Magna International Inc (MGA) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the third 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 Tuesday, November 6, 2007.

I would now like to turn the conference over to Don Walker, co-CEO. Please go ahead.

Thank you. Good morning and welcome to our third quarter 2007 conference call. Joining me today are Vince Galifi, Executive Vice President and CFO; and Louis Tonelli, Vice President Investor Relations; and from Detroit and will be available to answer any questions during the Q&A period is Mark Hogan, Magna's President.

Yesterday our Board of Directors met and approved our financial results for the third quarter ended September 30, 2007. Our Board also declared a quarterly dividend of $0.36 per share payable on December 14, to shareholders of record on November 30, 2007. We issued a press release earlier this morning for the third quarter. You'll find the press release, today's conference call webcast, and the slide presentation to go along with the call, all in the Investor Relations section of our website at www.Magna.Com.

This morning I will start with some thoughts on the third quarter and then update you on recent activities and then Vince will review our financial results for the quarter and discuss our outlook for 2007. Upon completion of our formal remarks we'll be pleased to answer any questions.

Before we get started, just a reminder the discussion today may contain forward-looking statements within the meaning of applicable securities legislation. Such statements involve certain risks, assumptions and uncertainties which may cause the Company's actual or future results and performance to be materially different from those expressed or implied in these statements. Please refer to today's press release and attached MB&A for a complete description of our Safe Harbor disclaimer.

The industry remains difficult particularly in North America where light vehicle production volumes are expected to end the year down for a fifth year in a row. Nevertheless, there continues to be growth in light vehicle production globally and we're positioning ourselves to capitalize on the growth opportunities. For those companies that remain focused and disciplined with strong engineering and emphasis on technological advancement, the industry can still be rewarding. All in all, we're pleased with our results for the third quarter, excluding foreign exchange we still reported sales growth year-over-year, as we continue to launch some significant new programs in North America and Europe. A number of our business units continue to post solid results and we're working hard to address the businesses that are not performing to our expectations.

In September, we completed the previously disclosed transaction with Russian Machines. We indirectly issued 20 million Magna class A shares to Russian Machines and shortly afterwards completed a substantial issuer bid under which we repurchased 11.9 million class A shares. We previously disclosed our intention upon completion of these transactions to conduct a normal course issuer bid to eliminate the equity dilution that remained following the substantial issuer bid. To that end, subject to regulatory approval, our Board yesterday approved a normal course issuer bid to repurchase up to 9.5 million class A shares with the bid to commence on or about November 12, and terminate in November of the next year.

Also I'd like to bring you up-to-date on our activities in Russia. With respect to our traditional customers, we are currently quoting business with Nissan, General Motors, and Ford in the St. Petersburg region and Volkswagen and Renault in the Moscow region. The quoting activity covers a number of product areas, the most significant being stamping, seating, exterior and interior plastic parts and powertrain components. With the Gaz Group, Maga continues to work closely with this customer to support the launch of the JR 41, the former Sebring vehicle scheduled for next year. A number of our operating units are participating in this support function with Magna Steyr taking the lead position on behalf of Magna. Our cost unit is supporting Gaz on the stamping side and will stamp parts on the program within its current capacity in Europe until the stampings can be localized and Decoma has been awarded the front and rear fascias on the JR41 program.

With respect to AvtoVAZ and their newly developed platform of C-Segment vehicles, a number of operating units of Magna are currently negotiating for future business. The potential exists for us to have significant content on the platform. We expect to complete these negotiations in the coming months. Magna Steyr has been working with AvtoVAZ in the ensuing development of the vehicle on this platform. AvtoVAZ announced in May a letter of intent to form a joint venture to jointly produce the new family of C-Segment vehicles in a newly built production facility. Under the letter of intent, the forming of the joint venture was conditional upon the completion of a feasibility study to assess the attractiveness of this concept. Following the completion of the feasibility study, AvtoVAZ will proceed on their own with Magna Steyr and AvtoVAZ working on a contractual basis.

The primary reasons for this decision was the existence of capacity in AvtoVAZ to produce the vehicles and the short timeline prior to launch in order to construct a new assembly facility. We remain excited about the growth opportunities in Russia and plan to provide the investment community with quarterly updates of our progress there. Last month, we announced the signing of an agreement with the Canadian Auto Workers known as the Framework of Fairness, or FFA. The agreement represents a new labor model that, among other things, preserves the key components of Magna's Fair Enterprise System. The details of the FFA will be introduced to employees in Magna's Canadian manufacturing divisions over a period of several years. These employees will have the opportunity to vote on a secret ballot basis on whether they want to approve a new contract under the terms of the FFA and join the CAW.

If a majority of workers in the facility vote in favor, then the plant will be covered by the new Magna CAW national collector agreement. Key terms and conditions of the FFA include the preservation of our culture and operating principles embodied in our Corporate Constitution, and employee charter, comprehensive no strike no lock out provisions, progressive concern resolution and plant representation mechanisms that preserve our current structure and secret ballot voting on all workplace issues that require a vote. We're pleased we've been able to reach an agreement that will allow us to maintain our competitiveness through our entrepreneurial and flexible operating philosophy as we continue to work hard to support our customers and win new business. With that I'd 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 third quarter ended September 30, 2007. Please note 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 third quarter of 2007 and 2006 respectively.

In the third quarter of 2007, we recorded unusual items related to a gain on disposal of land and a building in the United Kingdom, a foreign currency gain on the repatriation of funds from Europe offset by the loss and disposition of an underperforming exteriors facility in Europe, restructuring charges for three facilities to be shut-down in North America and a future tax charge as a result of an alternative minimum tax introduced in Mexico that is effective in January 2008. These items resulted in a $23 million increase in operating income, a $15 million reduction in net income and a $0.13 reduction in diluted earnings per share. In the third quarter of 2006 we recorded unusual items related to restructuring charges for two facilities in North America and one facility in Europe resulting in a $5 million reduction in operating income, a $4 million reduction in net income, and a $0.04 reduction in diluted earnings per share. The following quarterly earnings discussion excludes the impact of unusual items.

In the third quarter, consolidated sales increased 12% to $6.1 billion. North American production sales grew by 18% in the third quarter to $3.1 billion as a result of a 3% increase in vehicle production from the comparable quarter to 3.6 million units. North American content was strong, increasing 14% to $862 in the quarter. The key driver of the growth in content was the launch in new vehicle programs, an increase in reported U.S. dollar sales due to the strengthening of the Canadian dollar against the U.S. dollar, and the impact of higher production and/or content on certain programs including the Ford Econoline. New launches contributed to content growth quarter-over-quarter included some of the new CUVs in the marketplace, the Ford Edge, GM's Lambda platform, the BMW X-5, and the Jeep Patriot as well as GM's new full size pickups with Ford F-Series Super Duty pickups, the Jeep Wrangler and the Dodge Avenger and Nitro. Partially offsetting these increases were high content programs that experienced lower volumes and/or content including GM's full size SUVs, the Chrysler Pacifica, and PT Cruiser, Ford Explorer and Focus and the Dodge Charger.

Programs that ended production during or subsequent to the third quarter of 2006 including the Saturn ION, the Ford Freestar and Buick Rendezvous, and Ford Taurus negatively impacted content. Incremental price concessions and lower price per minivan production volumes as a result of the change over to the next generation vehicle in July 2007 also negatively impacted North American content.

European production sales grew to $1.7 billion representing an increase of 27% over the comparable quarter in a period when European vehicle production increased 5% to 3.5 million units. European content was strong, increasing 22% to $479. The key contributors to content growth in Europe were the launch of new programs including the Mercedes C-class, the MINI Cooper, the Smart Fortwo and the Land Rover Freelander, 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 Honda Civic. These positive contributors were partially offset by programs that experienced lower volumes and/or content in the third quarter of 2007, including the Mercedes E-class, and incremental OEM price concessions. Rest of world production sales increased 47% to 100 million, primarily as a result of the launch of new programs, increased production and/or content on certain programs in Korea, China, and Brazil, as well as a strengthening of the Korean and Chinese currencies each against the U.S. dollar.

Complete vehicle assembly volumes declined 25% over the comparable quarter and assembly sales declined 16% or $158 million to $859 million. The sales decline was primarily as a result of the end of production of the Mercedes E-class 4MATIC at our Graz facility in the fourth quarter of 2006 as Mercedes started assembling this vehicle in house. In addition, lower assembly volumes for the BMW X-3 and all vehicles accounted for on a value-added basis reduced assembly sales. Partially offsetting the decline was the impact of the strengthening of the euro against the U.S. dollar and higher assembly volumes for the Mercedes G-class and Saab 9-3 convertible.

In summary, consolidated sales excluding tooling sales increased approximately 14% for 692 million in the third quarter. The primary reasons for the increase are global cost inflow and the strengthening of the euro, British pound and Canadian dollar each against the U.S. dollar, partially offset by lower assembly sales. Tooling, engineering and other sales were $375 million for the quarter, a decline of $39 million from the comparable period. Some of the programs for which we recorded tooling, engineering and other sales in the third quarter were the Ford F-Series Super Duty, the Audi A4, Chrysler's minivans, GM's full size pickups, and the Ford Flex. Programs that drove tooling revenues in the third quarter of 2006 includes GM's full size pickups and SUVs, the Ford Escape, the MINI Cooper, the Land Rover/Range Rover, GM's Lambda platform, the Freightliner P-class and the BMW X-3. The strengthening of the Canadian dollar, euro, and British pound each against the U.S. dollar also positively impacted tooling, engineering, and other sales in the third quarter of 2007.

Gross margin in the quarter was 13.2% compared to 11.8% in the third quarter of 2006. The change primarily relates to incremental gross margin earned on new program launches and as a result of increased production volumes for certain programs. The end of production of the Mercedes Benz E-class 4MATIC at our Graz assembly facility which had a lower gross margin than our consolidated average gross margin. Productivity and efficiency improvements at certain facilities including under performing divisions meant a decrease in tooling and other sales that are in low or no margin.

These factors were partially offset by a favorable revaluation to warranty accruals during the third quarter of 2006 substantially within Europe, costs incurred at new facilities in preparation for upcoming launches or for programs that have not fully ramped up production, operational inefficiencies, and other costs at certain facilities, in particular at certain powertrain and interiors facilities in the United States, lower gross margin earned as a result of the decline in production volumes for certain programs, higher employee and profit-sharing, and incremental customer price concessions. Magna's consolidated SG&A as a percentage of sales increased to 5.9% in the third quarter of 2007 from 5.5% in the comparable quarter. Higher employee profit-sharing and incentive compensation costs, a lower proportion of both tooling and assembly sales, and the provision against our asset backed commercial paper or ABCP were the primary reasons for the increase year-over-year.

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 4% in the third quarter of 2007 from 2.9% in the third quarter of 2006. Our effective tax rate declined to 30.3% in the quarter from 39.7% in the third quarter of 2006. A higher effective income tax rate in 2006 is primarily due to an unfavorable Supreme Court of Canada ruling against the taxpayer which restricts deductibility of certain foreign exchange losses. The $23 million impact of this ruling was partially offset by a change in mix of earnings whereby more profits were earned in jurisdictions with higher income tax rates. Net income was $170 million in the quarter, a 73% increase from $98 million in the third quarter of 2006.

Diluted earnings per share were $1.51, a 68% increase over the $0.90 reported in the comparable quarter in 2006. This increase in diluted EPS was a result of the increase in net income, partially offset by an increase in the number of weighted average shares outstanding during the quarter. The increased number of shares is a result of the 20 million class A subordinate voting shares issued for the arrangement with Russian Machines and shares issued on the exercise of stock options and stock appreciation rights, partially offset by the 11.9 million class A subordinate voting shares repurchased on this substantial issuer debt.

I will now review our cash flows and investment activities. During the third quarter of 2007, we generated $300 million in cash from operations, prior to changes in non-cash operating assets and liabilities and invested $83 million in non-cash operating assets and liabilities. The investment in non-cash operating assets and liabilities reflects an increase in production inventory in North America, associated with the launch of the Next Generation Chrysler minivans as well as a general increase in production inventory after the summer shut down. An increase in tooling and other inventory in Europe in preparation for upcoming launches, a decline in accounts payable and accruals primarily due to the timing of payment to suppliers and an increase in income taxes payable primarily due to an increase in taxable income and certain jurisdictions resulting in our income tax payable growing in excess of our income tax installments which are based on prior years income.

For the quarter, investment activities amounted to $319 million comprised of $174 million in fixed assets and $145 million increase in investments and other assets. The increase in investments and other assets relates primarily to $130 million investment in ABCP. These investments matured in the third quarter of 2007 but as a result of a liquidity issue on the ABCP market, did not settle on maturity. As a result, these were reclassified as long term investments. We also recorded a $7 million impairment on the value of our investment in this commercial paper.

Next, I'd like to turn to our 2007 full year outlook. We have lowered our vehicle production expectation in North America to 15.1 million units, primarily reflecting adjusted production schedules for the fourth quarter of 2007. We have increased our European vehicle production expectation to 15.8 million units, largely as a result of stronger than anticipated production in the third 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 $845 and $875 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 third 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 410 to $435. The increase mainly reflects a strengthening of the euro and British pound relative to our U.S. dollar reporting currency. We expect complete vehicle assembly sales to be between 3.8 billion and $4.1 billion. Once again, reflecting the strengthening of the Euro, relative to our U.S. dollar reporting currency. We now expect total sales to be in the range of 25 billion to $26.3 billion, up from our previous outlook. This reflects the increased ranges for North American and European content per vehicle, increased assembly sales, and 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 775 million to $825 million. This is down slightly from our prior outlook, largely due to our continued focus on expenditures across the Company.

This concludes our formal remarks. Thank you for your attention this morning and we'll now open the call to questions.

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

Good morning, guys.

Good morning, John.

A quick question on the change in philosophy with labor here, and whether it's really actually that large a change. I mean, do you see the union becoming more sort of like minded with you in your view on how labor should be paid or should we view this more as you seeing a larger opportunity set with unionized labor in your plants and you might be able to conquest more business?

Yes, I'll answer that. We've had a fairly good relationship both with the CAW and the UAW over the past number of years and we've voluntarily brought the union in in a number of facilities, specifically some interiors facilities in seating. We've had what we would refer to as a model agreement over the last number of years that basically allowed us to continue to operate the way we had in our facilities with employee advocates, fairness committees, et cetera. We've been having a lot of discussions with the CAW over the past many years about coming up with a more progressive model that will allow plants to be competitive, still having input from the employees through secret ballot vote and basically be able to continue to win business. I think if we're competitive quite frankly, when we quote, we will get the business regardless of whether we're represented by CAW, UAW or anybody else just because the car companies primarily they need to have the best technology and the best price. They can't afford to pick and choose.

I think having the relationship with the CAW in Canada certainly doesn't hurt anything. I think this is probably a next logical step in working with them. I don't think it will make us any less competitive, when you read the agreement it's fairly progressive. In some cases if we have the opportunity to do some business whether it's required by --because the outsourcing which is based on the latest contracts may not be happening a lot anymore. But in some cases the car company has asked us to have a contract if we're taking business out of their plant or if we are taking business over from a unionized competitor, like a complete seat, so this gives us an opportunity to have a working relationship already. So it really I don't think has much of an impact one way or the other from a profitability standpoint. Our employees get to look at it and make a decision whether they want to vote on each, on bringing the barometric burners into each location going forward so I don't anticipate a big change one way or the other, and I think pretty encouraged that the CAW recognizes the fact that they also have to change if we want to maintain our competitiveness in North America.

Okay, and then secondly, and I apologize if I missed the first few minutes, I had another call, where you were talking about your Russian opportunities. Did you guys mention how much business you're currently quoting on in Russia right now?

John, it's Vince. We didn't mention how much business we're quoting on. It's actually quite substantial the amount of business opportunities in Russia. We're working as Don talked about on the call closely with Gaz on the JR41. We do have a number of awards there, and we have a number of programs that we're currently working with with AutoVAS on the new C7 vehicle. It looks promising but we still need to work through volumes. We still need to work through capital. We still need to work through pricing and so on. There's still a number of unknowns but there are opportunities there and hopefully some of them are going to materialize in the next quarter or so for us.

Okay, and then lastly, just on your frame business or your structure business inside of Cosma, do you see any growing opportunities as we're seeing an increasing push to hire CAFE or fuel standards here with the lightweighting of the vehicle and your hydroform technology?

I'm not sure, Mark, unless you want to comment. I think the number of framed vehicles, the number of pickups is probably not going to particularly increase. I think we're probably the healthiest and strongest from a technology standpoint so I think we have an opportunity to conquest more business. I think lighter weight vehicles is definitely going to be a trend, we've been looking into hybrid strategy, doing some, whether it be hybrid drivetrain or going to offer our customers some opportunities or some innovations in hybrid vehicles and electric vehicles, we've got quite a push on from our vehicle group and no matter what technology wins, whether it's electric, hybrid, diesel, fuel economy is going to be a major change and lightweight is a big part of that. So, whether it's hydroforming or some other technology, I think we will be able to continue to win business based on the technology we're developing.

--on the space frame yet, right?

On things like the space frame, we could talk for hours on where it's most applicable and every person would have a different opinion but there's definitely some application there.

John, just in particular when you think about structures and some of the things we've talked about they're working on some hybrid structures which is a combination of hydroforming and aluminum, and what they're able to achieve is weight reductions across the measure for a customer compared to a traditional cast of aluminum part. So there are a number of areas that we're focused on to minimize weight and make products more cost competitive for our customers.

Great. Thank you very much, guys.

Our next question comes from the line of Fadi Chamoun with UBS Warburg.

Thanks, good morning, guys.

Hi, Fadi.

My first question is as we look into 2008 can you sort of walk us through some of the key launches that you have this year that will continue to pay off in '08 and maybe through a few of your launches that you expect in '08 as well?

Fadi, it's Louis. In terms of losses for '08, we have sort of gone through that process collecting that data through our business time process, but clearly the launches that we had this year, the Lambda platform, the Avenger, the Liberty, even the F-Series Super Duty which is still ramping up, Chrysler minivan being a big one that's launching right now in North America, all of those are going to have full volumes next year so they continue to kick in for next year and I'd say the same thing applies to Europe with our major launches in Europe, C-class for instance, the Mini at Toyota, some of those Land Rover Freelanders, those ones are going to impact us through 2008 as well.

Okay and the other question is if you can walk us through a little bit as well the, if there is any implication from the recent contract between the OEMs and UAW on your situation at New Process Gear. Does it open any area for you to improve the situation there with the labor?

Yes, we're going through contract negotiations there right now, so I'm not going to make a lot of comments on it, and I haven't seen the final documentation on the Chrysler deal but definitely it has an impact because there's flow rates and a number of other issues which we will work through and the New Venture Gear obviously if you look at the cost base of the OEMs and you seem to have made a pretty significant move into becoming more competitive and we're still analyzing what the impact will be on the supply community and also on what assembly plants will stay open long term because it's, our number one issue is which plants will be producing vehicles, which have been -- if they move them offshore obviously we can't go after the content in our existing plants. In Chrysler's case with New Venture Gear, we need to get an overall cost down to remain competitive. We're looking at making some future capital investments there if we can get our cost in line with competition, so it's too early to say but it definitely does have an impact because the employees will have an option of what they want to do and we need to get our costs down in a fairly significant way there to be able to win new business going forward.

Okay, and a last question, just for Vince. Do you expect the working capital to reverse in Q4? Is it sort of a timing issue?

Fadi, I do expect some recovery in working capital in the fourth quarter. Again, it's pretty seasonal as I discussed in my formal notes, the build up of inventory in the third quarter so that should improve a bit, so I do expect some recovery in the fourth quarter.

Okay, thank you.

Our next question comes from the line of Chris Ceraso with Credit Suisse. Please proceed with your question.

Thanks, good morning.

Good morning, Chris.

I know you spent a fair amount of time on this Don but I just want to clarify because I'm not exactly clear. With regard to unionizing in the plants, if the car companies are going to pick whichever supplier gives them the best price regardless of who they're sponsored by whether it's a union or not, what exactly is the incentive? What spurred you to go down this path with the CAW?

Well, it's always better to have a cooperative working relationship. Where we have -- we have a number of facilities already in the states and also in Canada that have the UAW and the CAW respectively represented in them. The contracts which we are going to offer to our employees to vote on really preserves everything we've got in our plants now, so it's not going to make us less competitive and--.

But do you get anything out of it?

I don't think we get anything particularly positive out of it. I don't think we get anything particularly negative out of it. I think the CAW and UAW obviously are going to continue to push for representing the employees in Magna and rather than going through a knock down drag them out fight which is a lose-lose for everybody, the employees and the Company and the union quite frankly, if they're willing to work on a modern contract with the flexibility we have in our existing plant then there's no downside to us in my opinion, so I don't know whether on a go forward basis the car companies will give a positive recognition to somebody who has a -- workforce or not.

I haven't seen a lot of that happen in the past just because as I said earlier you've got to become competitive anyway but if it's an equal playing field and we're winning business from unionized, other unionized facilities certainly having the ability to have a contract or having a contract in a manufacturing plant would help. I don't think they will give us extra sourcing because of it but they certainly, in the case of a tie I guess then that would be a consideration to have the CAW/UAW pushing for one of our plants.

Okay, all right that's helpful. You mentioned also in your comments, Don about outsourcing and maybe there's a change relative to the new contract, something that Mark has talked about for awhile now is the expectation that the car companies will outsource more powertrain work. Has that changed or do you think that that's still an opportunity for Magna?

Well, they've certainly shown an interest, Chris, in continuing to outsource transmission work, and we don't see any change in that trend. Transfer cases also tend to be a very important outsourced item, and certain powertrain or engine components have given us opportunities that were traditionally done inside the powertrain divisions of the OEMs. So I haven't seen any trend of late to suggest that what we've spoken to in the past is going to change. Only time will tell now that the contracts are settled and we'll see the specifics on how they're played out but I don't see the trend changing.

I think in general, you got to look at, we'll have to see the final details of the contracts of Ford, GM, and Chrysler, but if they are trying to lower their wages and protect some level of employment, you would expect the first thing that they would go after would be where there's a lot of jobs and things like assembly that's got to be close to the assembly plants, anyway if they have the space to bring it inside they could bring it inside and there's not a heck of a lot of technology there if they can be competitive.

In powertrain and a lot of the new manufacturing processes or new products where technology is the big driver on cost and weight, et cetera, performance, I think you're going to continue to see that move towards whoever has got the best technology and who is competitive. I think the securing by the Big 3 of assembly plants long term in Canada and the states is good for the supply community because ultimately if that moves, everything moves with it and transportation is becoming more and more of a cost factor, especially for bigger components so I think where technology is involved, they will continue to go where they can get the best product.

That makes sense. Last question, about the outlook for Q4. Some of the other suppliers that have reported have commented that not only is volume kind of flat to down versus Q3 but also the schedules look a little bit volatile. Are you seeing the same thing and could you conceivably earn less in the fourth quarter than you did in the third?

Chris, we're not going to give specific guidance on the quarter other than the guidance we've given for overall content and sales. I guess if you want to just compare kind of third quarter to fourth quarter, I'm just personally concerned about macro-economics and the impact that that could have on overall our industry, but that's a personal concern, not necessarily a Company concern.

And in the schedules, Vince, are they looking rougher than what you saw in the third quarter?

I guess when you look at our overall implied volumes for 15.1, right? Our volumes for the fourth quarter imply roughly the same as the same volumes in third quarter in North America, anyway.

Okay. Thank you very much.

Our next question comes from the line of Peter Sklar with BMO Capital Markets. Please proceed with your question.

Hi, Peter.

You know there was that language in the UAW/GM agreement about a moratorium on outsourcing and as well, I've noticed in your release this morning you've added an additional risk about the potential for GM, Chrysler, and Ford to insource work that's currently being done by Magna so it seems like there's something happening here, I'm just wondering if you can elaborate a little bit further and what you think of that language in the agreement.

I think it's probably too early for us to really understand. We have to, I just got some of the wording out of the first agreement from General Motors. Haven't seen the others yet, and I think we've got to look at and talk to the car companies. If you look at what they want to insource, you would think that the first people they would go after would be weak suppliers that are in financial ill health anyway and they want to get the business out of there. I think they have to bring it internally, they can market assets. So I think in some cases it may have an impact in that, depends whether they've got over capacity, depends what plants they're going to shut, stamping is one that we've heard they may want to look at some insourcing but I think they're also taking some capacity out of the system as well so it's too early really to judge the impact.

I personally think long term, and this is a personal opinion, that the car companies if they want to compete, they will get more flexibility to run different models through their assembly plant, get more throughput with the given footprint and a given number of people, and will probably continue to try and have as much flexibility as possible. The question there about powertrain earlier, I think they are going to continue to outsource powertrain whoever has the best technology so we typically look at sourcing two to three years in advance and the contract lasts for three years so we'll see -- we'll have to see what the car companies actually do. At the end of the day whoever has the best technology or whoever is the most competitive and competitiveness is not just made up of labor rate. It's made up of a lot of factors internally in transportation and packaging and efficiency and work rules and everything else, so it's a big business. There's a lot of weak suppliers out there. So hopefully if they decide they do want to insource product, they will take it from the weaker players.

Yes, okay. And my last question is I just want to talk about this accelerated pace at which the Canadian dollar is appreciating here. It seems to me that it's putting your Ontario domiciled manufacturing facilities at a disadvantage when it comes to quoting new business and I'm just wondering if you have some thoughts surrounding that?

Peter, it's Vince. Certainly some of our Canadian plants have come under pressure, and the result so far has been unfortunately a shut down of some facilities in Canada with a move into other jurisdictions including Mexico, the United States as well as Asia. I think we have to consider what type of programs they are. If they're big programs, transportation costs which are expensive and the assembly plants are in Ontario, logistics costs of moving product from the United States or Mexico into Canada may be very expensive, so those facilities should continue to operate, provide the car companies assemble vehicles in Ontario; however, to the extent they are lighter type products where transportation isn't a big cost component, we've seen some pressure and we've seen pressure on pricing and we've reacted to that by moving production down into Mexico or the United States.

Okay that's all I have. Thank you.

Our next question comes from the line of Himanshu Patel with JPMorgan.

Hi, thanks, this is actually Ranjit on the call for Himanshu. I actually wanted to delve into some of your segments a little bit closer. You saw a nice level of margins in North America, 5.3% according to my calculation but Europe still seems to be a little bit weaker than that, about 2.3%. How would you characterize margins in these two divisions? Where is the opportunity? What's sort of a normal trend rate that you can get back to, and I notice you also sold under performing facility in Europe. Wondering if that has any implication for margins there? Could you comment, please?

Sure. Keep in mind when you look at North America and Europe, that the businesses are not identical. Remember in Europe in the quarter, sales were about $2.6 billion and complete vehicle production sales and assembly sales and assembly sales accounted for about $850 million and Magna Steyr when we do the complete vehicles, a lot of those contracts are full costed contracts where we purchase all of the inventory and we basically resell that back with a profit including our cost back to the customer and we've always said that Magna Steyr on average operates on lower margins than the rest of Magna so that has a negative impact on overall margins. That's why we focused internally on return on fund employees as well as just to EBIT margin or gross margin. With respect to the exterior facility that we disposed of in the quarter, it was an underperforming division. It's been an underperforming division for some time, so disposing of that will have a positive impact on profitability going forward.

Okay, so I mean, I guess my question on Europe was margins were down even on a year on year basis, even though your sales and revenues were up, so is that largely a function of the decline in CVA volumes?

No. Remember in the third quarter of 2006, we had some warranty revaluation and it's booked in our notes in the financials and we've got a warranty revaluation of about $40 million, that was substantially all in Europe so if you reverse that warranty accrual reversal, in 2006, our income would have been about $40 million less so you're really looking at on a normalized basis, 30 million to 60 million in 2007 so EBIT doubled while sales was increased by about $200 million.

Okay, that's helpful. Just wanted to revisit where you are on M&A, which is just what do you see out of there? What are some areas which you think need increasing focus at Magna? For example, are axles part of that? Could you comment?

We don't have any major acquisitions that are imminent. We are continuing to look at a lot of different areas. We're going through all of our products. We typically do this on an annualized basis but we are taking a particularly close look at it this year, what product areas we think we need to grow in, what areas are not as strategic. We've been looking at growth in specific areas in electronics, powertrain is a growth area for us. There's a lot on the market right now. I think valuation expectations are more reasonable than they were a couple years ago so we're continuing to look at opportunities but we have nothing to report on right now.

Okay, thank you.

Our next question comes from the line of Michael Willemse with CIBC. Please proceed with your question.

Great. Thank you. Just wanted to go back to the opportunities in Russia. First, on this JR41 program with Gaz, when would this program start?

They targeted to start having the first salable vehicles out next March/April time period.

And what kind of volumes are they expecting on that platform?

I'm not sure if they said anything publicly or not. I don't want to comment because I don't know if they've said anything publicly, I don't want to comment on their volumes but for Gaz, it's a new product area and it's modern vehicle in the sort of C-size, so it won't be huge volume to start with but they certainly are using this as an opportunity to grow into that market.

And the content per vehicle for Magna, if you combine the stampings, the fascias, the launch support, is it going to be pretty meaningful content per vehicle, like hundreds of dollars?

Just on a JR41, yes, it would be.

Okay.

I think when you look at all of the programs that we're looking at today, the opportunities, I think it would be safe to assume that the average content per vehicle on those programs we're focused on would be higher than what we're seeing typically on programs in North America and Europe on average.

Would they be similar to the content per vehicle you suggested back when you put out the presentation on the Russian transaction in the first place? I think you were saying $1,000 in metal forming, 150 to 250 in plastics?

Mike, certainly, those are what we talked about on the road show with respect to the Russian Machines transaction, they're still applicable and as we said we're still looking at a whole bunch of opportunities. It's premature at this point to come up with definitive numbers. We'll continue to update our shareholders and the investment community every quarter, as we get more visibility as to opportunities and contracts awarded in Russia.

And remember, Mike, when we prepared that presentation on that slide we were talking about the maximum capabilities that we had in all of our product areas so it wasn't necessarily suggesting we were going to get that amount in each of those product areas but that was what our capabilities reflected.

Okay, good point. And just one more question on Russia. The C-Segment with AutoVAS, when would that start?

2009 I think is what we're targeting.

2009?

Yes.

Okay. And then also, there was a contract dispute with one of your steel suppliers that started, it was initiated in the end of 2004 and the last update suggested that that dispute would go to arbitration in the Fall of 2007, so should we get a result from that arbitration? Is that going to be this month or December?

Mike, actually, the arbitration hearing was resolved. It was disclosed and you probably haven't had a chance to look at it in the MD&A. So it was favorably resolved in the quarter for us.

Okay. So but because it was result in your favor, there wasn't any impact on your results this quarter?

Any quarter, any point in time we're going to have accruals for a whole bunch of things and to the extent we had some accruals relating to this, they would have been brought back into income. Mike, there wouldn't have been any material amounts.

Okay. And just one last question. There's some reports in the press that Magna might be in a position to win the complete vehicle assembly per the mini sports activity vehicle for BMW. If that were the case, I guess when would that contract announcement be awarded if Magna was the winner?

Mike, we're not going to comment specifically on contracts other than if they're material contracts and they've been awarded, we'll make an announcement to our shareholders.

Okay, thank you.

Our next question comes from the line of Rich Kwas with Wachovia. Please proceed with your question.

Good morning, guys, how are you?

Good.

Just wanted to follow-up on the Chrysler announcements here. What are you thinking here over the next few years on their model reductions and what's your thinking on their ability to replace that with new products? Have you thought longer term about the ramifications in the intermediate term for you?

Well, it's hard to say, because obviously some of the announcements weren't a big surprise to us, if you look at the sales volume and they're trying to get their overhead costs in line and the capacity through to plants and things like that. As far as new vehicles coming to market, I'm sure they're working on some new vehicles and platform strategy and international sales we're cooperating and giving some ideas for some, we think some good ideas how they can increase some of their international sales in a place like Russia. It's hard to comment on until we hear specifically and it becomes public knowledge what they're working on for future vehicles but I don't think it's a big surprise they are trying to streamline their overhead with what they think their future sales are going to be.

And then do you view Chrysler as a more significant opportunity with the new ownership in terms of outsourcing opportunities and content per vehicle?

Probably remains to be seen and one of the things I'd like to take a look at before I make a comment would be whatever language they will have finalized in their agreement with the UAW. I suspect they're going to try and continue to make the decisions that any car company would, whatever is the most profitable for them. I think we have a lot of technology and typically the supply base is more competitive, so I think there's good opportunities there for the whole supply base, it will depend on what the commercial terms are and what the working relationship is.

Okay. And then Vince, what was the, I don't know if I missed this but what was the currency benefit for revenues in the quarter and then operating income or net income?

The best I can give you is some sort of flavor on content per vehicle. And again, it's just really difficult to come to grips with the impact of currency in North America, because we do have foreign exchange contracts in Canada to the extent that we're selling in U.S. dollars, but if you look at content for all of North America last year, our content was $756. Our growth in content, $29 approximately $29 was due to translation and again that's an approximation that could be higher or lower, and content growth which we can identify was about $77 or about 10%, and I commented during my formal comments on where that content growth came from. With respect to content growth in Europe, you'll recall last year we were at $394. The acquisition of Pressac in the January of 2007 added about $11. Real content growth that we could identify was about 10% or $38 and the impact of translation which is easy to measure in Europe because it's primarily euro translating into U.S. dollars was $36.

Great. And then what was the, do you have a number for the net income contribution this quarter?

For currency?

Yes.

No, I don't. As I said, it's easy to take Europe and look at the impact of translation to U.S. dollars. When you look at Canada and we have a substantial amount of business in Canada, it's much more difficult due to the foreign exchange contracts we have either on the revenue side or on the cost side on purchases, but certainly, translation would have been positive for sales and profits in the quarter.

Okay, all right thanks so much.

Our next question comes from the line of Dave Tyerman with Scotia Capital Markets. Please proceed with your question.

Good morning.

Good morning, David.

Hi, David.

A question on the corporate and other line. Aside from the ABCP, were there unusual items in there on the compensation side? Or one off type things?

There was the after-tax commercial paper.

Right.

Which was in there for the $7 million.

Right.

There was overall a reduction of inner Company fees as a result of profits being lower. I'm looking third quarter to second quarter. I know the year comparison. I'm just looking Q2 to Q3?

Sure.

And incentive compensation would have been higher in the quarter.

Okay, let me put it another way. You guys used to run, let's say for a round number 20 million a quarter plus. If you back out, if you add back the ABCP, you're up to low single digits. Has something happened there you're not running at that old 20 million level going forward? Or is the compensation the reason and it's kind of a one off?

I would say that we did have -- the asset backed commercial paper was unusual in the quarter. A big part of it is going to be inner Company fees and incentive compensation. We have been adding generally the headcount as we're building infrastructure both in North America and Europe as we look at expanding globally but nothing comes to mind as sort of substantial other than what I mentioned.

Okay, so it sounds like it should be, it's going to be at a lower level going forward?

Yes.

On the normal course issuer, you guys have had these things before and haven't typically executed on them very much. Is this different this time because of the fact that you want to neutralize the Russian Machines share issue?

David, I think when you look at the Russian Machines transaction, we talked about minimizing or eliminating dilution. We did complete the substantial issuer bid. We did buyback the B shares, but there's still an additional 7.9 million shares outstanding. We did discuss our intention to announce a normal cost issue bid to at least eliminate dilution and that's our current intention. We've got a year under the normal course issuer bid to do that. If we're successful we can actually purchase up to 9.5 million shares so we can more than offset the dilution from the Russian Machines transaction. So it's our intent to proceed with that, David, in the course of the year.

That's fine and then I was just wondering if you could comment on the underperforming assets. What kind of losses are you guys running right now there or low profit, whatever it is, and what's your thoughts on prognosis for those operations?

I'm not going to get into specific numbers unless Vince already disclosed it, but the biggest area of under performance is in the interiors business and that's pretty well global. I think we're making pretty good headway in Europe. We've got through some launches and I think we've got an action plan in place to deal with a lot of the issues there. North American Interiors continues to be an underperformer, we're going through a number of launches right now. Some of them we had a difficult launch in the third quarter which was costly. We're now in normal production mode there.

We do have some other launches which we are going through right now. We've got some pricing issues on that but if you look at the raw material impact, the difficulty in passing that through to our customers so we will improve in my opinion in the interiors area in North America, I don't think we have a solution. The other big area which has been a big underperformer has been in the Syracuse operation. We're going through contract negotiations there. We're looking at having discussions with our customers. We're also looking at taking down some overhead costs there, some operating efficiencies so that's another one that we need to make some headway on to get out of the loss situation we're in.

David, just with respect to some other underperformers that we've talked about in the past, we've talked about under performance in our exteriors group, particularly Valplast and there would have been another facility which we disposed of in the quarter. We don't talk about Valplast anymore. We talked about their about operational inefficiencies. The plan is running well now. We have good business coming in so we've taken that off our radar screen and that plant has started to see some positive outlooks. On the exterior side, the other facility we've talked about in the past is our Decostar facility. We continue to struggle there with just the volume of business, so we're focused on getting business in that facility but it currently is in the red.

I would say generally, we've had a number of, we always track what our underperformers are. We've made a lot of headway in a lot of areas. We're not out of the woods in all areas yet and specific areas in our interiors business both in Europe and in North America we are making some good headway but we still have some issues to deal with.

Okay, great. Thank you.

Our next question comes from the line of Nick Morton with RBC Dominion Securities. Please proceed with your question.

Good morning. Wondered if you could talk about your tax rate, what it's likely to be next year and just perhaps expand a little bit on the Mexican tax change?

Nick, I'm not going to comment on 2008, but let me just talk a little bit about the Mexican tax change. On September 28, the Mexican government announced the introduction of an alternative minimum tax. It's 17.5% and it's effective January 1, 2008, and the AMT is calculated independently of income taxes. Under Canadian GAAP, we met the rules for substantial enactment so we had to look at our deferred tax items on the balance sheet to see if there was an impact. We looked at our deferred tax assets and the deferred tax assets substantially relate to, in some cases tax losses and in some other cases, productions that we've taken from an accounting perspective but not yet from a tax perspective, and based on the new tax as we look forward, we're not going to be able to recover $40 million of those deferred tax assets. So we've taken a writedown on that.

Now we're going to look at between now and December 31, whether we can mitigate this impact, because the introduction of this tax is really punitive. There's no relief for items that are on the balance sheet so we're trying to figure out a way around this but it came up very suddenly at the end of the quarter and we haven't had time to completely understand the tax and how to try to minimize the impact for us going forward.

Well, thank you for that answer. Is there any broader implication for doing business in Mexico? Is it still an attractive place to locate new plants?

Yes. It's still an attractive place. The alternative minimum tax is almost a cash based tax, so we're going to have to spend a lot more time focusing on cash balances and cash transactions and again, we were just focused on accrual accounting like we do in the rest of the world so we just have to figure out a way to minimize the impact of the alternative minimum tax.

Thank you very much.

Operator we'll just take one more call. I think there's another conference call going on but we'll take one more call and wrap it up.

So our last question comes from the line of Patrick Archambault with Goldman Sachs. Please proceed with your question.

Hi, yes, good morning.

Hi, Pat.

Just wanted to get a sense in terms of contract repricing in interiors, how big of a driver has that been in the quarter for you in terms of improvement within interiors and sort of what inning are you in in terms of how much that could improve the outlook just as more -- better economics get priced into the newer contracts as they roll out?

There hasn't been much of an impact in the last quarter that I can recall. I think quite often we can go back in hardship cases and some customers will take a look at it and verify the pricing so I think that has some impact. I think the bigger impact is on the new contracts are bid and I think a lot of the very weak players are now out of the interior business, have gone bankrupt, or moved on so I think we can get more realistic pricing going forward so typically we have to wait it out, but in some areas we would expect that we're going to get some pricing concessions from some customers where we're under water.

But in general, like some of these large launches you talked about for the quarter, I take it margin improvement will occur just on the back of those becoming a higher percentage of your overall revenue base; is that correct?

Well, in the quarter we had some launch inefficiencies so as we get in normalized production we typically get back to normalized margins. In a couple of the areas we do have some pricing issues on a go forward bases and we're having discussions with the customer right now.

And on new stuff you're negotiating, in general are people open to potential escalators if raw material prices should begin to increase a lot again?

Not typically, and in specific cases we can discuss it but typically, you make your best estimates on where they are and try and get efficiencies going forward. The difficulty always is if there's people who are desperate to build an order book because they think they're going to flip the business they will underquote and sometimes we get caught in chasing that, but I think most of the players now are, I think taking more realistic view of what pricing should be, and I think many of the customers also have understood that if they get unrealistic prices from somebody who is not a strong supplier they will go under and then they have a huge issue to deal with and I think the car companies are getting smarter and understand who they're doing business with.

Okay, and I just had one question on cash, obviously your cash balance is a pretty significant here. You probably have at least a few hundred million of that that can be taken up by the issuer bid for the 9.5 million shares but beyond that, that would still leave your cash well above I think what you've said you need it to be for operating levels. Just wanted to hear about what your plans might be for that cash in the future?

Well, if you look at the normal course issuer bid, if we were to purchase 9.5 million shares at roughly today's price, we're going to need $900 million to do that, so it's more than just a couple hundred million dollars. It's almost $1 billion and when you look at the debt that we have on our books on a pro forma basis at the end of the quarter, we have about $1 billion of net cash, so taking that $100 million off the balance sheet is a big chunk of cash.

So we'll continue to look at growing globally, look at new market areas, look at acquisitions, and try and make the best decisions for utilizing the cash but at the same time we also want to maintain a healthy balance sheet.

Okay, great. Thanks a lot.

Okay. I'd like to thank everybody for joining us today. Once again we're pleased with the third quarter and remain focused on further improving operations across the Company and global growth. Thanks for calling in.

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.