Magna International Inc (MGA) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Magna International first quarter results conference call.

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

Afterwards we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded Thursday, May 1, 2008.

I would like to turn the conference over to Vincent Galifi, Executive Vice President and Chief Financial Officer.

Please go ahead, sir.

Good afternoon and welcome to our first quarter 2008 conference call.

Joining me today are Don Walker and Siegfried Wolf, our co-CEOs, as well as Louis Tonelli, Vice President, investor relations.

Yesterday our board of directors met and approved our financial results for the first quarter ended March 31, 2008.

Our board also declared a quarterly dividend of $0.36 per share payable on June 16, 2008, to shares of record on May 30, 2008.

We issued a press release earlier this morning for the first quarter of 2008.

You will 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 Web site at www.magna .com.

This morning we held our annual shareholders meeting in Toronto, which I'm sure many of you attended in person or via our webcast.

As a result, I will keep our formal comments today brief, allowing us more time for questions.

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

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

Please refer to today's press release and attached MDNA for a description of our Safe Harbor disclaimer.

We were pleased with our first quarter results, particularly given the decline in vehicle production volumes in our two largest markets, especially in North America.

At today's meeting, we highlighted our overall business strategy.

Central to our strategy is a strong balance sheet and consistent cash flow generation that allows us to continue to invest in our future.

At the end of the first quarter we had $2.1 billion of net cash on hand and a debt to capitalization of 8%.

Let me just highlight a few of the more recent uses of our cash balances.

This past quarter, we completed two small electronics acquisitions, adding an established electronics manufacturing footprint in China.

This morning Don highlighted some of the activities in our electronics business.

We also recently announced the acquisition of Ogihara, which provides us with additional stamping and sub assembly capabilities in the southern United States.

The acquisition of Ogihara hopes us to further diversify our customer base in North America.

Finally, we repurchased an additional 1.5 million class A shares in the first quarter of 2008.

Under our normal course issuer bid we can purchase up to approximately nine million shares up until November of this year.

Over ott past two quarters, we have already purchased approximately4.1 million shares under this issuer bid.

We continue to believe that having such financial flexibility and strength, particularly at a time when so many competitors struggle, is a significant competitive advantage that we intend to capitalize on.

I'd now like to review our financial results for the first quarter ended March 31, 2008.

Please note that all figures are in U.S.

dollars.

In the first quarter, consolidated sales increased 3% to $6.6 billion.

North American production declined 4% in the first quarter to $3 billion, reflecting a 9% decline in vehicle production to 3.5 million units, partially offset by a 5% increase in North American content to $874.

The key drivers of the growth in content were the increase in reported U.S.

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

dollar, the launch of new vehicle programs, and the impact of higher production and/or content on certain programs, including three CUVs; the BMW X5, the Chevy Equinox, an the Ford Edge, as well as the vehicles on Chrysler's LX platform, GM's full-sized SUVs, and the Ford Fusion.

New launches contributing to content growth quarter over quarter also included some of the new CUVs in the marketplace; the dodge Journey, the Buick Enclave, and the Ford Escape, as well as the Jeep Liberty and the Cadillac CTS.

Partially offsetting these increases were high content programs that experienced lower volumes and/or content, including GM's full-sized pickups, Ford's full-sized SUVs, the Hummer H3, GM's Envoy Trailblazer, and the Dodge Nitro.

Programs that ended production during or subsequent to the first quarter of 2007, including the Saturn Ion, and Chrysler Pacifica and incremental price concessions also negatively impacted North American content.

European production sales grew to $1.9 billion, representing an increase of 20% over the comparable quarter, in a period when European vehicle product declined 1% to 4.2 million units.

European content was strong, increasing 21%, to $473.

The key contributors to content growth in Europe were: The strengthening of the Euro and British pound, each against the U.S.

dollar; the launch of new programs, including the Mercedes C class, the MINI Clubman and the Volkswagen Tiguan; and increased production and/or content on certain program, including the smart fortwo, the VW Transporter/Multivan, the Porsche Cayenne, the VW Touareg, the BMW 1-Series and the Volkswagen Caddy.

These positive contributors were partially offset by programs that experienced lower volumes and/or content in the first quarter of 2008, including the MINI Cooper, the end of the production of the Chrysler minivan and Magna Sire, the sale of certain facilities during or subsequent to the first quarter of 2007, and incremental OEM price concessions.

Rest of world production sales increased 39% to $121 million, primarily as a result of the launch of new programs in South Africa, China, and Korea, increased production and/or content on certain programs in China and Brazil, as well as the strengthening of the Brazilian and Chinese currencies, each against the U.S.

dollar.

Complete vehicle assembly volumes declined 28% from the comparable quarter, and assembly sales declined 2%, or $18 million to $1.1 billion.

The sales decline was primarily as a result of the end of the production of the Chrysler Voyager at our Graz facility in the fourth quarter of 2007, and lower assembly volumes for the BMW X3, Saab 9(3) Convertible, and Jeep Commander and Grand Cherokee.

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-Benz G-Class.

In summary, consolidated sales, excluding tooling sales, increased approximately 3%, or $206 million in the first quarter.

The primary reasons for this increase are the strengthening of the Euro, British pound, and Canadian dollar each against the U.S.

dollar, and global content growth partially offset by lower assembly sales.

Tooling, engineering and other sales were essentially level with the prior year at $381 million for the quarter.

Some of the programs for which we recorded tooling, engineering and other sales in the first quarter were the BMW Z4, X3 and 1-Series, GM's full-sized pickups, Chrysler minivans, the Peugeot A58, the Landrover Freelander, the Audi A5, the Cadillac VRX, the Ford F-Series and the MINI Cooper.

Programs that drove tooling revenues in the first quarter of 2007, included GM's new full-sized pickups, the Ford Flex, the MINI Cooper, the Saturn Vue, and Chrysler's minivan.

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

dollar, also each impacted tooling, engineering and other sales in the first quarter of 2008.

Gross margin in the quarter was 12.7% compared to 13.1% in the first quarter of 2007.

The change primarily relates to lower gross margin as a result of a decrease in production volumes for certain programs, launch costs associated with programs in preparation for launch or that have not ramped up production, the end of production for the Chrysler Voyager at our Graz assembly facility, operational inefficiencies and other costs at certain facilities, in particular at certain interior facilities, in North America, and incremental customer pricing concessions.

These factors were partially offset by productivity and efficiency improvements of certain facilities, the decrease in complete vehicle assembly sales, which has a lower gross margin than our consolidated average, and incremental gross margin earned on new programs that launched during or subsequent to the first quarter of 2007.

Magna's consolidated SG&A as a percentage of sales was level with the comparable quarter at 5.4% in Q1 2008.

Largely as a result of a lower gross margin percentage and higher depreciation expense, partially offset by higher interest income, our operating margin percentage declined to 4.3% in the first quarter of 2008, from 4.7% in the first quarter of 2007.

Our effective tax rate declined to 28.3% in the quarter, from 29.1% in the first quarter of 2007.

The decline is primarily the result of a decrease in tax rates in Canada and Germany, and a decrease in losses not benefited, primarily at certain interior facilities in Europe.

Net income was $207 million in the quarter, an $11 million decline from $218 million in the first quarter of 2007.

Diluted earnings per share were $1.78, a 9% decline from the $1.96 reported in the comparable quarter in 2007.

This decline in diluted EPS was as a result of the small decrease in net income combined with an increase in the number of weighted average shares outstanding during the quarter.

The increased number of shares is primarily the result of the 20 million class A subordinate voting shares issued in connection with the arrangement involving Russia machines and shares issued on the exercise of stock options, partially offset by the 11.9 million class A shares repurchased under the substantial issuer bid, and the four million class A shares repurchased under our normal course issuer bid.

I'm now going to review our cash flows and investment activities.

During the first quarter of 2008 we generated $442 million in cash from operations prior to changes in noncash operating assets and liabilities, and invested $218 million in noncash operating assets and liabilities.

The investment in noncash operating assets and liabilities largely reflects the increase in accounts receivable, partially offset by increased accounts payable, both related to the increase in production sales.

In particular, vehicle product was higher in the month of March, 2008, compared to the month of December, 2007.

In addition, income taxes payable declined in the quarter due to the payment of our 2007 income tax balance in Canada.

For the quarter, investment activities amounted to $168 million, comprised of $128 million in fixed assets and a $32 million increase in investments and other assets, and an $8 million -- and $8 million to purchase two small electronics facilities.

Next, I will turn to our 2008 full-year outlook.

We have lowered our vehicle production expectations in North America to 14.2 million units, from 14.4 million units in our previous outlook.

The lower production reflects the weakening automotive sales market we are currently facing in North America.

Our vehicle production expectations are unchanged at 15.6 million units in Europe.

Since we issued our previous outlook in February, the Canadian dollar and the Euro have strengthened, each against our U.S.

dollar reporting currency.

Our range for expected North American content per vehicle is unchanged between $845 and $875 for 2008.

The impact of the strengthening of the Canadian dollar and the acquisition of Ogihara together are expected to be offset by the impact of the declining mix on our key platforms.

We increased our range for expected 2008 content in Europe.

Content per vehicle in Europe is now expected to be in the range of $485 to $510, largely reflecting the impact of the strengthening Euro.

We expect complete vehicle assembly sales to be between $3.9 billion and $4.2 billion, up from the $3.6 billion to $3.9 billion range in our previous outlook.

The strengthening Euro and higher expected volumes at Magna [Styer], were the main contributors to this increase.

We expect total sales to be in the range of $25.5 billion to $26.8 billion.

This is up from our previous outlook, largely due to the increased ranges for European content per vehicle and vehicle assembly sales.

For the full-year 2008 we expect fixed asset spending to be in the range of $900 million to $950 million.

This is down $25 million from our prior outlook.

The reduced outlook for capital spending reflects the efforts across our business to defer spending to the extent possible, given the difficult automotive market, particularly in North America.

This concludes our formal remarks.

Thank you for your attention this afternoon and we will now open the call for questions.

Thank you.

(OPERATOR INSTRUCTIONS) From the line of John Murphy from Merrill Lynch.

Please proceed with your question.

Hi, this is actually [John Lavolo] in for John Murphy.

How are you?

Good, John, how are you doing?

Good, thanks.

A couple of quick questions here.

First, can you give us an idea of the impact from the GMT900 pickups and SUV s in the quarter?

Well, John, it is really a difficult measure.

I think when we look at production in the quarter, I think there was some additional production volumes in the month of February, and then production came down in March.

But as I sit back and look at what does that mean to Magna, when I looked at inventory levels for the GM platforms, inventory levels were quite high.

So I just sit back and wonder whether, in the normal course of business without an American Axle strike, whether there would be reduced volumes in any event.

Okay.

So if you assume that there was production loss, certainly we lost revenue in the quarter, but I would have thought that -- I would think that that would have normalized in the course of the year.

Okay, that's fair enough.

It's a difficult number to come with.

Okay.

How about -- maybe just quickly talk about the difference between your current agreement with the unions and the framework and fairness agreement, specifically in relation to profit sharing and job security.

Is there much difference there?

Yes, it's Don Walker.

We talked about that quite a bit in the past.

so I'll just do just a real quick summary.

Sure.

It's basically -- it keeps everything that we've got in our plans intact, allows for secret ballot votes, competitive wages and benefits, so it really doesn't change anything in the plant.

Entered it more of a -- as an experiment to see if we can continue to see if we can get good ideas going forward but it shouldn't have any negative impact on us and we'll see as it progresses which plants are interested and which plants aren't interested.

Okay, perfect.

And finally just wondering about the process of the cancellation of the Chrysler Pacifica and the lawn of the Journey.

Do you anticipate those to kind of cancel out each other?

Our content on the Pacifica would have been higher than that on the Journey.

Okay.

And in terms of volumes as well, I've got to believe the Journey volumes are going to be higher than Pacifica volumes, so how that all balances out, I'm not sure.

Okay, fair enough.

Thank you very much.

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

Please proceed with your question.

Thanks.

Good afternoon, guys.

Good afternoon, Chris.

A couple of questions -- and I apologize if you mentioned this, Vince -- but do you have a feel for what the foreign exchange effect was on operating profit?

No, I don't have -- obviously, it benefited us positively, Chris.

I've got a better sort of view on the impact that the translations had on content per vehicle, and maybe I will just cover that for you, Chris.

When you look at North American content per vehicle, we talked about content being up 5%, but when you look at the -- sort of the ups and downs, translation accounted for about -- just over $50 to overall content change in the quarter.

And when you look at content, excluding FX, it is actually down in the quarter, about $13 -- $13 to $15.

And the reason content is down is we certainly benefited from a number of new launches, which we've covered in the past and covered this morning at the annual meeting.

A number of programs balanced out.

We just talked about the Pacifica, for example.

But we were faced with negative mix, primarily on pickup trucks and SUVs.

The GMT900 program, the Ford Expedition and Navigator, the H3, for example, those were all sort of negatively impacting mix.

We did benefit from some other positive mix, the launch of the X5, for example, or the Ford Edge also contributed to positive mix, but overall mix was negative.

So, content excluding translation in North America was down.

And in Europe we have the benefit of translation helping the content quarter over quarter by about -- just under $50, about $48.

But we had some real good content growth in the quarter of about $38 and that's due to a number of launches; the Daimler C-Class, for example, the MINI Clubman, and we also benefited from mix in Europe, the smart fortwo, for example, the Volkswagen Transporter/Multivan all contributed to positive mix.

Do you think --- tell me if this thesis is reasonable.

I know in quarters past, you've said that the effect on the operating line was muted, or tough to call out, maybe because you had some cross-currency effects that washed things out, but it seems like that in the first quarter, just about everything strengthened in the U.S.

dollar and you report in U.S.

dollar, so you did say it was positive, so clearly there something there.

Is it potentially tens of millions of dollars in EBIT?

Can you at least get us in the ballpark?

Well, think of it -- let's turn to Europe right now and if you look at the segment reporting we generated, I think it was about $120 million of -- sorry, $119 million of EBIT in Europe and the Euro depreciated year over year, so you can run the math in Europe, because that is pure straight translation.

That's going to give you a number nexus of ten -- $10 million.

In Canada it's more difficult to measure the impact on bottom line.

It's easier to measure more on top line but harder on bottom line.

Going forward, Chris, in terms of where the currencies are, so far in the second quarter of 2008-- and you compare that to the second quarter of 2007 -- all of this translation -- foreign currency translation always is going to come out, because the currencies are relatively the same quarter over quarter so far.

Okay.

Were there any mark-to-market gains on either commodity or FX hedges?

We've had a couple of companies that have had to run that stuff through the income statement in the first quarter.

Well, we had two things that we want to talk about that were one-timers.

We had to mark-to-market asset-backed commercial paper and as a result, we took a $17 million provision against the principal amount -- a An additional provision against the principal amount of that asset-backed commercial paper.

That $17 million hit is not tax effective, so from an EPS perspective, that is about $0.14 negative.

On the positive side, there were some changes made to capital taxes in Ontario.

They were eliminated effective 2007, so we had a one-time pickup of $12 million.

Now that is subject to tax, so the impact of that was about $0.07 on earnings.

So when I look through the quarter, overall, there's probably $0.07 of unusual items in the quarter -- negative unusual items.

Okay.

And then just lastly if you could comment on your outlook for commodities and the impact in the quarter.

There's been a lot of stuff, at least on a spot basis, that has moved up and you have broad exposure, whether it is steel or resin or a variety of commodities.

Well, Chris, I think when you look at the biggest commodity we buy, which is steel, we're pretty well protected, either through the customer's resale programs, or long-term contracts or short-term contracts.

As you know, steel prices have been moving up and there's always the risk that the steel companies may impose some surcharges.

But at this point, based on the contracts we have in place, steel should be fairly neutral for 2008.

On the resin side, again, we do have some contracts, but with oil prices at the levels they are, there's going to be some upward pressure on commodities for sure.

Okay.

Thanks a lot, guys.

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

Please proceed with your question.

Hi, gentlemen.

David Lim here with Rich Kwas.

Just wanted to ask you about your European EBIT margins.

Saw it take a hit a little bit and wondering if you could just provide a little bit more color on that, please?

Sure, I can provide some color on that.

If we go back to Q1 of '07, if you run through the notes or the statements, you'll see that there was a warranty accrual reversal that we recorded in income last year, it was about $13 million, and that was coming out of Europe.

So our European numbers were impacted positively by that reversal last year.

So if you back that out, I think the percentages are more in line.

And we've got a whole bunch of movements, ups and downs.

Assembly volumes are substantially down in Europe, quarter over quarter.

But we've talked a lot about our interiors business and I'm happy to report that we have made some real positive progress in our interiors business in Europe in the quarter.

Can you talk a little bit about business wins when it comes to interiors, as well as the seating business in Europe?

How do you guys -- how would you characterize the environment there?

It's again -- especially regarding interior we see that there is linkage of good (inaudible) suppliers that helped us over the year really to gain strong business opportunities, and we won a lot.

It is a little bit more in the direction that there is not a very strong innovative bunch of suppliers left, very difficult what they see now and they see there is a good possibility for growing into this business profitable.

Regarding seating, seating on the normal cars is pretty well common -- covered by the big players there.

[We are more in the niche (inaudible) and in the transporter and there we gained a lot of possibilities over the last two years.

We won business.] This will come in next year and we are quite optimistic how this seating business in Europe is moving.

Great.

Thank you very much.

That's all the questions I have.

Thanks.

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

Please proceed with your question.

Good afternoon.

I wondered if you could talk about the opportunities in India for Magna?

It seems to be making more headlines.

And also what you intend to do at Graz after 2010 when I think the X3 production ends?

So let's start with Graz.

As we're all aware, all of our car programs have life cycles, between six and seven years.

There are cars running out and we win the new businesses, and we won -- I just said in the annual meeting today, we won two new contract, one is a (inaudible) successor that 's the BMW sport utility car, what we won, that will be running exactly after the X3.

Volume wise, I don't see that it is -- that we will 100% cover.

We won a second contract which gives us a lot of, let's say, prestige, a lot of work in Graz, that's the Austin Martin repeat.

It is the most recognized car, what you can have at the time being.

And for instance we can say James Bond is driving Magna and that's-- it's running well.

Do we have order business in line or do we have booked (inaudible) for after 2010?

Closely, not everything, but we are on a very good way.

That's what I can say.

We are optimistic there.

That's good news.

Regarding India -- regarding India, we see India as a very fast-growing market, but we make very clear priorities.

Priority number one is that we do everything to have success and make money in Russia, where we are working very positively in the direction.

We will not ignore India, but do we go in with the big, let's say, investment there from the beginning?

No.

Don and myself we will, let ' s say, sort out very clearly where we really have a chance for a long-term good position.

We did a little bit in India, and we work, we have experience, especially in India, since years, mainly from engineering, calculation, programming, and mirror parts, but India, we see in the next couple of years is a good coming market.

Thank you very much.

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

Please proceed with your question.

Good afternoon.

Hi, David.

Hello.

I was wondering if the 28% tax rate looks sustainable going forward and even going lower as tax rates come down in Canada?

David, there was some changes in tax rates that impacted us positively in the quarter.

When you look at the Canadian tax rate, it actually has benefited us.

It's come down -- just trying to find the page here.

We look at 2007 versus 2008, the rate's gone from 34 -- just over 34% in '07 to about 31.5% in '08.

The other big benefit from a tax savings perspective is Germany, where the rates moved from about 38.5% to 30%.

So subject to income mix being consistent, the rate we've got in our first quarter should be fairly representative for the balance of the year, because it is based on tax rate changes in a couple of jurisdictions.

Yes.

Okay, makes sense.

That's helpful.

I just wanted to come back to the raw materials question, too.

Vince, you said you're well covered for this year, which makes sense given your contract position.

I'm wondering, though, what happens come the turn of the year.

Do you have a material amount of your steel contracts slipping over at the start of 2009?

David, we have some contracts that actually are the smaller contracts that are coming due in 2008 -- in the second half of '08, but they are smaller, but more of them are going to roll off in '09.

I'm not sure that they're all January 1, '09.

It's throughout the course of 2009, but certainly there's going to be some rolling off.

But when you talk about whether it is material or not, keep in mind that roughly 50% of our steel buy is under customer resale program and we do have longer-term contracts that go beyond a year -- a year or two.

So there is probably 20% to 25% of our steel buy that is going to probably at some point turn over in the next year and a half or two.

Okay.

Okay, that's helpful.

Thanks.

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

Please proceed with your question.

Good afternoon.

Hi, Peter.

Siegy, during the -- your presentation during the annual meeting, when you were talking about Styer and the sportec -- and the mini sports activity vehicle, you mentioned that you thought that the revenue from that -- from that assembly contract could be about $1 billion, which I found -- which was higher than what I anticipated and according to my arithmetic, our arithmetic implies about 50,000 units.

I'm just wondering if you could talk a little bit more about that contract and why the annual revenues seem quite significant and what your underlying production assumptions are?

Especially there, it's always the same story line, we can't discuss volumes publicly, because we are not authorized to make public statements in -- let's say with not an agreement with our customer.

You can make your math that you can see that the car, in my mind, will be a good seller.

It looks great.

It is great brand.

And it's the first time that somebody's bringing (inaudible) SUV on the B segment that gives us a lot of comfort, that this car will be a good seller.

Peter, the excess of $1 billion is consistent with the disclosure that we had last year when we announced this trans -- this contract.

Correct.

Okay.

One other question is, in the previous quarter discussion following the earnings release, during the call you talked about some of the underperforming businesses in North America, particularly North American Interiors and your powertran business in Syracuse, I'm just wondering if you've had any improvement in those businesses in the first quarter of this year versus the fourth quarter of last year?

Peter, I guess when we look at the two business units --I'll start with Syracuse first.

Syracuse in the first quarter still underperformed and compared to the fourth quarter it's relatively the same.

The bright side of the Syracuse operation is that we were successful in negotiating a new labor arrangement with our employees that provides some flexibility to us, improves our working relationships with the employees, and we believe that we now have a facility that is competitive and it's going to be able to go after some new work.

So we're going to see some improvements in Syracuse starting in the second quarter.

Mind you, we did buy down wages and benefits, so we are going to have some expense related to that, but overall, it is a net win for us and a net win for the plant, because it will be competitive.

With respect to Interiors, we're continuing to launch some new business in a facility in Mexico.

We continue to incur launch costs.

We do have some pricing issues there.

So quarter over quarter I would say that Interiors probably got worse, not better.

But again, as we're looking out over the course of the year and some of the ongoing discussions that we're having with our customers, we're expecting some improvements in the Interiors business as we move through the balance of this year.

Okay.

Thanks very much.

And our next question comes from the line of Rod Lache from the Deutsche Bank.

Please proceed with your question.

Hi, it is Pat Nolan on for Rod.

I just had two questions.

First, Don's talked a lot about the tier two supply base and the distress that he sees going on there, so how should we think about, as we look for the balance of the year, how your productivity and purchasing savings are going to run?

Are they going to get less as we go through the balance of the year or do you think you can maintain the level you were doing in the first quarter?

Well, from productivity standpoint, that's within our own control, and we're working real hard in a lot of different areas on continuing to drive our costs down in improvement and efficiencies, et cetera, as we always do.

But we've had a real focus on it in the last year.

In some cases if you have a failure in a supplier, if it's a competitor of ours, and hopefully we can pick up business, or we can -- if they're not in good shape, you wouldn't expect the car companies to continue to source them business.

In some cases they may be sub-suppliers to us, and in which case I could have a financial impact on us.

But a lot of what we buy tends to be smaller components and things we can ship in from other countries, the low cost regions, so they're all -- and we don't expect a lot of failures there because business is booming elsewhere, so I don't think it'll have a significant impact on us one way or the other.

Hopefully it'll lead to more consolidation in the supply base and opportunities for us.

As you look at your sub-supply base, do you see a lot of raw material exposure there?

I know you have a lot of contracts, but under long-term contracts that -- are some of your suppliers exposed there, as far as you know?

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

I suspect it is.

I think the steel price increases is going to hurt everybody, and everybody's going to be having discussions, I'm sure, with the OEMs to determine how we're collectively going to handle it, but I'm sure we will get pricing pressure from some sub suppliers, but we'll deal with them as they come.

And if I could just ask one more question on the North American Interiors piece.

You said that you expect it to improve throughout the rest of the year, how do you reconcile that with what steel prices are doing, and then what -- you probably have some pressure on foam prices because of what oil is doing, so sequentially, aren't the headwinds getting worse for the business?

I know there's the launch costs going down, but aren't the external headwinds getting worse?

Well, when we talk about interiors we're talking about mainly instrument panel, door panels, headliners, things like that.

The launch we've got going on that Vince that referred to is a complete interior down in Mexico.

New plant, new product.

We have some pricing issues on it, but it's been a horrendous launch in the first quarter.

When I say horrendous, it's big.

It is a complete interior with a lot of different components.

So I would think by the third quarter, hopefully we're back to a reasonable position there.

Raw materials may impact us.

Anything based on oil could have an impact but it'll be the same as steel, we'll have to work through it the best we can.

Steel prices has more of an impact -- talking about steel and foam, it could have a slight impact on our seating group, like other groups, but it is too early to tell.

Okay, thank you very much.

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

Please proceed with your question.

Yes, Don, I just want to follow up on that.

If I recall correctly, you guys had a pretty horrendous launch when you had (inaudible) with the Ford minivan seats and when you did get it fixed, there was a pretty large swing in profitability.

Is that the kind of situation we're looking at here in Mexico?

No.

Yes, the problem we had was a software problem on our sequencing conveyors when we figured it out.

Basically that made the launch difficult, but then we got it into the market.

The situation is different -- if you're going to launch one product it's a big launch, but when you're launching a complete interior it's just a very expensive, a lot of new products.

Once we get it up and running and we get our costs under control -- and we have launched it successfully, it looks like the vehicle's (inaudible) good, then it'll come down to what our margins are on there and that's something that I think will take another quarter to get to the point where we're more comfortable.

But we're going to have -- as Vince says, the next quarter will still be a tough quarter as we continue -- as we finish the launch.

Okay, fair enough.

And then just a question on the European market.

Is production coming down then, I take it, given your forecast sometime soon?

Are you seeing that in releases for Q2?

If you look at the numbers we expect production being flat.

So overall, David, we've been assuming 15.6 million units in Europe, which is our recent outlook, which is consistent with our outlook in February, as well as our outlook in January, so we really haven't moved that number as all.

Okay, so it's pretty --

Which is down -- it's down from 2007, but we haven't moved our numbers at all throughout '08.

Right.

4.2 in Q1, so are you looking at the same sort of profile as last year ,where have you two very strong quarters and then a lot of seasonality at the end?

Well, typically, when you think through the cycle of a year, the third and fourth quarter are going to be impacted by lower production.

Right.

But it seems like that is an awfully big one because you did $16 million last year $15.9 million and you're talking about $15.6 million this year, and yet you're running at the same rate in Q1 as last year.

Hopefully you're right.

We're running a little bit less than last year, right?

We're about 50,000 units less?

Right.

Last year, we were at 4249, Q1 '07 and we're at 4196.

And if you take that 50,000 per quarter that is 200,000 less, which is $15,9 million to $15,6 million is pretty close, gives you 200,000 dollar -- 200,000 unit difference.

Okay, that's fine.

Okay, great.

Thank you.

(OPERATOR INSTRUCTIONS) And our next question comes from the line of Kelvin Cheung from National Bank Financial.

Please proceed with your question.

Good afternoon.

Hi, Kelvin.

Hi.

I wanted to ask about the Chevy Traverse program.

I was wondering if you have the same amount of content on that vehicle as you do on the other Lambda vehicles?

Yes, very similar.

We're about $1,800 on the whole Lambda platform.

Okay.

And if I could just read into that, take that one step further.

Minimal launch costs on those additional units of production, so the additional volumes sales should fall quite nicely to the operating line?

Yes, it's hard look at one program in -- it is lard to look at one program in isolation but I think it is fair to say that the pro -- facilities that are launching -- that launched the rest of the Lambda program is launching the same vehicle, so it should be -- the launch impact should be somewhat minimal, but be careful focusing on one platform?

Okay, that's all I had.

Appreciate that.

Thank you.

Operator, we're going to take one more call then we're going to have to wrap up.

Sorry.

We have no other questions at this time.

We will turn the call back to you.

Great.

Well, thanks for joining us today.

Once again, we're pleased with the first quarter given the ongoing industry challenges.

We'll continue to focus on using all of our efforts and resources to generate long-term shareholder value.

Enjoy the rest of your day.

Thank you.

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

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

Have a great day, everyone.