Magna International Inc (MGA) 2008 Q2 法說會逐字稿

Welcome to Magna International Inc second-quarter 2008 conference call.

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

Afterwards, we will conduct a question-answer session.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded Wednesday, August 6th, 2008.

I would now like to turn the conference over to Don Walker, Co-Chief Executive Officer.

Please go ahead, sir.

Thank you.

Good afternoon and welcome to our second-quarter 2008 conference call.

Joining me today are Vince Galifi, our Executive Vice President and Chief Financial Officer, and Louis Toneli, Vice President Investor Relations.

This morning our Board of Directors met and approved our results for the second quarter ended June 30, 2008.

Our Board also declared a quarterly dividend of $0.36 per share payable on September 15, 2008, to our shareholders of record on August 29, 2008.

We issued a press release earlier this afternoon for the second quarter.

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 website at www.magna.com.

This afternoon, I will start with thoughts on the current environment and some of the actions we're taking to mitigate the impact of weak production in North America.

I will also update you on activities in Russia and our recent uses of cash.

Vince will then review our financial results for the quarter and discuss our updated outlook for 2008.

Upon completion of our follow remarks, we'll be pleased to answer any questions.

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

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 the statements.

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

In North America, we're faced with among the most challenging times we have experienced in the last 20 years.

Our expectations heading into this year with a vehicle production will be weaker for sixth year in a row.

Experience in the prior year.

In early May, when we provided our previous our previous outlook, we trimmed North American vehicle production expectations modestly.

However, few expected the rapid and significant decline in US vehicle sales over the past few months, which has led to high inventory and various OEM announcements of capacity reductions and significant near-term production cuts.

Our largest customers have been severely affected by the shift away from light trucks, particularly pickup trucks in the mid-and large SUVs, where they hold large market stair shares.

As a result, the current environment in North America, we have reduced our vehicle production expectations in North America by 1 million units.

In addition to the weak production environment, industry is facing levels of commodity costs in particular for rising levels of quantity costs for steel and resin.

The negative of increasing commodity costs, including surcharges are expected to be significant in the second half of the year.

We expect our sales and earnings to continue to be negatively marketed by the weak automotive environment and the head winds of rising commodity costs for the remainder of the year.

Despite the turmoil facing the industry in North America, we posted fairly strong results for the second quarter of 2008.

This reflects to some degree our success in becoming less dependent on the North American market for consolidated profit.

Over the past two decades we have diversified our geographic sales initially by growing business in western Europe and more recently by doing so in other markets, including eastern Europe, Asia, South America and Africa.

For this first quarter are results in Europe for the second quarter of 2008 exceeded those in North America in terms of sales and operating income.

In addition, the rest of the world sales in operating income increased, once again, in the second quarter of 2008 compared to Q2 2007.

I would like to update you on our activities in Russia.

We announced the acquisition of Technoplac, which provides us with plastic exterior, interior, and painting capacity to serve the local OEMs, as well as OEMs in the surrounding regions.

Magna is considering additional opportunities in Russia with a view to gaining capacity on the ground.

In addition to business awards, Magna and its JV parnter Shin Young Metal by Hyundai, Magna has been awarded business with other customers.

In total, we have over $100 million in booked business to date in Russia with a significant amount in additional quotes outstanding.

We've also before supporting the recent launch of the Volga Cyber by Dodge.

This launch was a major undertaking by everyone involved.

Take the old from former Chrysler Sebring and relaunch the vehicle with some modifications and a different facility in a different country.

Volumes in the Cyber continue to ramp up.

Russia continues to experience significant automotive sales growth in the past year.

Automotive sales forecast for the country continue to be revised upwards.

We are pleased with our activities to date in Russia.

Continued efforts to grow in new regions and less on our reliance in North America, it remains an important market for us.

No one expects US light vehicle to remain permanently before 14 million nor for vehicle production to continue to remain below 15 million units indefinitely.

However, we're taking actions to mitigate the negative impact the current environment is having on results.

Where necessary, we have been closing, consolidating and selling facilities to make sure that we have right size footprint.

This applied to facilities around the world, not just North America.

As much as we regret to take these actions, we have announced a number of layoff's in various facilities impacted by lower vehicle production levels.

Trimmed our capital spending delaying all outlays to the extent that we can, eliminated spending presently considered less critical.

Across the company, each operating unit has cut discretionary spending.

Having said all this, given our financial strength, we're not sacrificing our future.

Our emphasis on investing in innovation is unchanged.

We recently completed two acquisitions.

We purchased Ogihara, which provides us with additional stamp and self assembly capabilities in the southern United States and helps us to further diversify our customer base in North America.

We also bought a substantial portion of the exterior business and related assets of Plastic, which allows us to improve capacity utilization in existing facilities.

And we are looking at other acquisitions to capitalize on the weakness of some of our competitors in the current environment.

Finally, we continue to execute under our normal course issuer bid.

We repurchased an additional 1.9 million Class A shares in the second quarter of 2008.

Under our bid we can purchase up to approximately 9 million Class A shares up until November of this year.

Over the past three quarters, we have already purchased for cancellations 6 million Class A shares for an aggregate purchase price of $453 million.

Going forward, we'll continue to balance the need to reduce spending and conserve cash given the short term uncertainties of the industry, with our long-term view that the industry will recover in North America and will continue to grow globally.

The current turmoil in North America and changes going on in every region of the world provide opportunities for companies with significant resources.

Introduce new technologies to support OEM platforms globally and to further consolidate is supply base.

We want to keep the pedal down on our ability to capitalize in these opportunities.

And more than ever, it's important to be closely aligned with our customers as the automotive landscape changes.

I'll now turn the call over to Vince Galifi.

Vince.

Good afternoon, everyone.

I would now like to review our financial results for second quarter ended June 30, 2008.

Please note all figures are in US dollars.

Appendix A in the slide package accompanying our call includes a reconciliation of certain key financial statement lines between reported results and results excluding unusual items for second quarter of 2008 and 2007 respectively.

In the second quarter of 2008, we recorded impairment charges resulting in a $9 million reduction in operating income, a $7 million reduction in net income, and a $0.06 reduction in diluted earnings per share.

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

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

In the second quarter consolidated sales were essentially level with the second quarter of 2007 at $6.7 billion.

North American production sales declined 12% in the second quarter to $3 billion, reflecting a 14% decline in vehicle production to 3.5 million units, partially offset by a 2% information in North America content to $858.

The key drivers of the growth in content were the increase in reported US dollar sales due to the strengthening of the Canadian dollar against the US dollar, the launch of new vehicle programs, acquisitions, including the Ogihara facility in Alabama, and the impact of higher production and/or content on certain programs, including the Ford Fusion, and Escape.

New launches contribute to content growth quarter over quarter, including Chrysler's Minivan, the Dodge Journey, the Ford Flex and Ecoline, the Jeep Liberty, and Cadillac GTS.

Partially offsetting these increases for high content programs that experience lower volumes and/or content including GM, Ford, and full-sized pickups, GM full size SUVs, the Ford Explorer, the Dodge Nicro, GM's Lando platform, Hummer H3, GM's Envoy, Trail Blazer,the Ford Edge, and the Chrysler LX platform and Sebring.

Programs that ended production subsequent of the second quarter of 2007, including the Chrysler Pacifica and Pontiac Grand Pre and incremental price concessions also negatively impacted North American content.

European production sales grew to $2.1 billion, representing an increase of 23% over the comparable quarter in a period when european vehicle production remained essentially level at 4.25 million units.

European content was strong, increasing 23% to $500.

The key contributors to content growth in Europe were the strengthening of the euro each against the US dollar, increased production and/or content on certain programs, including the Mercedes-Benz C Class, the mini Clubman and the VW Transporter Multi-van and the launch of new programs, including the Volkswagen Touareg.

These positive contributors were partially offset by programs that experienced lower volumes and/or content in the second quarter of 2008, including the Mini Cooper and the BMW X3, the end of production of the Chrysler Minivan at Magna Star, the sale of certain facilities during or subsequent in the second quarter of 2007, and incremental OEM price concession.

Rest of world production sales increased 48% to 148 million.

Primarily as a result of the launch of new programs in South Africa, Korea, and China, 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 US dollar.

Complete vehicle assembly volumes declined 28% from the comparable quarter and assembly sales declined 1% or $10 million to $1.1 billion.

The sales decline was primarily as a result end of production of the Chrysler Voyager at our facility in the fourth quarter of 2007 and lower assembly volumes for BMW X 3, Saab 93 Convertible, Chrysler 300, Jeep Commander, and Grand Cherokee.

Partially offsetting the impact of the strengthening of the euro against the US dollar.

In summary, consolidated sales excluding tooling sales increased $19 million in the second quarter.

The primary reasons for this increase are the strengthening of the euro and Canadian dollar each against the US dollar and global content growth partially offset by lower assembly sales.

Tooling, engineering, and other sales declined 8% to 399 million for the quarter.

Some of the programs for which we recorded tooling, engineering, and other sales in the second quarter were the Mazda 6, the Mini Cooper, Mercedes Benz C class, and Nissan Primstar, the Suzuki, XL7, GM's full sized pickups, the BMW X 3, the Audi A5, the Honda Pilot and the Porsche Boxer.

Programs that drove tooling revenue in the second quarter of 2007 included the Ford Flex, Chrysler's Minivans, GM's full sized pickups, the Cadillac STS, and the Mazda 6.

The strengthening of the Euro and Canadian dollar, each against the US dollar also positively impacted tooling, engineering, and other sales in the second quarter of 2008.

Gross margin in the quarter was 13.3% compared to 14.6% in the second quarter of 2007.

The change primarily relates to lower gross margin as a result of the significant decrease in production volumes for certain programs, substantially in North America, operational inefficiencies.

Operational inefficiencies and other costs in certain facility, in particular, a certain insured facility in North America, downsizing costs primarily in North America, and incremental customer pricing concessions.

These factors were partially offset by productivity and efficiency improvement in certain facilities.

A favorable settlement on R&D, favorable revaluation of warranty accrual and improvements as a result of prior years restructuring activities.

Magna's consolidated SG&A as a percentage of sales was 5.4% in Q2, 2008 compared to 5.6% in the quarter largely reflecting reduced stock compensation costs related to accelerated restricted share arrangements in Q2 2007 and lower incentive compensation.

Largely as a result of the lower gross margin percentage and higher depreciation expense, partially offset by higher interest and equity income, our operating margin percentage declined to 4.9% in the second quarter of 2008 from 6.1% in the second quarter of 2007.

Our effective tax rate declined to 29.6% in the quarter from 30.9% in the second quarter of 2007.

The decline is primarily the result of a decrease in tax rates in Canada and Germany.

Net income was 234 million in the quarter, a $52 million decline from 286 million in the second quarter of 2007.

Diluted earnings per share was $2.04, a 20% decline from the $2.56 reported in the comparable quarter in 2007.

The decline in diluted EPS was a result of the 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 supported of voting shares issued in connection with the arrangement involving Russian machines in the third quarter of 2007, partially offset by the purchase and cancellation of class A shares under our substantial issue of date in 2007, as well as our ongoing normal course issue of date.

I will now review our cash flows and investment activities.

During the second quarter of 2008, we generated 483 million in cash from operations prior to changes in non-cash operating assets and liabilities, and invest 279 million in non-cash operating assets and liabilities.

The investment in noncash operating assets and liabilities largely reflect increases in inventory and expenses and a decrease in income taxes payable.

Increased tooling inventory relates to new program launches and the increased prepaid expenses were primarily due to the deferral of buydown payments made to NBG employees which are being advertised over the term of the collective bargaining agreement.

The decrease in income taxes payable primarily due to a favorable settlement on R&D incentive and the amount of income tax installments.

For the quarter, investment activities amounted to 366 million comprised of 187 million in fixed assets, 97 million in acquisitions for the Ogihara facility and a substantial portion of the exterior's business and related assets Plastex.

As well as an $82 million increase in investments and other assets.

Next, I will review our current 2008 full year outlook.

As don mentioned earlier, we have lowered our vehicle production expectations in North America a full 1 million units since our last outlook to 13.2 million units.

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.

Our range for expected North American content per vehicle has increased $5 to between 850 and 880 for 2008.

The acquisition of the essential portion of the business and related assets of Plastex has awarded takeover business or the main reasons for increase.

Content per vehicle in Europe is unchanged and is expected to be in the range of $485 to $510.

We reduced our expectations for complete vehicle assembly sales, largely as a result of a reduced assembly volume expectations on certain programs accounted for on a full cost basis.

We now expect complete vehicle assembly sales to be between 3.5 billion and $3.8 billion down from the 3.9 to $4.2 billion range in our previous outlook.

We now expect total sales to be in the range of 24.3 to $25.6 billion.

This is down from our previous outlook largely due to the lower expectation from North American production and the lower range for vehicle assembly sales.

For the full year 2008, we expect capital spending to be in the range of 850 million to $900 million.

This is down 50 million from our prior outlook.

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

Despite the negative outlook for the automotive industry in the short term, we remain well positioned to continue to grow our business and establish new and emerging markets.

We continue to have the financial strength to capitalize on opportunities for new programs, take over businesses and acquisitions.

This concludes our formal remarks.

Thank you for your attention.

We will now open the call for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Chris Ceraso from Credit Suisse.

Please proceed.

Good afternoon.

Can you hear me?

Good afternoon, Chris.

Yes, we can hear you.

Some of the other folks that have reported so far have talked about a potential increase in raw materials in the second half that's up as much as 50% relative to what they saw in the first half.

Are you expecting the same kind of increase?

Chris, with respect to raw material costs and primarily we look at steel and resins.

If we compare first half to second half, we're seeing some pretty significant head winds in the second half of this year.

Whether that's through surcharges or additional pricing for commodities, in terms of the exact magnitude, Q2 -- oh sorry -- first half versus second half, we still don't have a good number for it other than we know we're going to be paying a lot more for commodity cost in the second half of this year.

A lot of it is under contract and people are trying to break the contracts.

We're trying to do as much as we can to not see the increase mitigate what we can and having discussions with our customers because we can't eat it all.

We have to have some discussions with them.

Okay.

What was the rough dollar amount in the first half?

I think when you look at overall material costs, if you look at the first half of 2008 versus the first half of 2007, it was relatively neutral when you sort of look at everything on a global basis.

But moving forward to the second half of 2008, as I mentioned earlier, we are expecting some head winds with a negative impact to earnings on a sort of second half comparison.

Okay.

What's the -- I know you didn't change your forecast for Europe, but on a percentage basis, what are you expecting european production from the second half of '08 versus the second half of '07?

Let me just calculate the number and I'll respond back to you as soon as I run the numbers.

I just don't have that handy.

No problem.

Just do the math.

The last question has to do with Chrysler.

Can your just catches up on how much of your business is with Chrysler as a percent of sales?

And maybe what kind of working capital if Chrysler files.

It varies depending on what volumes you'd expect for Chrysler and everybody else.

The sales to Chrysler is plus or minus 10%.

So the second part of your question if they file?

Wat is our working capital with Chrysler?

Chris, it's going to vary depending on time of the month.

If it's after a payment, that number is going to be lower.

If it is just part of a payment, the number is going to be higher.

What I can say specifically about Chrysler is when we look at production receivables, we're being paid according to a contract on time.

With respect to some of the other receivables related to tooling and engineering, there isn't a normal pattern of payment.

We need to receive on tooling.

It goes for a different process of payment at Chrysler.

And those payments are going to be more lumpy.

That's been the practice for a long time.

So there isn't anything unusual.

Okay.

Chris, about 4%.

Down 4%.

Thanks, guys.

The next question comes from the line of John Murphy with Merrill Lynch.

Good afternoon, guys.

On the restructuring front you talked about downsizing in North America.

There's been fairly large changes in capacity.

And I was just wondering where you are in rationalizing your capacity and what opportunities.

Sounds like you did something very interesting with that Sebring capacity.

Just wondering if you can talk about that.

The Sebring was a vehicle being launched in Russia.

We helped out with that.

It didn't change our capacity.

Typically, the way we're structured is we're very decentralized.

And break down the division levels.

The division basically make the decision on what they're doing.

We've been changing our footprint over the last couple of years, certainly in the first half given the drastic reductions.

We don't have a one policy fits all.

Some plants have gone to four day workweeks, some have reduced.

We've consolidated a number of plants.

We've had a number of layoffs, some of them permanent.

We closed a few plants because production is going out.

It's a variety of things.

We don't have a step function, but we're going to continue to react as we need to.

Just some numbers here on what we've been doing for manufacturing footprint.

If we go back to '07, we had a total of 13 plants that we closed of sold or consolidated.

That was for full year.

And year to date basis for 2008, the number is seven.

And at the same time in '07 for the full year, we added 25 new plants and so far this year across the world, we've added seven plants.

Overall number of plants at the end of the second quarter, it was kind of flat between plants we've shut down and consolidated and new plants that we've put in place in some other location.

For all the supply dates when the OEMs make a decision, it's better for us.

Then we can take the action to acquire and everybody can plan better.

The worst thing production went up and down on a week by week basis.

So you feel like on this GM the capacity specifically there's not going to be a big bump somewhere in the third or fourth quarter where there is a big restructuring charge that goes along with it, that you're working through this through in sort of the normal course of business.

Pretty well we've been working in the normal course.

We had an announcement 400 people out of our (inaudible) facility, but as the volume goes down, we'll adjust.

We won't wait and have a big step function.

Okay.

And then on the acquisition front, it seems like you're starting to pick off some smaller acquisitions or smaller companies here.

Is it getting to be the right time where assets are getting distressed enough and you're getting the right pricing.

I know you guys have been disciplined about not running into the situations in the last year and a half.

Are we getting to the point where you're going to start pulling more and more smaller pieces of different companies in or is we still not far enough long yet?

I think it depends on the situation.

We're looking for technology.

If you look at opportunistic things that come along.

Companies are going into restructuring and close down.

If we can get the production contracts and existing capacity.

Then we can get contribution margin on those contracts, which means we can use.

Even if they are a bit underpriced, we can take them over and support our customers and still make money on them.

Generally, the appetite for people coming in and overpaying for companies in the auto parts segment whether it's North America or Europe, I think there's not much.

There's more reasonable expectations as the credit has tightened up and more and more examples of people being forced to sell or close their doors.

I would expect to see continued opportunities.

In a high level, we're still looking at trying to expand our footprint into the growing regions of the world.

We wouldn't be out and buying new capacity in North America or western Europe.

If we can pick up contracts, we certainly have a lot of open capacity going after that.

And lastly, you guys were pretty openly in the mix last time Chrysler was for sale.

Would there be any interest in certain assets or brands or parts of the company or even the whole company or is it too early to talk about that stuff?

It wouldn't be high on our priority list at all.

If we -- we never did want to compete with our customers.

We can do something in conjunction with the customer, if there's a product area we're interested in, like an engine area or something like that.

We would look at it, but we're not running out after car companies.

Would axles be one of those places where you might be interested in getting more size or scale I should say?

We've got some technology in axles and we're pursuing the axle business, but it's not a high priority right now.

Thank you very much.

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

Please proceed.

Good afternoon.

Can you hear me?

A couple things.

There was a comment on warranty reversals in your ND&A and also R&D recovery.

Can your just put some quantification around that?

With respect to the warrant reversal, Rod, if you look at the notes and the statements, what we have continuity of our warranty reserve accrual.

What you note is that overall there is probably 20, $25 million swing.

Year-over-year.

And it just related to more recent information we received from customers so we revalued our accrual.

Actually that number was about 22 million.

The net number.

The other $25 million number was R&D incentives.

We've been dealing with a government body on some R&D credit.

We reached a successful settlement in the quarter so we booked some -- an income item of about $25 million.

Okay.

And was the 22 million the change in the -- was that the income statement?

Or was that the reserve?

Let me just clarify.

The income statement impact was in total $25 million.

And 2007 we recorded on a consolidated basis a warranty expense of $8 million.

And in the second quarter of 2008, we recorded a net warranty income of $17 million.

So the change quarter over quarter was $25 million.

Okay.

Generally speaking, obviously, the big three in particular, but I think all auto makers are recasting product plans, looking at smaller vehicles or hybrids.

Generally speaking, over the next few years, how should we be thinking about the impact of that on Magna?

Is there likely to be pressure on content for vehicle over the next few years as you look at it in North America?

Or do you see some of these things as being an opportunity?

I would say that an opportunity.

Number one, we've got a strong balance sheet.

We have a lot of capability across the company.

But certainly looking at what hybrid and electric.

And looking at complete vehicles and subsystems of a vehicle.

We'll continue to spend money on research and development.

And I see this as a fairly big opportunity.

We had a board review about a year ago.

Our expectations on the volumes for electric vehicles a year ago would have been five years out and be relatively low volume.

That's probably given the reality of today.

And our expectations of hybrids or electrics with range extenders is about the same as what we predicted about a year ago.

I think it's going to become relatively significant part of the market, especially in North America, probable in Europe as well and some other regions.

And we are actively pursuing developing technologies, developing sub-systems and looking at the complete vehicles that we can work with car companies on.

I see this as a big opportunity, if we are successful in developing the technology and bringing it to market.

On a short term basis, if we look specifically at the second quarter, trucks into smaller vehicles, does create negative mix for us.

Overall content.

The negative mix has been larger than the out of content we have had on launches.

So longer term, we should be benefiting with our strong balance sheet.

Shorter term until we get into the new programs, it will be a negative on overall content per vehicle.

Okay.

And lastly, can you talk a little bit about.

Quantifying the drag that you're experiencing at the moment from the new interior businesses.

What is the magnitude of that at this point?

And do you have any kind of a time frame for closing that gap?

An update for that.

Let Vince speak to the numbers.

But interiors in Europe, we've pretty well turned the corner.

In North America we made substantial improvements.

We've still got a couple of plants that are fairly significant losers less than last year.

Other than one significant operation we've got in Mexico and we'll hopefully be coming to a conclusion with the customer there to get more reasonable pricing.

So the interiors continues to be a drag.

Certainly on a go forward basis.

In the new venture, we did a major restructuring last year.

Renegotiated the contract.

Our expectations was that we would hopefully get back to break even there.

Get a very comprehensive plan.

We're recutting the plan because the volumes have fallen off the face of the earth.

Especially the transfer case business.

So we are re-evaluating our position.

We're having discussions with the work force down in Syracuse as well as customers and looking at opportunities for reducing costs.

We have more flexibility after we re-negotiated the contract.

Unfortunately, based on the volumes we're going to have another significant loss this year.

I wouldn't expect it to be as high as last year.

It's going to be fairly significant.

We're looking at all options down there right now.

Do you think you can get that to break even by next year or is that a longer term fix.

It's going to depend on volume.

It's going to -- we're going to have to have discussions with the work force, what we're doing with our sub-suppliers, with our customers, and we'll have to see what the volumes.

In Syracuse we're going to have to address our cost structure.

We had fairly good progress with the labor force.

Volumes dropped off the face of the earth.

We're going to need support of the union to continue to reduce our cost structure.

We need support from our customers.

And we're looking at alternatives.

And if we can't fix this, one solution might be that we have to shut the facility down.

We're looking at how we make this a viable business going forward.

Okay.

Thank you.

The next question comes from the line of Rich Kwas from Wachovia.

Good afternoon.

Hi.

Good afternoon.

Don, I wanted to ask about the Russian machines transaction from a year plus ago.

I think initially you talked about some opportunity in reducing material costs there and that may be a nearer term opportunity at the time of the transaction.

I just want to get an update on that on where you are in trying to leverage their scale on the materials side.

We haven't been able.

I didn't expect short term benefit on material.

I do have a lot of material as we started production over there.

I'm hoping we'll have the advantage of lower material costs.

We can export parts.

We can certainly see that help in other regions of the world.

I would expect the biggest benefit as we grow content over there that they can be more competitive because they can have access to the cheaper energy or raw material costs.

But to date, we haven't -- a year ago we didn't expect the rapid increase in type of commodity that we use.

How long do you think it's going to take to be able to leverage it?

In any material way?

I don't think we'll have a huge material impact on leveraging lower raw material costs because ultimately they'll look at where they can sell it globally.

But if we can get up to where we hope to in the next couple of years production wise and we're buying the raw materials over there.

We need to do development and make sure we have great quality steel for example.

But in resins, oil based products and aluminum, then as soon as they ramp up, I would hope to see some benefits to more competitively place raw material.

And in the interiors business have you seen any major trends among the major OEMs where they're trying to outsource to low-cost countries, to China, India, and really trying to lower costs?

Are you seeing any of those trends from the major auto makers?

I think we see the trend.

We have seen the trend for the past five years on anything that's relatively easy to ship.

We saw huge push to try and buy most of the OEMs in China.

We saw our sub components in China.

And we also ship to OEMs in China.

I would say I would expect it to slow down.

And the reason I say that is prices are going up in China, especially for skilled people in management.

I think the growing market there is putting pressure on the supply base.

They're also pursuing the volumes there.

I don't think that raw material costs and energy prices will stay really low over the long haul in China.

And certainly, I don't know what happens with currencies.

But the US is becoming a bit more competitive to any euro based supply.

Just because of the swing in the currency.

And I would suspect the Asian based currencies that will have an impact as well to make it less attractive to ship over there.

The transportation cost is going through the roof.

Depending on the commodities, if it is easier to ship, whether it's interiors or anything else.

In many cases, we can find competitive supply down in Alabama or Mexico or other regions as well.

I think Russia long term back into Europe and I think maybe North America may also be a good opportunity to ship sub components back as well.

So I wouldn't say it's accelerating, but it's probably relatively the same.

We may see some of those coming back to North America.

Okay.

And then finally, on the tax rate, it declined a little bit year over year with more of the income from outside of North America.

Will the tax rate decline?

The tax rate declined a little year-over-year.

The biggest part of that was lower tax rates in Canada and Germany.

We typically have lower rates in Europe.

We should see that trending down a bit.

Okay.

Thanks.

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

Please proceed.

Good afternoon.

A couple of questions.

First one is on new venture gear.

Can you remind us, what you carry it for now?

Nick, I guess you're looking at goodwill and working capital and all that?

I think we're looking at overall fixed assets in the facility of about -- we've got pre-pads on there as a result of the buydown to have $60 million that I talked about.

I think it's somewhere between 130 to 150 million for fixed assets.

Okay.

And my other question is on this profitability of Styer, as volumes fall over the next couple of years until the new programs begin there.

How do you look at the profitability of that operation?

We look at that operation just like any other operation.

There's a substantial change over of product and it's coming to end of life.

You'll see that sales and profits are going to come down.

And what's also going to impact profitability in a negative way is the startup cost for the new program.

Until the new program ramps up, profits are going to be depressed.

When we look at Magna Star and everything that's going there, we're ready for that, we're expecting that, it's not unusual, so we're not necessarily panicing.

We're comfortable with the progress we're making and pleased with the awards that they've received over the last year.

Okay.

I was looking at page 14 of your release and it was talking about investment spending and they're spending on other assets of 82 million compared to 10 million.

And I was wondering is that related to Star?

A big part of that is Star and it's related to the launch of the BMW Colorado.

But there's other spending.

Generally other investment spending across the company.

The biggest part is Magna Star.

Sorry they launch when?

As Magna Star is ramping up for the new launch investment spending is increasing.

Good.

Thank you.

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

Good afternoon.

A couple questions.

On page 6 there is a mention of downsizing costs in North America negatively impacting EBITDA.

Can you give us some idea of what that is?

David, we have downsizing costs and it's hard to get an exact number.

When you look at Q2 '07 and Q2 '08, we're probably looking additional 5 to $10 million of downsizing costs in the second quarter of '08 compared to the second quarter of '07.

In the second quarter downsizing costs roughly in the $15 million plus or minus range.

Okay.

The biggest chunk of that David was incurred in North America.

And if that's normal course now almost from your commentary?

I would say the shift in footprint is normal of course.

I would hope that we're going through a lot more right now than we would typically see because of the volumes drop off and we have to react to it.

After having said that.

I would think Q3 and Q4 will be difficult quarters as well.

Sure, okay.

And then on the two acquisitions, can you give us some idea of the incremental sale that is those will add?

In the case of the Ogihara facility, on an annualized basis, that's going to be around $160 million.

With respect to Plastex, again, depending on, if you're looking at probably slightly less than $200 million in declining over time.

And EBIT impact?

Positive.

Very much?

Well I think if you think about what we're doing with plastex.

We bought a book to business and we are moving into existing facility to utilize the capacity.

So what we're doing is not only generating sales, but we're avoiding potential downsizing costs.

And if EBIT is positive, that's great.

With respect to the Alabama facility.

Not only do we have book business but other business awarded to us in Alabama.

And the facility is located in an area where automotive production is increasing.

Right.

And overall we're looking at both of these things.

We're looking at achieving normal returns for our business.

Would that be right away?

Or is that over time?

I think in the case of Plastex, there's some transitional costs.

But the returns, the probability is going to be pretty low to mediate.

In the case of the Ogihara facility, there's an ongoing operation.

We'll see the positive impacts and profitability.

We saw positive impacts in the second quarter and we'll continue to see positive markets in the second and third quarter.

And on Russia.

Does the 100 million of book business that don mentioned -- does that include the techno plastex or is there something additional?

That includes the Technoplac acquisition which is expected to close in the third quarter.

Okay.

Great.

Thanks very much.

Thank you.

The next question comes from the line of Mark Warnsman of Calyon Securities.

Please proceed.

Good afternoon.

Regarding customer tooling, do you have any of your tooling amortization in piece price that might be your recovery which would be adversely affected if you drop in production?

Just trying to think.

We have typically if we capitalize tooling, we capitalize, we have volume guarantees.

We have volume guarantees and in theory we should be getting paid no matter what the volume is.

After I said that, It is not all the time.

Sometimes we will have a threshold of 80%.

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

I don't think we have significant, do we?

We have tooling on our balance sheet.

To the extent that volumes are less, it will impact our revenue stream which will impact profitability.

Like the case for fixed assets that are dedicated to specific program, we'll have -- we'll continue to have the fixed assets or the tooling.

And a short fall on the revenue line.

If you're talking about where we capitalized it.

Then typically we won't capitalize until we have some volume guarantees.

Okay.

And then in terms of business potential, what's the extent of your aluminum forming capability, whether it's casing, or stamping.

Aluminum forming.

We have quite a bit.

We're one of the leaders in stamping aluminum.

And we have significant dye casting for medium sized parts.

Okay.

Thank you.

The next question comes from the line of Mike Willemse of CIBC, please proceed.

Thank you.

Just a follow up on the question on the aluminum.

Are you seeing any significant increase in quoting or activity on aluminum stampings or formings.

Given where steel prices have gone.

The aluminum has gone up in price.

And we could probably talk for an hour on it.

I would say, in some cases, we are seeing more requests for aluminum.

Other processes we're using high strength steels.

We are using technology.

We will use a combination of high strength and aluminum.

And cast in body structures.

There's a lot of interest now on lightweight vehicles and people are willing to pay for that for environmental reasons.

Also look at the life cycle energy of aluminum and to produce aluminum and to discard it later, there's energy costs with that as well.

So I would say not significantly.

We tend to see more demand in aluminum in some areas, more demand in magnesium.

Then it will swing to plastic.

Now that oil has gone up, we move away.

Generically, you are going to see more aluminum requirements, but it's not a drastic change that I'm aware of.

Okay.

And going back to your commodity exposure.

Are most of your problems on commodity exposure in North America or in Europe?

The bigger impact is in North America.

We're seeing --

Okay.

And then going back to your comments on hybrids or electric vehicles and Magna Star.

You kind of suggested some numbers.

If I did the math, it sounds like three or four years away.

Is that what you're thinking?

Well, there's a lot of hybrids out there now.

I think hybrids will continue to grow.

I can't remember the study we did.

But 2013 we were looking at 1.72 million vehicles.

Electric is a little bit further out.

High volume being half a million units per year.

Probably four years.

I think there's a lot on the drawing board and there's a lot of interest whether it's electric with a range extender or pure electric.

You have basically the same technology.

I think before you see significant volumes in electric, probably 2011 and you'll get ten different answers from ten different people on what the best solution is.

I think electric has a role in the future.

And would you work with just one OEM or multiple?

We work with multiple OEMs.

We work with anybody that wants to work with us.

And cooperating on vehicles, we'd work with as many people as made sense.

Those are pretty big programs.

We would probably pick one or two Maybe, maximum of three car companies.

And at lot of it depends on how much money they want to put in it.

Everybody needs their own mission vehicles.

Some people are tight on cash and we might do cooperative ventures with a couple of them.

Okay, then, just one last question.

The BMW Mini Cooper sports activity vehicle, is there opportunity to move up the launch?

Or is it set in stone in 2010?

I don't know off the top of my head.

I would suspect it's pretty set in stone.

I'd have to look.

It's pretty difficult to move things drastically forward.

Okay.

Thank you.

and the next question comes from the line of Itay Michaeli.

Citigroup.

Please proceed.

Great.

Good afternoon.

A couple questions on North American.

Remind us the body on frame mix off sales in North America is.

And then if -- have you done any hedging on receivable to Chrysler or any of the Detroit three customers?

Answer your second question first.

In terms of hedging exposure, we haven't done any of that.

With respect to receivables or production or tooling.

Either in North America or Europe.

I'd be guessing what the percentage on body and frame.

I don't want to guess off the top of my head.

Get it for you.

That would be helpful.

Just one quick housekeeping.

Income tax impact from the favorable R&D settlement, should we expect another outflow in the income tax payable in the remainder of the year.

Is that more of a one time hit?

That was more of a one time hit.

We ended up booking a receivable which essentially increased working capital.

Once the cash comes in the receivable goes back down.

That will reverse in a subsequent quarter.

Okay, great, thank you.

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

Please proceed.

I didnt quite catch the numbers on the R&D settlement and the revaluation of the warranty.

Did you say that the amount of the settlement on the R&D incentive was 25 million and also that the swing on the warranty accrual was 25 million?

That's correct, Peter.

And with the warranty accrual would that be tax affected?

Yes.

Okay.

That's all I have.

Thanks.

And so would the R&D one be tax affected.

Oh, it would be?

Tax affected right?

the R&D incentives are recorded in operating income.

They're tax peak affected, as well.

The downside in cost go the other way.

I missed that.

The downside in cost, go the other way.

Okay.

Thank you.

Operator, it's been over an hour.

We'll take one more question.

the last question comes from the line of Himanshu Patel from JPMorgan.

Hi, this is Ramel on behalf of Himanshu.

Some of the supplies have recently complained in raw material costs like freight and energy.

Are you guys seeing any of that?

Yes, both of them are going up.

Freight is becoming a big issue.

In many cases our customers will pick up the parts at our door.

Anything we can do to help mitigate the freight costs helps them and our freight costs are also going up.

So we have had for the last couple of years a lot of emphasis on pack densities, and transportation routes and making sure we don't have partial shipments.

But we're also seeing that as well.

I can't quantify it.

It is handled at a division level.

Certainly, energy costs and transportation costs are both a factor.

And then any of the regions where this is more pronounced like Europe or North America?

I don't off the top of my head.

Anywhere where you're shipping bulky parts long distances.

That's an obvious thing to say.

If you're taking a big part and moving it offshore.

We've seen that shipping long distances.

It becomes less attractive.

As it becomes less attractive, I'm optimistic that the ability for our customers to get much lower prices by moving some of these parts to low cost regions is less.

So hopefully, we have less need to be shipping parts that we produce in either Europe or North America to low cost countries like China.

All right.

Thanks.

Thanks, everyone for listening to our second quarter call.

We'll be talking to everyone real soon.

Good night.

Thank you.

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.