Magna International Inc (MGA) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter, 2007, and Year End Results Conference Call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Wednesday, February 27, 2008.

I would now like to turn the conference over to Mr. Vincent Galifi, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Good morning and welcome to our fourth quarter, 2007, conference call. Joining me today is Louis Tonelli, Vice President, Investor Relations. Don Walker is traveling today and is not available for our call. Yesterday, our board of directors met and approved our financial results for the fourth quarter ended December 31, 2007. Our board also declared a quarterly dividend of $0.36 per share payable on March 19, 2008, to shareholders, of record on March 10, 2008. We issued a press release earlier this morning for the fourth quarter and full year 2007. You will find a 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 web site at www.magna.com. This morning, I will cover off some of our accomplishments for 2007 and then discuss some recent developments. Louis will then review our financial results for the quarter. And, I will come back to discuss our outlook for 2008. Upon completion of our formal remarks, we will be pleased to answer any questions.

Before we get started, just as 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 a 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 MD& A for Safe Harbor disclaimer.

2007 was a year of many accomplishments for Magna. We posted record sales of $26.1 billion on the back of record levels of content per vehicle in both North America and Europe. These record sales were posted despite a fifth straight year of decline in North American vehicle production volumes and only a modest increase in western European production. We posted improved earnings despite the significant industry turmoil facing most automotive suppliers. We launched or continued to launch a significant amount of new business in both North America and Europe. In North America, much of the new business launched was in the crossover utility segment, the fastest growing segment in the market. G.M.'s all new Landa platform, the all new Ford Edge, and the re-engineered Ford Escape and BMW X5 all either launched or ramped up production during 2007 and we have substantial content on all of these programs. We were awarded a significant amount of new business from our customers. We continued our growth in new regions increasing rest-of-world production sales by 53% in 2007 to $411 million. The launch of new business in a number of emerging markets, in particular China, continues to aid our growth in rest-of-world sales and strong growth in these emerging markets is expected to continue.

We completed a significant transaction with Russian Machines which provide a strong foundation in Russia.. Russia is among the emerging markets in Eastern Europe which we believe will experience the fastest growth over the next number of years. Pursuant to the Russian Machines transaction, we issued 20 million Class A shares and at the same time repurchased 11.9 million Class A shares with some of the proceeds of the 20 million share issuance. In November of 2007, we announced a normal course bid. Our intent is to at least offset the remaining equity dilution from the Russian Machines transaction. We are authorized to repurchase approximately 9 million Class A shares of which we purchased 2.5 million for cancellation in the November to December period. The bid expires in November of this year. And we ended 2007 with one of the strongest balance sheets in the industry. With debt to capitalization of 9% and net cash of $2.2 billion, our strong balance sheet allow us the flexibility to capitalize on opportunities in the industry, to invest in new technologies and grow in new regions. Our balance sheet also allows us to execute our share repurchase.

Next, I'd like to discuss recent developments. We recently reached an agreement with the UAW representing workers at our new process gear facility in Syracuse. Employees ratified the agreement last week. The agreement includes wage and benefit reductions for employees and increased flexibility with employees in the plant. The net benefit to Magna from this agreement will depend on the number of employees choosing between three main options. The first option is to choose to accept the Magna offer and remain with Magna. The second option is to retire or to terminate employment with New Process Gear Chrysler and finally to choose to leave New Process Gear and flow back to Chrysler. Employees have until March 14 to choose an option. As part of the agreement with the UAW, Magna committed to invest $40 million of capital in New Process Gear this year. We believe the agreement balances the needs of the employees of the plant and provides an opportunity for New Process Gear to be a profitable and viable business going forward.

I would like to update you on our Russian activities. We announced last month that Cosma and it's joint venture partner, [Ching Yong Metal ]were awarded businesses to supply major standings and weldings to Hyundai's new assemblies plant in St. Petersburg, Russia. Cosma and Ching Yong will supply Hyundai from a Greenville plant to be built in close proximity to the Hyundai assembly plant. With respect to Gaz, which is a subsidiary of Russian Machine, we continue to work toward the launch of the Gaz Cyber vehicle expected in the coming months. Magna Steyr has been assisting Gaz in launch preparations and Magna will supply components on the cyber. With respect to Auto Vas, there is nothing new to report. [Berneau] continues it's due diligence process related to their potential investment in a 25% stake of Auto Vas. We are currently working on plans to add engineering centers in certain cities in Russia including Moscow and [Nizhniy Nokarart]. We continue to review acquisition opportunities with a view to quickly establishing a manufacturing footprint in Russia. We have a number of quotes outstanding with our traditional customers as (inaudible) expand their assembly operations in Russia. We continue to see Russia as a market with significant opportunity for Magna and our close relationship with Russian Machines allow to us move more quickly than would otherwise be possible.

Finally, I'd like to update you on a couple of small electronics acquisitions that we have recently announced. We acquired Sushing Electronics, based in China, which manufactures control modules. We also acquired Allied Transportation, which also has manufacturing operations in China. Allied supplies ultrasonic sensors, a market that is expected to grow rapidly. While the businesses are small in size, they provide us with an established electronics manufacturing footprint in a low-cost region and technologies that complement our existing capabilities and driver assistance. With that, I would like to turn the call over to Louis.

Thanks, Vince. Good morning, everyone. I would like to review our financial results in the fourth quarter ended December 31, 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 fourth quarter of 2007 and 2006 respectively. In the fourth quarter of 2007, we recorded unusual items related to impairment charges in North America and Europe, restructuring charges associated with certain of our North American operations, a net future income tax charge and a $150 million charge to establish a valuation allowance against certain of our future tax assets in the United States. These charges were partially offset by a net foreign currency gain on the repatriation of funds from Europe. These items resulted in a $32 million decrease in operating income, a $144 million reduction in net income and $1.21 reduction in diluted earnings per share.

In the fourth quarter 2006, we recorded unusual items related to impairment charges in North America and Europe and restructuring charges for two facilities in North America and three facilities in Europe resulting in a $91 million reduction in operating income and $80 million reduction in net income and a $0.73 reduction in diluted earnings per share. The following quarterly earnings discussion excludes the impact of unusual items. In the fourth quarter, consolidated sales increased 7% to $6.8 billion. North American production sales grew by 15% in the fourth quarter to $3.3 billion, reflecting a 1% increase in vehicle production to 3.7 million units and a 13% increase in North American content to $906. The key drivers of growth in content were the launch of 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 vehicles on the Chrysler's L.X. platform and the Jeep Wrangler.

New launches contributing to content growth quarter over quarter include some of the C.V.s in the marketplace. The Ford Edge and Escape, GM Landa platform and the BMW X5. As well as GM's new full size pickups, the Ford F series super duty pickups, Chrysler's minivans and the Jeep Liberty. Partially offsetting these increases were high content programs that experience lower volumes and/or content, including GM's full-sized SUVs, the Dodge Nitro and Ram pickup, the Chevy Impala and Equinox and Ford Fusion. Programs to end this production during or subsequent to the fourth quarter of 2006, including the Saturn Ian, the Buick Rendezvous and the Chrysler Pacifica also negatively impacted content. Incremental price concessions also negatively impacted content-- North American content. European production sales grew to $1.9 billion representing an increase of 25% over the comparable quarter. In a period when European vehicle production declined 1% to 3.9 million units.

European content was strong, increasing 26% to $478. The key contributors to content growth in Europe were the launch of new programs including the Mercedes C Class, the Mini Club Van, the Smart 4-2 and Volkswagen T1. The strengthening of the Euro and British pound, each against the US dollar, the acquisition of two electronic facilities from Pressback in January 2007 and increased production and/or content on certain programs including the Mini Cooper, BMW 3 series, the Volkswagen Caddy, and the [Oblaxtra]. These positive contributors were partially offset by programs that experienced lower volumes and/or content in the fourth quarter 2007 including the Mercedes E Class, the BMW X3, the Jaguar XJ Series, incremental (inaudible) price concessions and the sale of certain facilities during or subsequent to Q4 of 2006.

Rest-of-world production sales increased 57% to $124 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 the strengthening of the Brazilian, Korean, and Chinese currencies against the US dollar. Complete vehicle assembly volumes declined 36% over the comparable quarter and assembly sales declined 21% or $265 million to $981 million. The sales decline was primarily a result of the end of production of the Mercedes E Class formatic at our Graz facility in the fourth quarter of 2006 as well as Mercedes started assembling the (inaudible) in house. In addition, lower assembly volumes for the BMW X3, the Mercedes Benz G Class 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 US dollar, and higher assembly volumes for the Saab 93 convertible. In summary, consolidated sales, excluding (inaudible) sales, increased approximately 10% or $589 million in the fourth quarter. The primary reasons for this increase are global content growth and the strengthening of the Euro, British pound and Canadian dollar, each against the US dollar, partially offset by lower assembly sales.

Tooling, engineering and other sales were $536 million for the quarter, a decline of $121 million for the comparable period. Some of the programs for which we recorded tooling, engineering and other sales for the fourth quarter were the BMW Z4 and One series GM's 4-5 pickup Chrysler's minivan, the Dodge Journey, the Smart 4-2, the Mercedes C Class, the Dodge Nitro and Jeep Liberty. and the Ford F Series Super Duty. Programs that (inaudible) revenues in the fourth quarter of '06 include GM.'s new full sized pickups and SUVs, the Ford Edge, Mini Cooper, the Saturn View, the Dodge Journey and Caliber, and Mercedes-Benz C Class. The strengthening of the Canadian dollar, Euro and British pound, each against the US dollar, also positively impacted tooling, engineering, and other sales in the fourth quarter of '07.

Gross margin in the quarter was 12.7% compared to 10.7% in the fourth quarter of 2006. The change primarily relates to incremental gross margin earned on new program launches and is a result of increased production volumes for certain programs. The end of production of the Mercedes-Benz E Class Formatic 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 underperforming divisions, the sale of underperforming divisions during or subsequent to the fourth quarter 2006, the decrease in tooling and other sales that earned low or no margins and a decrease in assembly sales, improvements as a result of recent restructuring activities and lower warranty accruals in the fourth quarter of '07 as compared to the fourth quarter of '06. These factors were partially offset by 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 power train and interior facilities in the United States.

Lower gross margin earns are the result of decline in production volumes for certain programs. Higher employee profit sharing and incremental customer price concessions. Magna's consolidated SG&A as a percentage of sales increased to 6.2% in Q4 '07 from 5.5% in the comparable quarter. Higher incentive compensation costs, the provision against our acid-backed commercial paper, cash awarded to a former sales agent pursuant to an unfavorable arbitration award, costs to grow and develop our business in Russia and a lower proportion of both tooling and assembly sales were the primary reasons for the increased year-over-year. As a result of the higher gross margin percentage and higher interest in equity income earned, partially offset by higher SG&A percentage of sales and higher depreciation expense, our gross margin percentage increased to 3.4% in the fourth quarter of 2007 from 2.1% in the fourth quarter 2006. Our effective tax rate increased to 27.2% in the quarter from 18.5% in the fourth quarter of 2006. In the fourth quarter of 2006, US R&D tax credits related to all of those mix were cleaned in the fourth quarter as a result of a tax law that was newly enacted in December of '06.

Much of the remaining increase relates to the a change in the mix of earnings where by more profits were earned in jurisdictions with higher income tax rates. Net income was $172 million for the quarter, a 58% increase from $109 million the fourth quarter '06. Diluted earnings per share were $1.45, a 46% increase over the $0,99 reported in the comparable quarter of 2006. This increase and 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 the result of the 20 million Class A shares issued in connection with the arrangement involving Russian Machines and shares issued on the exercise of stock options and stock appreciation rights, partially offset by the 11.9 million Class A shares repurchased under the substantial issue bid and the 2.5 million Class A shares repurchased under our normal course issue bid.

I will now review our cash flows and investment activities. During the fourth quarter 2007, we generated $429 million in cash and operations prior to changes in noncash operating assets and liabilities and a further $400 million in noncash operating assets and liabilities. The recovery of noncash operating assets and liabilities largely reflects the collection of accounts receivable prior to year end. For the quarter, investment activities amounted to $320 million comprised of $305 million in fixed assets and a $15 million increase in investments and other assets. The purchase of fixed assets in Q4 was significantly lower than previously expected, largely due to our efforts to delay spending to the extent possible for new programs. I'll now pass the call back over to Vince.

Thanks, Louis. I will now review our current 2008 full-year outlook. Our vehicle production expectations in North America and Europe are unchanged from our previous outlook at 14.4 and 15.6 million units respectively. Since we issued our previous outlook in January, the Canadian dollar has weakened and the Euro has strengthened, each against our US dollar reporting currency. As a result, we have reduced our range for expected North American content per vehicle. North American content is now expected to be between $845 and $875 for 2008. We increased our range for expected 2008 content in Europe. Content per vehicle in Europe is now expected to be in the range of $450 to $475. We expect complete vehicle assembly sales to be between 3.6 and $3.9 billion which is unchanged from our previous outlook.

We expect total sales to be in the range of 24.9 to $26.2 billion unchanged from our previous outlook. The increased range for European content per vehicle is expected to be completely offset by the reduced range of North American content. For the full-year 2008, we expect (inaudible) spending to be in the range of of 925 million to $975 million. This is up $50 million from our prior outlook. The increase outlook for capital spending reflects that a portion of capital, we anticipated being spent in the fourth quarter of 2007, has been deferred into 2008. This concludes our formal remarks. Thank you for your attention this morning. We will now open the call for questions.

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

Good morning, guys.

Good morning, John.

A question first on Magna Steyr. How should we think about the operations there, on sort of a variable margin basis? Should we think of that as a typical production facility or is there more variability in a fixed cost structure there?

I think when you think about that facility and some of the contracts that we have in place, a lot of the contracts provide for a cost recovery model. So some cases there is a lot of variability. Keep in mind we do have a big facility there. We have been over the last couple of years been running a number of units through that facility. Production did fall in 2007. It's expected to continue to fall in 2008. That'll have some impact overall on our sort of fixed cost absorption rate at that facility.

Vince, if you could talk about your product selection process in developed markets, North America and Europe because you've done a good job at picking the right products to be on and a lot of these OEMs. Just wondering how you translate that also into developing markets particularly China and potentially Russia.

I think when you look at-- I'll start with Russia. When you look at Russia, what we've analyzed is what segment of vehicles are we thinking of selling the most there, the A, the B, the C segment, the truck segment. We think that the C segment's going to do extremely well in Russia. That's one of the areas we're focusing on particularly in Russia is the C segment.

With respect to China, a lot of what we've been doing in China is really a couple strategies we have. The first is the source components in China and ship them throughout the rest of the world to our existing facilities. The second is really to support our existing customers. And if you think some of our existing customers, in particular, let's say, GM, a lot of the product that they're manufacturing in China is product that we also have substantial confidence here in North America or Europe. A lot of what we're doing in China is following our existing customers, supporting our traditional customers and looking at ways of reducing our production costs by manufacturing in China and potentially exporting outside of that region.

Okay then lastly just on the Cap Ex bump we're seeing in 2008, does any of that have to do with increased takeover business and have you seen more potential for takeover business as other suppliers are weakening further?

Well, John, I think when you look at the increase in capital spending, our guidance for 2008, it solely relates to the timing of Cap Ex. When we look at where we ended up in '07, we're probably about $50 million shy of where we thought we might be. Our operators are looking all the time on how they can defer expenditures, defer costs. A lot of the capital's just moved from 2007 to 2008.

With respect to, takeover opportunities and business, certainly we look at opportunities to take over business. Unfortunately as troubled suppliers that went into Chapter 11 protection, the time is difficult for the OEMs to pull the contracts away. And the troubled supplier needs to continue to operate the business, but certainly, in a situation that we're facing today with some financially challenged suppliers as new business comes up, we think we certainly do have an advantage with our balance sheet strength to go after that business.

Thank you very much.

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

Thanks, good morning, guys. Couple of things. It looked like the margin in Europe was a bit weaker than we expected. Was it also weaker than your forecast or were we just looking for too much?

I think -- are you looking sequentially Q3 to Q4, Chris?

Yeah. And also versus the first half. Is it a volume issue? Or, did the performance in Europe deteriorate?

I think when you look at sequentially, Q3 to Q4, when we look at operating that margin on a normalized basis and we've identified in our slide show what we consider as unusual costs, the operating margin actually improved in Europe quarter over quarter. Some of the things that you need to keep in mind when you look at the fourth quarter, whether that's North America and Europe, there are a number of items that have impacted us in a negative way as both in North America and Europe. Think about Europe, for example, we continue to invest in electronics which is a drag on overall earnings. And if I look at our investment in Q4 versus Q3, that was a negative.

We also had some launch costs, some preoperating costs for business launches, in particular a power train group. It adds up, which is good news because we're going to have business coming onstream which is going to generate revenue and profits as well. In both North America and Europe, we've talked about restructuring costs in our discussion this morning. What we haven't talked about is just some right sizing costs that we have in a number of divisions. There's a couple million here and a couple million there. When you add it up across a number of divisions in North America and Europe, it starts to add up. When I sit back and look at Q4, you specifically asked me about Europe, I'm pleased with the operating margins there, given some of the noise that we have in the quarter.

And, Chris, when you talk about volumes, if you look at the first half of the year, you're running at 4.2, 4.3 in volumes in Europe. We're at 3.5, in Q 3 and 3.9 in Q4 so certainly volume's going to have some impact on the overall first half versus second half.

I've got some questions on the deferred tax asset writedown just to make sure I'm clear on that. So are you suggesting that you're losing money in the US and that all of the profits that you're showing for North America are coming from Canada and Mexico?

No, Chris, that's not what we're suggesting at all. If you go back into Magna's history and you think about our U.S. group, there's really a number of groups from a tax perspective that came together. We did have three publicly traded subsidiaries. Each one of those subsidiaries has their own legal structure in the United States. So if you think about it from a tax perspective, we had a number of different pools. What we're doing for 2008 is we're going to merge all those into one consolidated group from a tax perspective, but historically, we had three separate groups.

When I look at two of those groups, our interiors group and our power train group, and we've talked about some of the challenges that we faced both in interiors, North America, and particularly Syracuse in the United States. When we look at some of the accounting standards that we've got to apply in terms of establishing a deferred tax asset, some of those things we look at, a three-year history of accumulative profits. A look at our US interiors facilities and power train facilities in the US We don't have that history. And we have to also look at available tax planning strategies and given where we are, we just can't, at this point in time, justify the deferred tax assets for our interiors or power train group. That doesn't mean that we don't expect to utilize those losses. The accounting just won't allow to us set up those assets on the balance sheet anymore.

Have you min it down completely or just partially.

We've written it down completely for interiors US and power train U.S.

Okay.

Total is $115 million on the charge to our tax line in the quarter.

Okay. So it's not the U.S. in total, just those businesses in the U.S.?

That's correct.

Okay. Maybe you can just spend a second on Chrysler. Have you thought about what the company is up to with regard to its product portfolio and what the impact there might be on Magna?

Chrysler's talked about taking some production out. Talked about some platforms coming out. The overall impact to Magna's really hard to determine. Certainly if production is declining in areas that we have content, that's a negative. The question we have to ask ourselves is where is that production going to? Where is that additional sale going to that capacities coming out. Is it going to a G&T (inaudible) platform? Is it going to a Ford Edge? What's the net balance when all that shift takes place? I don't know the answer to that. We monitor certainly the situation of all our customers throughout the world, and we continue to support each one of those customers in a global way.

Okay. Thanks.

Our next question comes from the line of Michael Willemse with CIBC. Please go ahead.

Thank you. Just to go back to the operating margin in North America. It dropped quite a bit sequentially. Just so I had it right, Vince. Did you say pretty much all of that was due to, I guess, right sizing and prelaunch costs?

Yeah. North America I was specifically referring to Europe, just some common elements of North America and Europe. Let me just describe the sequential change in operating margin in North America. I'm looking at it on a normalized basis. There is a number of operating divisions where we took accelerated depreciation and some minor (inaudible) at write-offs we haven't identified as impairments or restructuring as just sort of normal course. But, as it comes to the end of the year, our controllers do a scrub of everything and there's been some writedowns across a number of divisions. There were some right sizing costs.

We had some additional launch costs in the quarter, and preoperating costs. Over a number of business units, you think about the Chrysler minivan that's launched, and it's an important vehicle to us. Sales are ramping up. We've got a lot of launch costs supporting that launch. In interiors, there's a launch going on in Mexico. A Chrysler launch, which we've been spending some money. It's getting close to launching, but we incurred quite a bit of money on that program. And the S6 is launching as well. So that's all added to our costs and reduced operating margin. There's one other item, too, that impacted us in the fourth quarter in North America and it relates to our employee profit sharing or DPSP. Under our corporate constitution, we're required to distribute 10% of pretax profits to employees, which we accrue on a quarterly basis.

In North America, couple years ago when we had a defined benefit pension plan, we replaced that with a defined contribution pension plan. And as part of that whole package to employees, what we've guaranteed them is that there would be a contribution to the deferred profit share plan at least equal to 5% of base salaries and wages. And when we look at sort of a results in the fourth quarter with the impairment, we weren't at that 5% threshold. So there was a catch up adjustment to the deferred profit sharing plan to achieve that number. So that's sort of an unusual item in the quarter that wasn't there in the first, second, or third quarter.

Mike, just one thing that's ruled up with what Vince talked about. The CS program. The Chrysler Pacifica was canceled and there are some costs that we had to incur related to that cancellation.

Okay. How much was cost related to deferred profit sharing plan?

I think-- you think about it, it's probably about $10 million.

Okay. But a lot of these costs, I mean, it would be safe to assume that a lot of these costs, the launch cost obviously the profit sharing would go away in first half of 2008?

Certainly the -- when you think about some of the (inaudible) depreciation, (inaudible) writedown, that's going to go away. The DPS, the trueup the floor, that's going to go away. The launch costs are going to improve as the year moves on and I'll have the exact numbers in the first quarter. Certainly that's going to ease up as we move into 2008.

How about the launch costs for the new F-150 frame? When would we expect the bulk of the launch cost for that?

That's launching in the summer. So we're going to incur costs there. We're talking about one program, there's a bunch of programs that are going on. We're going to start ramping up on that the next couple quarters.

Okay. And just second question. Could you just go over your exposure to steel prices again? Stock markets jumped quite a bit. If you could go over your (inaudible) exposure, your contract exposure and how much is cashed through.

Yeah, we're about--- about half of the steel that we've purchased is under resale programs with our customers. We've got about 25 to 30% that are covered under long-term contracts. And the remainder of that, Mike, is either under short-term contracts or spot buys. And the bulk of that we try to cover under the one-year contracts.

Okay. Thank you.

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

Hi. The new process gear deal, I'm wondering-- a couple of questions. One, could you give us the ratification rate of that deal and number two, could you get into a little bit more detail on what were the packages that were offered to the workers, both for the first option where they stay on board for a lower wage rate and for the second option where they retire? How were they structured?

In terms of the acceptance rate, I don't have the number in front of me, but it certainly was over 50%. It was supported by a large percentage of our workforce. Just in terms of broad brush, what we're doing there if we're getting an offer to employees to accept employment at Magna, and if they choose to do so, the employee's going to receive $87,500 over a four-year period. And that's really to buy down wages and benefits.

If employees do accept that, what we see happening is that wage rates will be dropping from about $2911 today to $20.16 per hour, on average. There's a lot of sort of wage rates. That's kind of the largest wage rate group at New Process Gear. Employees will move to Magna benefits, and they're going to permanently terminate Chrysler service. What that all means to us really depends on how many employees elect to stay with Magna or how many employees choose early retirement or termination or decide to flow back with Chrysler. We're not going to know that until later on in the middle of March when employees actually decide which option they're going to take.

The buydown, you mentioned, what happens to base wages. Any quantification you can give us on sort of hourly basis on what happens to benefits kind of where they were before and where they would land for someone who does accept a buydown package.

I don't really want to get into that level of detail. All I can say is that when you look at the entire package offered to employees, we were looking at a situation that we needed some to improve our competitive position in New Process Gear, we're going to do that in a number of ways. We're going to invest in capital to modernize the facility. Employees are going to share a little bit in terms of reduced wages and benefits offset in part by the buydown. But overall I'm not going to get into details of what that means on a per out basis (inaudible) with wages and benefits.

Just directionally. Does this kind of achieve the goal of taking you to master contract wages to Tier two wages and benefits combined or would you still say that, post buydowns for the people accepting buydowns, the workers would still be cost uncompetitive compared to some of your other plants where they're getting much closer to where you'd say are comparable tier two wages?

I would say actually not Tier two wages, but it. would bring us down to Tier one wages and benefits. Tier one.

Okay. And then the -- for the people who retire, I think that was a second option. Is there a buyout package offered for them or do they just retire?

If they retire that'll be a package that will be provided to them. If they retire or terminate, that'll be a package provided by Chrysler.

Okay. So that's paid by Chrysler. That's useful. Couple separate questions. Earlier, there were some questions about commodity costs. Are you seeing any signs that the health of the tier two supply basis is starting to slip again or is this a situation that isn't really at the top of your mind right now.

We;re-- actually-- we've had some discussions, Charlie, about focusing on our tier two supply base. With production volumes coming down in North America, and a number of suppliers financially challenged, I think there's heightened exposure to the (inaudible) supply base. So our antennas are up. It's something that we're keeping a close eye on.

Mm-hmm. And then Europe, any signs of what's going on, on production over there. It sounds like Q 1 production was maybe coming in a little bit stronger than people thought. But when you look at what the forward 12, 16 weeks scheduled, seeing any signs of softening in any of those major car makers?

I don't have specific knowledge of the first quarter. All I can tell you is as we looked at our outlook that we just gave this morning, we did once again look at production volume for the year, both in North America and Europe and we were comfortable with the guidance we'd given in January 15.6 million and Europe. So I'm not actually sure where first quarter volumes are at compared to overall. Our first quarter expectations for the year, we're right on track.

And we didn't do a lot of our shuffling in terms of the quarterly and that. There isn't a lot of change in that. Of course you look at the quarter. So, nothing remarkable there.

Okay, and then the two small acquisitions that were made, you classified those as, things that bulk up your capability in driver assistance. I'm just wondering is this representative of potentially a broader move by Magna into active safety more aggressively or would these just bolt-on acquisitions where you needed to fill out the portfolio and we shouldn't read much more into that?

We've had for a number of years strategy to grow our electronics business. The one area we've had wall of success with out customers-- with a number of customers is with driver assistance. So we've been looking at, as we move forward, where is that part of the vehicle or that part of the business going? What technologies do we need to apply or develop or where do we need to have a manufacturing footprint? I look at this sort of bolt-on acquisition that we've been doing both on acquisitions for electronics for the the last two to three years. It's probably safe to say we continue to do that. But they are going to be smaller type acquisitions to round out our capabilities and advance our capabilities.

Okay, great. Thank you very much, guys.

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

Good morning. I wondered if you could comment on the sharp sales decline at GM. and Chrysler in the first half of February and how that might affect your first half?

Tough to say, Nick. You always have to look at the programs that are moving around and in our customers. So truthfully, we're very often not looking at one month, sometimes even one quarter of results and saying it's indicative of anything. I don't think we had any particular view about half a month's worth of the results.

Okay. And then my second question is just on the balance sheet. What amount of cash is appropriate in the environment brand?

More rather than less, Nick.

Right.

Well, when you think about our cash balances and they did grow in 2008 for a couple reasons. One is the Russian Machines transaction where we actually have brought in $1.5 billion. We havne't used the 1.5 yet to buy back stock, but also generating cash from operations.

I think if you ask our executive team here at Magna, we have a number of priorities of the cash balance. We have announced the normal (inaudible) for bid. We did buy back some stock in the fourth quarter. So we intended to continue to, as we see appropriate, to continue to buy stock in the market. As we look at acquisitions and we always look at acquisitions, but there seems to be a change in expectations in the marketplace. (inaudible) and I think part of that is that (inaudible) markets just aren't available. With our cash position, we think we're in an ideal situation if the right acquisition comes up in the right product area. So, we think, if you asked me today versus a year ago, I would say that I would be more comfortable with more cash today than I would a year ago. But the overall economic environment has changed and maybe the opportunity to leverage that for our benefit.

Okay. Well, thank you very much.

Our next question comes from the line of Peter Sklar with [Nesbit Burns].

On this issue of insourcing, there's been reports that as part of the UAW. negotiation this past summer, that the domestic three have agreed to in source quite a few thousand of jobs back into their parts operations and I'm just wondering are you seeing any evidence of that with respect to your operations and how do you see that playing out?

Peter, we've heard the same thing with the contracts with the OEM that there's a will to in source. We haven't seen a whole bunch of that. I don't know if we've seen any of that. I guess from where we look at it, we've kind of continued the low-cost producer with the right technologies and that'll protect our revenue line. So we haven't seen an impact of it yet.

Okay. And lastly, this arbitration you lost in Europe. Haven't had a chance to read the MD&A yet thoroughly. Can you just explain just a little bit what that related to and what the magnitude of the charge was during the quarter?

We had an arrangement with a commissioned salesman, several long-term relationship that we had with him and I think it was a couple years ago we wanted to access our relationship, and we had made accruals, actually earlier on this year for what we thought would be on the hook for the relationship. It went to arbitration and at arbitration, we lost. We ended up paying more for terminating the relationship. The arbitrator looked at the future earnings that the salesman was going to lose. The amount in the fourth quarter was just under $10 million for the (inaudible).

Is that all in the terms of your segmented reporting, is that all in the European segment?

It's in Europe and SG&A.

Okay. That's all I have, thanks.

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

Good morning.

Good morning, David.

Just to deal with the-- the other unusual there that seems to be embedded, the favorable word on the steel arbitration, finally-- congratulations. Can you give us an idea what that worked out to?

David, that wasn't a fourth quarter item, by the way.

Okay.

That was a third quarter item because that was resolved prior to us completing our third quarter financial statements. The amount isn't material. I'm not really going to get into the quantum of that settlement.

Okay that's fine. Material, that's all I need. Your CPB in North America was very high in Q-4. Is there anything unusual in there or any explanation for that? And it's massively above your guidance for 2008.

(inaudible) Q4?

Yeah, it's up huge sequentially, it's just really a high number.

Two things really, its launch, and in particular Chrysler minivan launch. We've got $29 sequentially in foreign exchange. Besides that, nothing else is remarkable, those are the two I (inaudible) sequentially..

At this point, though, the exchange would still be in place, would it not?

No, the Canadian dollar was strengthening in Q4. Think about where it went in Q4, so the market was higher.

Right, but it's roughly at that level right now.

It's come off a little bit. You're seeing that in our content. From where we were when we gave our guidance in January to where we are now, down about 2.5%.

Okay. I just had a question, too, about this interior facility in the US and power train facility. You mentioned in the report that the losses are going to continue through the business planning period (inaudible) charges. I was wondering if you could give us the magnitude, what exactly are the problems and what you're doing to fix it? Any idea how much you can fix it by.

The two areas are the new processed gear facility and searches and the number of facilities on the insurer side in North America. When you think about New Process Gear, we would say there was a number of challenges, reduced (inaudible), higher steel costs. A situation where we weren't really competitive on a cost structure. We did have some launch costs and launching efficiencies during 2007. So what we're doing about it, a number of things.

One, we're happy that we have a new agreement with the members of UAW in Syracuse. We think it's a real positive step going forward. If we can have competitive wages that is going to go a long way for making that facility profitable. We're going to be investing some more capital in that facility to modernize it. (inaudible--cough) We continue to focus on operating inefficiencies and we're hopeful that we're going to get some support from both federal and state governments to support that facility. We're expecting some change -- some big changes in Syracuse and again, like I say, I'm really happy we've been able to ratify the agreement. In interiors-- goes back to a whole number of things as reduced volumes, higher resin pricing, launch costs, launch inefficiencies, operational inefficiencies, pricing.

So what we're doing about it is from a structural standpoint in 2007, we're actually combining our (inaudible) facilities to take some fixed costs out of the structure. We're going to see some positive impact of that. That's going to help. Some of the launch costs that se incurred in 2007, are going to go away as these programs ramp up. We're still going to be hurt by some poor pricing. We're just going to have to wait for the programs to work themselves through. So we're expecting some improvement in both of those areas, and, if we can hit our targets, the numbers will be large because we have large losses today.

Could you give us some idea, there's reports MPG alone was $117 million last year.

I think there was something in the paper regarding that number. I can tell you that the loss in New Process Gear had three digits in it.

Okay. And the interiors, are we talking the same kinds of magnitudes?

They're big numbers, David. We're not going to go on beyond that.

Okay. That's helpful. And then just one last question. On the Steyr situation, you have the Voyager and 300 rolling off, I believe?

The Voyager's gone, the 300 stays.

Okay. The 300 stays. And you're going to be picking up mini SUV, I think it's 2010 or something like that?

We can't tell you when.

Okay. When all of that is done, where would your capacity utilization be roughly in that plan?

David, you're missing one other piece that Magna will continue to go after a number of other programs.

Right.

That depends on our success rate at acquiring other programs.

Okay, but based on what you have right now?

We can't actually say that, answer that question because we're not talking at all about volumes on the mini program. So we really can't get into a level that we expect in that year out that far.

David, I think if you go back where Magna's running at peak volumes at 220,000 units, 240,000 units, and E Class is gone, the Voyager is gone. You can expect that unless we get new business that the number of units for Magna is going to be lower than 240,000 units. If we have success with some of the things we're looking at, that could be a different situation.

Okay. Okay great. Thanks very much.

Thank you, David.

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

Good morning, guys.

Good morning, Rich.

I wanted to ask about Russia and one of the potential benefits from the Russian transaction is lower commodity costs potentially. Are you going to see any benefit to 2008 from that?

Rich, I don't expect to see any in 2008. We made some comments in the past about potentially working with Russian Machines and others in Russia to develop a source of raw materials whether that's on the aluminum side or steel side, and that, we think longer terms could benefit us, but it's going to be a longer term opportunity versus a short-term opportunity.

All right. So when you say longer term, are we talking 2010 and beyond more or less?

I think that's safe.

Okay. And then on the minivans, where do you or when do you expect to kind of get to your highest margin on that? I'd expect that after the launch costs kind of wear off that your margins should improve on that. When do you kind of expect to get the higher margins?

You know, we're only a couple -- at Q4, we're only a couple quarters in. It's hard to say whether it's going to be Q1, Q2 this year. Usually it takes three, four, five quarters to get up the curve and get the maximum amount. So, we expect later this year we'll be in a better position than we were certainly at the back half of last year.

Bigger picture question with BMW, they're cutting cost across the board. Some of that's on the personnel side. I expect that they'd probably be working with their suppliers on cost reduction. Are you seeing any of that right now?

We're across the board, we're only seeing our customers looking for ways to reduce their purchasing buy. One customer will be a little more aggressive than the other on one part of the year and the other customer sort of picks up. So it's kind of normal business for us. But we'll have to deal with it as it comes up.

Okay. And in terms of Europe overall with the manufacturers that operate over there, are you seeing any additional pricing pressure relative to the last two or three years? Europe usually gets better coverage. Any change to that?

I'm sorry, is that on the cost side or revenue side?

Well, on the pricing side, yeah.

Are we seeing more pressure?

Right. Relative to the last two or three years.

It depends on the OEM, Rich. Different pressures depending on the bigger OEM. I think generally, when I look at overall pricing pressures, it's constant. We always have those pressures every day. I don't see it standing out more this year than it did sort of last year.

On the cost cover size, we have been successful in getting coverage from the customer where's we have increased commodity costs. We're at least getting partial recovery. We haven't seen any change.

Okay. Thank you.

Okay, Rich.

We have a follow-up question from the line of Mr. John Murphy with Merrill Lynch. Please go ahead.

John?

Mr. Murphy?

Can you hear me?

Now we can.

Will it be profit sharing with the new labor agreement with New Process Gear the 10% pretax profit sharing that you have with your other employees? Under the new contract?

John, you know what? I'm going to have to get back to you on that. I don't know the answer to that. Can I get back to you on that?

Surely, please. Thanks a lot, guys.

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

Certainly. That question will also be a follow-up from the line of Michael Willemse with CIBC. Please go ahead.

Thank you. Just a follow-up question on Russia. Given the programs that you're quoting on and talking about now, what year -- what launch year are we thinking about? Is this 2010 launch year? Is there anything you could still be quoting on for 2009?

No. I think when you look at -- when you quote and bring into production, we're probably looking a couple years out. The one program we are working on right now, well, there will be production in '08 would be the gas cyber, but the other programs that we've been awarded or are looking at is going to be beyond 2009.

And to the extent that we have acquisitions that we do have to (inaudible) there may be some business that comes down the current business. In terms of new stuff we're quoting on it's beyond that.

Okay, and just one follow-up question from that. Your Cap Ex guidance from 2008, what portion of that would be for Europe and what portion for North America if you could break that out?

I don't have that handy, Mike.

I'll follow up with you on that one.

Just from a general observation standpoint, we're seeing with our capital, Mike, a couple things. More capital being spent in sort of the southern United States and Mexico. And relatively more capital being spent in new regions of the world such as Asia and Russia and Eastern Europe.

Okay. Thank you.

Thanks, everyone, for joining us today. Once again, given the significant challenges that the industry faced in 2007, we are pleased with our operating results. While the challenges continue for the industry for 2008, we will continue to focus on improving operations across the company. Enjoy the rest of your day.

Ladies and gentlemen, that does conclude today's conference call. We thank you all for your participation and ask that you please disconnect your lines.