you want me to look at Q2 versus Q1?

Or Q2 to Q2?

How do you want me to look at that?

I think year-over-year.

Year-over-year?

Yes.

Okay.

Just one second, Chris.

It's -- year-over-year, when we look at North America, the biggest benefits came from strong volumes in a number of key programs and mix.

As you know, to the number of launches that are ramping up, the launch curve, the Ford Edge, the F-250, the Land Rover vehicles, the X5 and the Wrangler.

We also, for a long time, been focusing on underperformers and we're seeing some improvements there, which is added to the bottom line, and we've been taking some restructuring activities over the last couple of years, and we're seeing the benefits of some of that restructuring now generate some bottom line improvement.

We also saw improvements on the T900, we were just launching the pickups last year relative to this year when this were essentially fully launched.

Is the interior business in North America getting any better?

The interiors business in North America, we're seeing some improvement, quarter over quarter, and year over year, Chris.

But we still have a way to go before we generate some profits in that business in North America.

Okay.

Did you guys have to deal with a change in payment terms, is that what drove the payables down?

No, Chris, that is not what drove the days in payables down, it is just the timing of payments, there were a couple of large payments that were released just prior to quarter end and that drove our accounts payable numbers down which was a big impact overall on our working capital investment in the quarter.

Okay.

Thanks a lot, guys.

Thank you.

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

Please proceed with your question.

Good morning, guys.

Hi, John.

If we look at the gross margin in the quarter at 14.6%, that's been -- that's the strongest it has been in almost three years.

And you guys have been working through some restructuring actions and rationalizations, and clearly, you have pretty good mix in the quarter.

If we think about this going forward, I mean should we be thinking about there being some structural fix in some of the restructuring efforts you've been taking, or was it more of market dynamics and mix in the near term?

Well, when I look at the sort of second quarter, and margin in particular, what stands out is certainly the launches, the mix on key programs has been favorable.

We have seen the benefits of restructuring, so that should continue, and should improve, as those restructuring activities continue to generate some reduced expenses or additional profit for us.

Remember, we also benefited from lower tools in the quarter, so that could reverse next quarter, or the quarter thereafter, depending on our overall tooling revenues.

But we have seen, across the company, I would say, whether we look at North America or Europe, we're starting to see some improvements.

So it is not just in one area.

It is pretty well throughout the whole organization.

Just some bounds as well.

But generally we're seeing some ups everywhere in the company.

Okay.

And then if we think about Magna Steyr, you have some vehicles migrating out of there, the biggest one the BMW X3.

Anything on what may be backfilling there and would you -- this is purely, just sort of hypothetical, would you welcome Jaguar and Land Rover volume into the facility?

No.

We don't have anything to announce at this point in time.

We're working on a number of different programs.

We're hopeful we can get some replacement business, but until we land it, we obviously can't talk about it.

I would say whether it is anybody, Jaguar, Land Rover, or anybody else, if they have lower volumes or something unique about the vehicle, four wheel drive, or convertible, or something that doesn't fit well into their assembly operations, and we think we can be competitive, especially if we can help engineer the vehicle.

So we will keep everybody focused on if an when there is something to announce.

And maybe just the last question, and a little bit more longer term, if we think about your sort of traditional connection to the Detroit three, in particular GM, I mean that is you had a very strong relationship there, and it looks like the Russian deal is -- the Russian Machines deal is an opportunity to grow into that market.

But is it possible that you embrace GM a little bit more closely as they grow globally, and grow with them more globally in China and the rest of the world?

Is it tough to get into the Japanese or penetrate the Japanese manufacturers?

I would say, John, all of our key customers, we're working with them, specifically on global platforms.

They want global suppliers.

So they can have one company take the lead on engineering, tooling, optimization of supply.

So whether it be General Motors or Ford, BMW, or Mercedes, or anybody else, we are participating in China already.

We have operations in Korea.

We are looking at continuing to try and get penetration from the Korean-based automaker, the Japanese-based automakers.

I think when you look at Russia, that is a classic example of a lot of customers are going into the market, they typically start with knocked down vehicles, as they get more vertically integrated and they need a supply base over there, we think there is good opportunities for everybody who we already do business with.

We advocate abilities to support new programs.

It is a very, very undeveloped supply base over there right now.

For a company even specifically like GM, as they move to more of the global platforms, I mean does that create a larger opportunity set for you or addressable market as they head down that road?

Yes, that is going to transfer the past many years, and if you look at the number of vehicles that are produced off the global platforms, it increases every year.

And that is why when we look at where our footprint should be, we're looking at low cost facilities, so we can provide products globally, if they're easy to ship.

But we're also looking at, depends who our key customers are, where we see them going with global platforms and if they happen to be in Brazil, Thailand, wherever, then we will try and make sure we have facilities there that can support them in those areas, or else develop joint ventures for them.

Great.

Thank you very much.

Thank you.

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

Please proceed with your question.

Vince, I know you answered the question about the improvement in the operating performance of your North American operations, looking year-over-year, but I was particularly interested in the quarter over quarter improvement.

Was there any one thing that stood out that would have caused such a significant improvement versus the first quarter?

I think what stands out when I look at it is the launches and the mix of our key programs.

The mix was quite favorable for us in the quarter.

Quarter two versus quarter one.

And that has helped our margin line, as well as our bottom line.

Peter, if you look at the programs we are launching, they all continue to have pretty strong quarters, and obviously we're further one quarter down the road in terms of efficiencies and the top program, nearly all of them were up pretty strongly Q1 versus Q2.

But you would have taken a big hit on the minivan, wouldn't you, relative to the first quarter?

And that is an important platform for you.

That is right.

But in terms of quarter one, the minivan was negative, quarter over quarter.

There is a changeover taking place as we speak.

But on a net basis, when you look at launches, and the mix of programs overall, that was positive to us in the quarter.

Right.

Okay.

Can you just go through the tax rate?

The tax rate --

Sure, guys.

Again, do you want that Q2 to Q1, Peter?

Yes.

Probably the more relevant.

Yes.

I think when you look at Q1, the rate was 29.1%, and we reported 30.7% in the second quarter.

The biggest change, I would say, quarter over quarter, just two things, one is losses not benefited.

We are in a quarter, we were able to benefit more losses to our tax planning, so that was a positive.

And what hurt us was the mix of earnings, and where we were generating earnings.

We generated like I said more earnings in north America in higher tax jurisdictions, so when you blend all of the rates in on a global basis, that just resulted in a higher effective rate.

Okay.

And lastly, I'm sure you've seen the reports that Deripaska reportedly acquired a 5% interest in GM and I'm just wondering how Magna management, what your thinking is about that, and does it have any impact positive or negative on the potential transaction that you're about to do with him?

I'm not sure what he owns.

We read the same thing.

Whatever he has owned in, there I think he has probably owned it for a while, I don't know anything recent that has happened but we're not privy to the information.

I don't think it has any impact and one way ort other, he's got quite a bit of net worth, and I'm sure he has many investments, and I don't have -- I haven't talked to him so I don't know what his plans are there, I don't think it has any impact on our relationship with GM one way or the other and I don't think it has any relationship on the proposed transactions.

Yes.

Let me add --

That's in automotive, though.

Let me add something there, Peter.

We think Oleg looks at potential and the upside and obviously they have a working relationship with GM and Russia, so our take on it is because of GM's expanding presence globally, including in Russia, I think Oleg sees some upside with respect to GM as an investment.

Okay.

Thanks very much.

Thank you.

Our next question is coming from the line of Fadi Chamoun from UBS Warburg.

Please proceed with your question.

Good morning.

One question, perhaps, Don, you have growing cash balance and a lot of balance sheet capabilities.

I'm wondering if there is more willingness to step in perhaps and new technology like diesel or hybrids to improve the growth prospect?

Well, we have been looking at a hybrid strategy, and hybrid means a lot of different things to a lot of different people, I think the -- we expect hybrids as an example to grow.

I think it is going to be a lot of new technologies, whether it be in the powertrain side, or the battery side, electricity generation, driving the wheels, so we are doing a fairly in-depth analysis of what we have internally, what the new emerging technologies we think will be winners, who the potential players are out there, trying to partner with, or potentially look at buying somebody.

So I would say given our product portfolio right now, it is an ongoing process, but we have been focusing on what products do we think are going to create the most upside going forward.

If it is becoming more and more of a commodity, is it to sustain certain areas and where are the growth areas, so I think acquisitions are also going to be interesting.

There's a lot of people in the capital market are looking at buying companies.

I think we're in as good a shape as anybody else to actually take on an operation, and improve the results.

So we have been focused quite heavily in the past year on launches and fixing our losing divisions and looking at product strategies.

Hopefully in the next while, we can specifically depending on the outcome of this Russian Machines proposal, as well as, I think that gives us some pretty big opportunities, and I know that Oleg thinks there are some big opportunities to grow in some of these areas of Russia and India as well.

Fadi, I just wanted to add, with respect to investment opportunities, given the tightening in the credit markets globally, and our strong balance sheet, that gives us a little bit more advantage looking at acquisitions today versus what we would have been seeing six to seven months ago.

And one final comment, a bit unrelated, I think we had a pretty good quarter.

However, there was a lot of things going the right way, and I think I make headway in a lot of different areas.

I still think this will be an extremely difficult industry.

There are a lot of people who are new to the industry coming in with different strategies, getting big, and having leverage over the customers, which I don't think necessarily works.

I think expectations and value have been coming down to more reasonable levels, and I think we're going to continue to see a pretty major fallout of some of the suppliers in the industry, which I think will give us some opportunities at a takeover business or buy assets even cheaper than we can today.

Okay.

Thank you.

And on the dividend policy, it looks like you went back to the older trend you've had there.

Is this how the way we should see it, and -- or is there more on the table?

Is there more discussions that are being -- taking place at the board level within management as far as where you would go with the dividend policy?

As you know, we have been on the road, Don and I, and Louis, and we heard from a number of our shareholders regarding our dividend policy and we've been discussing our dividend policy at the board level, and what the board concluded yesterday was that the practice before, what we were doing, I would say a year and a half ago, or two years ago, where we set a dividend, and as earnings grow, we would slightly move up that dividend.

So we would have a more level strain of dividend payments as opposed to a more erratic dividend payment that would have resulted from the dividend formula that was rescinded.

So certainly, as profits grow, there will be an increase in the dividend rate accordingly.

Okay.

Thank you.

Thank you.

Our next question coming from the line of Richard Kwas from Wachovia.

Please proceed with your question.

Hi, good morning, guys.

I wanted to ask about the manufacturing footprint in Europe, and Vince, remark, if you could, or Don, if you could comment on where you are with your footprint regarding western Europe, versus eastern Europe and how comfortable you are with the current footprint and where you think you can go.

Yes, maybe I will address that.

We have been over the past three, four, five, six years, like everybody else in migrating our new capital investments where the new assembly plants tend to be being built, and where we need to be located for shipping other components into our core operations or into the car companies directly, and also as new investments for core manufacturing have been in low cost countries.

So our footprint in Europe has been moving.

We still have quite a few operations in what would be considered high-cost regions.

If we were doing assembly work, or making large components, instrument panels, bumper faces, seats that have to be shipped in a just in time basis, those will always have to be relatively close to the assembly plant.

So we're not where we would like to be from a footprint standpoint, but we are making headway, and we have been making headway pretty consistently over the past number of years, and we will probably continue that way, but I don't think any -- we will see any major shifts.

And what we're trying to do is backfill the plants and the employees in those, what we consider higher cost region, with the bulkier products that have to be local to the assembly plants.

You will continue to see us have a shift in the lower cost footprint.

So, Don, how long do you think it will take to get it to where you really want it to be?

I think it will be an evolving process probably forever, because I think the -- in the next 15 years, you are going to see more assembly plants from the car makers move to low cost regions.

So as they continue to move, the supply base will have to continue to move to support them.

Haven't really done an analysis, but I would say we probably won't see an increase in movement to the low cost regions, it is going to be -- we will continue to restructure some plants and I think most of our new capital for core manufacturing will go in those low cost regions.

So it will be a gradual shift over time.

Rich, don't underestimate the impact of logistics, too.

I mean, there was a rush to go to the low cost country for almost everything done to hit the nail on the head.

I mean, for most of the larger sub assemblies, we want to be just in time, and logistics has an ever-increasing piece of the cost puzzle.

So we're paying close attention to that as our customers are.

Okay.

Thanks, Mark.

And then when you look at the rest of the year, here, you obviously had a big tail wind on the launch this year in the second quarter, you've got the minivan ramping up and the Liberty as well, here in the second half.

How do you characterize the launches that really hit in the first half of the year, and the momentum that you will see from that, and then balance that with the -- with the minivan and the Liberty, and some of the other stuff coming on later in the year?

How do you think about that?

How should we think about that?

It is very difficult for us to talk about the balance of this half, but some of the things you should be focusing on is overall volumes, certainly in North America, as well as in Europe, and I think you need to look at our key platforms, and whether they're outperforming or underperforming general volumes, and that will give you some indication of where the results should be heading, but other than that, I'm not in a position to comment further.

Okay.

And then finally, Louis on the Chevy Malibu that's being -- that's redone here from GM, do you have content on that?

And if you do, is it higher than the previous version?

We have content on it.

I'm trying to find it, but it is not a significant program for us, the Malibu, and the incremental content is not significant, either.

Okay.

Okay.

Great.

Thank you.

Thank you.

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

Please proceed with your question.

Hi, this is [Jedon Furon].

Guys, if you could give us some more details on the European EBITDA improvement.

It was like $60 million.

It was kind of similar improvement I saw in the first quarter.

Can you kind of break it up into like efficiencies in underperforming plants, and production, what are the major factors?

I'm going to just clarify the second quarter of '06 to the second quarter of '07.

I believe that's your question, right?

Yes.

There were a number of contributors.

One is certainly launches, as benefited the bottom line, and year-over-year.

We have seen some continued improvements at a number of underperforming facilities which has helped profitability.

Some of that has been offset as well by our continued spending investment for electronics, our costs to grow in Russia.

We are spending some money right now on some programs that we're expensing our costs, and higher price concessions.

We're looking at we're looking at underperformer, year over year, we have seen some improvement, in our insurance facility, that has been a high focus for us, but generally there has been growth in just about every group in Europe.

But it is launches improvements underperformers and some offsets that I talked about.

Okay.

And on your production assumption, you have it all towards -- we saw GM, Toyota, and Ford kind of cut their sales system by about probably 300,000, 400,000 units and we are seeing product coming down and the product to 100,000 and is it because you were conservative in the first place or do you think that is more risk?

Well, when I look at North America, from from where we started at the beginning of the year, we were assuming 15.5 million units of production.

Our most recent outlook is 15.2 million.

So we've trimmed overall production estimates by 300,000.

We may have also been, just from the start, a little bit more conservative than some of the other numbers but we've been bringing our numbers down as well.

And lastly --

We know as well as you do, looking our reviews and what we see, and looking at the reviews the last couple of months and the risk there and we have to put a stake in the ground.

Okay.

Lastly, on -- I know it is too early, probably too early, but the recent management changes at Chrysler, any initial thoughts?

No, I would say that there has been a number of changes at working levels since the announcement of the sale Cerberus and the most recent obviously in the CEO position.

I think it is too early to tell.

The car business is a very interesting business.

It is a very long term.

We have short-term pricing pressure in the business.

However, it is not like you have parts that can be moved overnight.

It is not like the car companies haven't already been extremely aggressive.

You look at the fallout in the supplies base.

And it will be interesting to see for all of the car companies including Chrysler going forward, who they align themselves with, what is their strategy for sourcing and how affects us and what is their strategy on spending money for new platforms.

So I think it is too early to tell.

I think we're obviously very supportive of Chrysler, and we always have been, and we want them to do well, as all of our other customers, and we think we've got some good technologies.

The best long-term solution, if you have a long-term thinker, is to get -- spend the money on the right platform, get the right technologies, and from a supply base, get suppliers who are healthy and can provide you with consistent parts and are healthy enough to try and use the fees to drive the engineer costs and the components.

Continued price pressure, I think we're already squeezed as hard as we can from everybody, and I think there's got to be a better solution going forward.

Okay.

Thank you.

Thank you.

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

Please proceed with your question.

Good morning.

Vince, you mentioned that the mix in North America was unusually good in the quarter, and I don't know if I'm quoting you right, but something along that line.

Do you see that ebbing off, like there was just really strangely good in Q2?

I didn't actually use the words unusually good, I guess we had good mix in the quarter, and if you go back over a number of years some quarters have been better than others.

And in terms of the mix, as we talked about the -- certainly the 900 pickups, the positives, and the 900 SUVs have been negative.

I talked about the Chrysler minivan, and the changeover and that impacted us negatively, but the F-series SuperDuty, for example, the Ram pickup, the Impala, the Wrangler, that all contributed to positive mix.

A lot of that is just launches as well.

You going to have a view as well to some of our key platforms and how they're going to do.

I don't have a crystal ball and know exactly what each one of those units is going to produce in the next six months, but we're certainly pleased with the mix we've seen in the first quarter and the second quarter of this year.

I guess what I'm driving at is the 3.7% sequential increase in North American EBITD, when tooling is up sequentially, is a huge increase.

And I'm trying to sort out how much of this sustainable and how much isn't.

Well, David, keep in mind some other things that are impacted in the quarter as well that we are seeing some restructuring benefits and that should continue.

And some of the launches, the Ford Edge, for example, the 250, and the X5 -- Land Rover X5 and the Jeep Wrangler and moving up the launch curve and as long as they sustain themselves, that should be sustainable.

It sounds like your merger can move quite fast, which is quite something.

Anyway, did you mention two plants still having problems, Syracuse and the U.S.

interior facility.

I was wondering if you could give us an idea of how big this problem is, and what exactly is going wrong in those two plants and the prognosis?

Yes.

I'm not going to give too much detail.

On the interiors business, we have a couple of launch divisions, which weren't particularly pointed out, but they are ones in ramp-up now and one is just getting ready for launch.

And it has been hitting the bottom line.

We have one facility which we had to make the decision to downsize, and basically move the business front, and that has been pretty costly for us.

But the interiors business, we've talked about in the past, is just a very difficult business, and nobody is making much money.

I don't see any short-term solution to turning around other than operational improvements and realigning our capacity utilization.

In the powertrain business, we've had a couple of different challenges in the quarter, in the first half, and some of them launches.

In Syracuse specifically, it is a very large plant, it's got a much higher cost base than other areas we've been working on continuous improvement in there, looking at streamlining what we've competitive in and what we're not competitive in.

We have -- there's a lot of discussions going on with the UAW, right now, with the car companies, we also have some contracts coming up, so we have been looking at the overall operation.

What we need to do from a purchasing standpoint, from a structural standpoint, from an overhead standpoint, and from a wage and benefit standpoint to continue to win business.

And we just need to get more business in, there streamline the operation, and realign our overhead.

So it is a big focus for us and we will keep you posted as to how we're doing, but we have a lot of continuous improvement activities in that facility as well.

It is a very large facility.

David, I also wanted to add, as part of this review at Syracuse and manufacturing operations, we have identified various underutilized machinery equipment, and that led to $22 million impairment charges at Syracuse.

So it is an ongoing process that we're undertaking at that facility.

Have both of these areas deteriorated in the last years?

Is that the idea here?

Well, when I look at the Syracuse facility, on a year-over-year basis, I would say that our performance has deteriorated.

Sequentially, we're seeing some improvement.

There was some launch inefficiencies in the first quarter, as we were ramping up for the GMT900.

But quarter over quarter, there has been substantial deterioration.

With respect to the interior facility that Don mentioned, we are in the restructuring mode.

We are moving business around.

It has been costly.

It is going to continue to be costly for the next quarter or so.

But again, we should see some benefits of that restructuring at some point in the later part of '07 or the beginning of '08.

Okay.

Good luck with that.

And last question I had, your corporate and other, it is down a lot.

I know you have the stock compensation thing in there but even if you take -- add that back, you have normally been running $20 million, $25 million a quarter, and were you were closer to $10 million.

Is there some change there?

Or I'm just wondering where we're going on that.

There is a couple of I would say one-time items that impacted us the quarter.

One was the -- us in the quarter.

One was the restricted shares which we talked about, the stock compensation costs, which was about $10 million.

In the quarter, we also booked some consulting fees, an expense relating to our global purchasing initiative, and that has certainly been a big benefit of the privatizations as we now can work together as one company, to leverage our global buy.

But we expensed some consulting costs in the quarter.

That hit the corporate line, not the divisional results.

So that should go away, or will go away in the third and fourth quarter.

So it sounds like you revert back to more normal then.

Yes.

Okay.

Great.

Thank you.

Thank you.

Our next question is coming from the line of Nick Morton from RBC Securities.

Please proceed with your question.

Good morning.

I wondered if you could talk about the regulatory conditions for the Russian Machines investment?

I think there is anti-trust approval required in Canada and Europe, and I just wondered how that stands now.

Actually we have Jeff Palmer in the room.

Why don't I just have Jeff answer that.

On the U.S., Nick, there is no issue at all, there was no filing required in Canada.

We received an advanced certificate from the competition authorities, clearing the transaction, confirming that there is no anti-trust issue.

And there are a number of filings that have been made in Europe and other countries specific filings.

Again, there is no overlapping in the operations between Russian Machine, they are basic elements and Magna, so there is no issue that we are expecting that would possibly hold up the deal.

But there are routine filings and we expect those more or less to be completed some time in September.

Great.

Thanks very much.

That was my question.

Thank you.

Our next question is coming from the line of Pat Archambault from Goldman Sachs.

Please proceed with your question.

Hi, yes, good morning.

Just on the dividends, I just wanted to know, how much of the change in dividend policy that you guys put in place was a reflection of better fundamentals going forward, your greater comfort with the cash position, or how much of it was really just reflecting the interests from shareholders who wanted a different value proposition?

I think it was a number of things.

We had come off a disappointing Q3 last year, and Q4.

And the board had this discussion, if I remember correctly, it was about in January, there was a lot of discussion about where is this industry going, our -- and there was a discussion about where were we, because we were paying a consistent amount, compared to the corporate constitution.

We were overpaying the corporate constitution because we -- because our results were down.

And there was a lot of nervousness in the final decision was to reduce the dividend.

We cut it in half.

I think going forward, we have talked to, since that time, we've talked to a number of different shareholders who were -- who encouraged us to go back from the way we were before.

We have had a number of discussions at the board.

The results in Q1 were more in line with what we would have expected in Q2, you've seen the results there.

So the discussion was -- I would say based on comfort level of the results, and also certainly feedback from shareholders, I think on a go forward basis, assuming the Russian Machines deal is completed, we have some new directives, and we also have the -- I guess the viewpoint of '08 in there as well with a significant number of shares.

I would have thought the thought process with someone who has that number of shares will probably be more aligned with our A-class shareholders.

So I think it's a number -- it is a combination of a number of different things.

I think going forward, if the deal gets done, we're probably have more decisions that are in alignment say with the majority of the A-class shareholders.

Okay.

Great.

And we've talked to a decent amount about the sustainability or potential sustainability of North America margins.

Just wanted to touch on Europe a little bit more and obviously, you had a pretty substantial increase there.

I was wondering about the seasonality issue.

We've had a couple of companies really shoot-out the lights in that region, but say that seasonal factors in the back half would make it unwise to sort of carry forward the performance from the first half.

And just wanted to get your take on that, especially seeing as you haven't really broken it out for a long period of time so we don't have much history to go off of on that front.

Pat, you look at our global business historically, when you look at the third and fourth quarters, margins are depressed.

The third quarter in North America, because of typically the shutdowns in July.

In Europe shutdowns are typically July, August.

And in the fourth quarter, we have the Christmas break, so that tends to have a negative impact overall on the results.

And so it is just the cyclical nature of the business.

But that is pretty normal.

Yes.

But would you see it as more pronounced in Europe?

I mean, consumers themselves take like almost the entire summer off.

It is going to depend in part really on the sales mix.

I don't necessarily have a view on that in our business.

Okay.

I will leave it at that.

Thank you.

Thank you.

Our last question coming from the line of Brett Hoselton from Key Banc.

Please proceed with your question.

Brett?

Good morning, gentlemen.

Good morning.

I apologize.

I had the mute button on.

Syracuse, can you give us a sense of -- it is a UAW facility, as I understand it.

Can you give us a sense of the number of employees at that facility?

But more importantly, when does the contractor -- can you talk a little bit about the contract, the timing of the contract, when it expires, and what your expectations might be in terms of changes in that contract, and so forth?

Just roughly, it is about 3,000 people.

It was a master contract plant B.

We have negotiations going on right now.

So I'm not going to comment on it.

We've had a -- I would say a pretty open and good working relationship with the people in the plant.

I think the -- it is no secret that there is a lot of restructuring going on, if you look at what is happening at Delphi, and at the end of the day, if any facility is not competitive, and not winning new business, and everybody there, the management, everybody in the shop floor understands that.

We are working well together on continuous improvement ideas and better uptime for equipment.

We're looking to put in some new capital in there.

But at the end of the day, we need to align our costs with what the competitors are quoting to the marketplace, we have a lot of expertise there, but I would say generally we need to make headway in a number of different areas.

Some of them are commercial discussions with our customers, and overhead costs in the plant, efficiency in the equipment.

So there is a number of different fronts where we're working on, and some of those need the leadership and the decision making from the union, and those are discussions we're having right now.

And quite frankly, we need to make some improvements in how we run some of the operations in the plant.

We're working hard at that.

Right now it's too early to tell.

We're just in the middle of the discussions.

And so does the contract expire in September, as does the automakers' contract?

It is in September.

I don't have the exact date but it is in the September time frame.

We're having discussions right now.

And, Vince, can you just remind me.

Your nonconsolidated sales and just a quick feel for what the amount is and then kind of the regional mix for nonconsolidated sales?

Are you -- is it joint venture sales or the equity account sales?

The equity sales.

The equity sales are primarily in north America.

And just in terms of magnitude of sales?

Yes.

Do you know what -- Brett, let me get back -- it is in our financials for last year.

Yes.

Okay.

I don't have the number off the top of my head.

We can follow up with you, Brett, on that.

And then, Don, just kind of conceptual question for you.

We were in a meeting with General Motors yesterday.

They were talking about their expansion into Russia, and their accessing the market, it sounds like through Daewoo, their facilities in Korea.

Kind of just conceptually, is your tying up with some of these Russian automakers who clearly have dominant market share in that market, but appear to be losing market share, is -- I guess do you see yourself as tying yourself closely with a couple of larger players with dominant market share, but are likely going to lose market share?

Or do -- and do you see that potentially limiting your ability to gain market share with the General Motors who are kind of accessing it through Korea, and/or Toyota, who you've obviously had some challenges in terms of getting -- or gaining market share with?

How do you see yourself expanding in Russia with the major players currently there versus the other players growing?

Actually I don't see them being exclusive.

I actually see -- everybody is looking for a good supply base there, somebody who has got some -- they have to be obviously cost competitive, but somebody who has got good quality, is willing to spend some capital, and put some expertise in the ground in management.

And there are some good suppliers there now, but they are -- everybody is sort at the infancy of what I would consider low cost supply base.

So our strategy there is if we can get enough content and get enough facilities built by providing parts and working with [VOS] and [GOS], who are the two dominant car companies, and that is going to be through engineering new product, and helping them get good modules and parts to market.

Once we've got that infrastructure set up, everybody is looking for a good supply base, like every other emerging company in an emerging country, once the supply base is there and you can get some competitive quotes they are comfortable with, they will source more and more locally.

So they've had a lot of discussions.

We are going to have to be competitive, obviously.

But we believe if we have got a strong partner, and will help us through all of the things that we may not be aware of, to get set up over there, and help us find good management, and train them, and get critical mass in Russia, I would expect we're going to get a very large percentage of the -- win over a large percentage of the quotes that are coming out from all of the car companies, because they all need local supplies.

So I don't see it being -- if anything, it will help us with the business because they know we are there to stay in and they know we're going to be a good supplier.

Okay.

Very good.

Thank you very much, gentlemen.

Okay.

Well I would like to -- as the last question, I would like to thank everybody for joining us today.

As I said earlier, we are pleased with the second quarter, particularly given the automotive environment in North America.

We will continue to focus on things under our control to further improve operations across the company.

We specifically urge all shareholders to consider the contents of the circular, which we mailed out last week, and a devoted a plan of arrangement is an extremely important matter for the future of Magna and all of its shareholders.

So thank you again, and enjoy the rest of your day.

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

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

Have a great day.