Magna International Inc (MGA) 2008 Q4 法說會逐字稿

Welcome to the fourth quarter and year-end 2008 results conference call.

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

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

(Operator Instructions) As a reminder, this conference is being recorded, Tuesday, February 24th, 2009.

I would now like to turn the conference over to Don Walker.

Please go ahead, sir.

Thank you.

Good morning and welcome to our fourth quarter 2008 conference call.

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

Yesterday, our Board of Directors met and approved over financial results for the fourth quarter and the year ended December 31, 2008.

Our Board also declared a quarterly dividend of $0.18 per share payable on March 23, 2009 to shareholders of record on March 12, 2009.

We issued a press release earlier this morning on our results.

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.

I will start with some thoughts on 2008, the current environment, and some of the actions we are taking to offset the severe downturn we are facing.

Vince will then review our financial results for the quarter.

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

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

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

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

2008 was a difficult year for the global automotive industry.

The year began with the expectation of continued global growth in vehicle sales and production.

However, global economic conditions, including weakening economies and a severe credit crisis, affected every major market in the second half of 2008.

This led to the first annual decline in global automotive sales and production in many years.

The contraction in automotive sales and production negatively impacted the financial results and condition of essentially all industry participants.

Many of the world's largest automotive OEMs, including the Detroit 3, have asked for some measure of Government assistance.

In some cases in order to avert imminent restructuring.

Toyota, the world's largest OEM by vehicle sales, recently announced it would post an annual operating loss.

Its first in 70 years.

Many other large OEMs, as well as suppliers, have or expect to report annual operating losses.

In North America, light vehicle production declined for the sixth straight year to 12.6 million units.

The rate of decline accelerated in the second half of 2008 with production down 22% year-over-year.

For the Detroit 3, the production decline has been compounded by a shift in consumer preferences away from certain light trucks, as well as continued market share erosion.

In the second half of 2008, Detroit 3 trucks, excluding the crossover utility vehicles, declined 44% relative to the second half of 2007.

The Detroit 3 have been adjusting their assembly capacity, particularly in North America, and have indicated they will continue to do so to offset the impacts of vehicle segment shifts and market share losses.

The decline in North American production reflects a significant decline in vehicle sales, which in the fourth quarter of 2008 dropped to annualized sales levels not seen in more than 25 years.

The deteriorating US economy, low consumer confidence and limited availability of financing for automotive consumers were among the largest drivers of the decline in North American automotive sales.

Certain of the conditions affecting North America have similarly impacted many other automotive markets.

In particular, Western European automotive sales declined approximately 16% in 2008.

With the last three months of 2008 experiencing year-over-year rates of decline of approximately 17% in October, 23% in November, and 25% in December.

Western European light vehicle production declined 8% for 2008, but 26% in the fourth quarter of the year.

While 2008 was a difficult year for the industry, 2009 is expected to be worse.

Most industry observers expect light vehicle sales and production in most large automotive markets to be considerably weaker in 2009 than last year.

The first half of 2009 is expected to be particularly challenging, as many OEMs struggle to reduce dealer inventories.

Our financial results have been negatively impacted by the declines in vehicle production, especially in North America and Western Europe.

In addition, in North America we have been negatively impacted both by the shift away from certain light trucks on which we have relatively high average content and by OEM capacity adjustments, in particular by the Detroit 3.

We have been taking actions to offset the production declines and the capacity reductions, including reducing our own capacity to adapt to the current realities in the automotive market, consolidating, selling or closing a number of facilities particularly in North America, reducing discretionary spending across the organization, and reducing or deferring capital expending to the extent possible.

As a result of our capacity reduction actions, we have incurred considerable restructuring charges in 2008 and expect to incur additional restructuring and downsizing costs in 2009.

We have also recorded impairment charges reflecting the decline in value of certain of our long-lived assets.

Our restructuring has been painful for some employees.

However, we believe these actions have been necessary to strengthen Magna for the future.

Despite our actions we have not been able to reduce costs at the rate that production has declined nor do we believe it is prudent to capacitize our business for certain levels of production or for current levels of production.

As a result our sales and earnings have been, at least in the short-term will continue to be negatively impacted by the current automotive environment.

2009 is expected to include massive industry restructuring, including a number of OEMs and auto suppliers.

Our solid financial condition with a net cash position of $1.5 billion and a strong cash flow generation should allow us to benefit in the medium term from potential industry changes, including supplier consolidation.

This would include both takeover work, as well as the outright acquisition of business.

As an example, we recently announced the acquisition of the European operations of Cadence Innovation.

Cadence Europe, a supplier of interior and exterior plastic components and systems, recorded 2007 sales of approximately $370 million.

The acquisition expands our presence in Eastern Europe through its three facilities in the Czech Republic and one in Hungary and strengthens our low cost footprint.

We have been preparing ourselves for a significant downturn.

However, at some point beyond 2009 we expect the global automotive industry to return to growth and we anticipate that with the actions we are taking in our traditional markets, together with our planned growth in new markets, we will remain a key supplier to the automotive industry.

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

Thanks, Don.

Good morning, everyone.

I would like to review our financial results for the fourth quarter ended December 31, 2008.

Please note all figures are in US dollars.

The explanation of results from operations for the fourth quarter can be summarized as large declines in vehicle production, particularly in our principle markets of North America and Western Europe, which led to a significant reduction in both our production and assembly sales.

These sales reductions led to a deterioration in our profit.

I will take you through the specifics.

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 quarters of 2008 and 2007 respectively.

In the fourth quarter of 2008, we recorded certain items resulting in a net $96 million reduction in operating income, a $72 million reduction in net income, and a $0.65 reduction in diluted EPS.

In the fourth quarter of 2007, we recorded certain items resulting in a $32 million reduction in operating income, a $144 million reduction in net income, and a $1.21 reduction in diluted earnings per share.

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

In the fourth quarter, consolidated sales declined $2 billion or 29% from the fourth quarter of 2007 to $4.8 billion.

North American production sales declined 28% in the fourth quarter to $2.4 billion, reflecting a 25% decline in vehicle production to 2.7 million units and a 4% decline in North American content to $874.

Factors that negatively impacted North American content were high content programs that experienced lower volumes and/or content including GM's full size pickups and SUVs, the Chevy Equinox, the Chrysler minivan, vehicles on the Chrysler LX platform, the Ford Explorer and Edge, the Jeep; Liberty and Wrangler, and the Hummer H3.

The weakening of the Canadian dollar against the US dollar.

Programs that ended production during or subsequent to the fourth quarter of 2007, including the Chrysler Pacifica and incremental price concessions.

Offsetting these factors were the launch of new programs, increased production and/or content on certain programs including the Chevy HHR, Impala and Cobalt, the Pontiac G5 and the Ford Fusion, as well as the acquisitions of a facility from Ogihara and a substantial portion of Plastech's exterior business.

New launches positively impacting content growth include the Chevy Traverse and Malibu, the Dodge Journey, Ram and Challenger, the Volkswagen Routan, the Mazda 6 and the Ford Flex.

European production sales also declined 32% in the fourth quarter to $1.3 billion in a period when European vehicle production declined 26% to 2.9 million units.

European content decreased 9% to $436.

The key factors leading to the decline in content in Europe were the weakening of the Euro and British pound each against the US dollar; lower production and/or content on certain programs including the BMW X3, the Renault Trafic, Opel Bravera, and Nissan Primastar, the Ford Transit and the Porsche 911; the disposition of certain facilities during or subsequent to the fourth quarter of 2007; programs that ended production during or subsequent to the fourth quarter of 2007 including the Chrysler Voyager; and incremental customer price concessions.

These negative factors were partially offset by the launch of new programs including the Volkswagen Tiguan, the Audi Q5, and the Mercedes-Benz GLK as well as programs that experienced increased volumes and/or content in the fourth quarter of 2008 including the Volkswagen Transporter and the Smart Fortwo.

Rest of World production sales declined 17% to $103 million primarily as a result of the weakening of the Korean, Brazilian and South African currencies each against the US dollar and decreased production and/or content on certain programs in Korea and Brazil.

These factors were partially offset by the strengthening of the Chinese currency against the US dollar.

Complete vehicle assembly volumes declined 60% from the comparable quarter and assembly sales declined 51% or $502 million to $479 million.

The sales decline was primarily as a result of a decrease in assembly volumes on a number of vehicle programs, the weakening of the Euro against the US dollar and the end of production of the Chrysler Voyager at our Graz facility in the fourth quarter of 2007.

Partially offsetting the decline was higher assembly volumes for the Mercedes-Benz G5.

In summary, consolidated sales including tooling sales declined $2.1 billion in the fourth quarter.

The primary reasons for this decrease are the decline in vehicle production in our two principle markets North America and Western Europe, lower complete vehicle assembly sales as well as lower average content per vehicle in both North America and Europe and a decrease in rest of World sales.

Tooling, engineering and other sales increased 10% to $589 million for the quarter related to a number of new programs.

Despite the negative impact of the weakening of the Euro, British pound and Canadian dollar each against the US dollar.

Gross margin in the quarter was 9.6% compared to 12.7% in the fourth quarter of 2007.

The change primarily relates to lower gross margin as a result of a significant decline in sales.

The decline in sales reflects much lower production volumes, in particular on many high content programs in North America.

Accelerated amortization of deferred wage buy-down assets at our Syracuse facility.

Operational inefficiencies and other costs at certain facilities.

Costs incurred in preparation for upcoming launches.

An increase in tooling and other sales that are (inaudible) or no margins, increased commodity costs and incremental customer pricing concessions.

These factors were partially offset by the decrease in assembly sales which have a lower gross margin than our consolidated average, productivity and efficiency improvements at certain facilities, incremental gross margin earned on new programs that launched during or subsequent to the fourth quarter of 2007, lower employee profit sharing, and the benefit of restructuring activities during or subsequent to the fourth quarter of 2007.

Magna's consolidated SG&A as a percent of sales was 7% in Q4 of 2008 compared to 6.2% in the comparable quarter, reflecting a significant decline in sales including assembly sales and net foreign exchange losses in Q4 2008 compared to net foreign exchange gains in Q4 of 2007.

These were partially offset by lower incentive compensation, higher tooling sales and no asset backed commercial paper write-down in Q4 2008.

Largely as a result of the lower gross margin percentage, higher SG&A percentage, and lower interest and equity income, our operating margin percentage declined to negative 1.4% in the fourth quarter of 2008 from positive 3.4% in the fourth quarter of 2007.

Our effective tax rate was negative 10.1% in the quarter compared to positive 27.2% in the fourth quarter of 2007.

Our inability to benefit losses incurred in the United States is the most significant reason for the negative tax rate in the fourth quarter.

Our net loss was $76 million in the quarter compared to net income of $172 million in the fourth quarter of 2007.

Our diluted loss per share was $0.68 compared to diluted EPS of $1.45 reported in the comparable quarter in 2007.

The decline in diluted EPS was a result of a decrease in net income partially offset by a decrease in the number of weighted average shares outstanding during the quarter.

The decrease in the number of diluted shares was due to the repurchase of shares pursuant to our normal course issuer bid.

I will now review our cash flows and investment activities.

During the fourth quarter of 2008, we generated $119 million in cash from operations prior to changes in noncash operating assets and liabilities and $257 million in noncash operating assets and liabilities.

For the quarter, investment activities amounted to $358 million comprised of $274 million in fixed assets, $49 million to purchase Technoplast and BluWav, and a $35 million increase in investments and other assets.

As Don noted earlier, in the face of extremely difficult conditions this year, we are taking actions across Magna to reduce or delay cash outlays and improve operational efficiency.

We expect to weather the storm and be in a stronger position as automotive markets around the world recover.

Largely due to the current uncertain conditions facing the industry, we indicated last month that we have suspended our policy of providing an annual outlook.

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 with Credit Suisse.

Please proceed with your question.

Hi, guys, this is actually Joe Durham on for Chris this morning.

Hi, Joe.

Good morning, Joe.

Hi.

I am wondering if we can talk about the improvement in EBIT in North America sequentially.

It looks like sales were down I think a few hundred million dollars but EBIT improved.

Can you breakout sort of what happened there sequentially.

I think if you look at sequentially and you focus on production sales in North America.

Overall production sales were down about $120 million but sequentially EBIT was up $42 million.

A couple of main reasons for that.

When you look at some of our operations, in particular kind of interiors North American, powertrain North America as a whole, we have seen some operational improvements there.

We also did benefit in the quarter as a result of recording some research and development tax credits.

Okay.

These were items that we had filed some years ago and they were resolved in the quarter.

So that - there was ups and downs everywhere.

I guess some sales were up and some sales were down in most groups but that accounts for the change in EBIT quarter to quarter.

Okay.

Do you have a dollar amount for the R&D tax credits?

Joe, no, I don't.

Okay.

I guess what is the latest that you guys are seeing out of Europe?

Are production schedules still changing rapidly?

Are they still in free fall?

Do you have any feel for how Eastern Europe is doing versus western Europe?

All I can tell you is in the last, if you look at the months of November, December and January that production schedules have been changing; decreasing pretty rapidly in Europe.

Whether that continues for some period of time, we don't know.

Certainly just a whole bunch of volatility in Europe.

It seems that Europe is a little bit behind where North America was in terms of overall production and adjusting inventory levels to sales.

Okay.

But I think as we look forward at least in the first half of this year, we are expecting a whole bunch of uncertainty and volatility in both North America and Western Europe.

Okay.

I know you guys aren't giving any guidance, but do you have any feel for what your capital spending will look like in 2009.

And then also, do you have any plans for 2009 restructuring cash spend level?

Let me talk about capital.

Obviously, we are reviewing capital on going basis as we projected the future production volume is going to be.

We are trying to minimize any new expenditures.

But we are not at the point where if we've got good payback on an operating improvement or a new program that we want to cut back on it.

So 2008 came in just about $740 million.

I would expect it will be lower than that -- we will be lower than that.

We are going through with a fine tooth comb.

We are re-cutting our business plans right now.

We don't want to get to the point where we are cutting off good capital investments.

But obviously if it is anything discretionary and we have got a lot open capacity then we will cut it off.

Okay.

Any feel for the cash spend on restructuring in '09?

Joe, in the -- get your MD&A.

We talked about expensing somewhere in the neighborhood of $40 million to $60 million on restructuring activities that have been initiated so far.

In terms of how much of that is cash, I'm not sure.

Some of it we may have expensed in 2008.

The cash didn't go out until 2009.

But over and above that, we will see some downsizing expenditures across the organization.

When we think about restructuring costs, those are sort of bigger type actions.

Might be a plant consolidation or a shut down on the facility.

But throughout the entire organization we are right sizing our operations and unfortunately we have had to let some people go.

It is hard to add up the onesies and twosies across the company but it does add up.

We do expect that there will be additional down sizing costs in 2009 that haven't been reflected in that $40 million to $60 million number I just mentioned.

Okay.

Thanks, guys.

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

Please proceed with your question.

Hi.

Good morning, guys.

Good morning.

I wanted to ask maybe Vince or Don you could speak to this.

You talked about not capacitizing through current production levels.

What are you thinking about longer terms in terms of at what level are you capacitizing to both in Europe and North America?

That's an interesting question.

When I say we are not capacitizing to current production levels, we are at a run rate -- if you look in January, I don't know what the number is.

It is down, Louis, it is 7 million or (inaudible)?

So what we don't want to do is -- and I am not sure where it is going to end up in Europe as well.

We do expect it is going to be going down from where it has been, certainly, for the first half.

What we don't want to do is close plants, lay people off, incur the expenses, get rid of assets and then if the market comes back to even 12 million units then we are running overtime.

So, it is a bit of a wild guess where it is going to be right now but we are trying to make prudent decisions on what's the right level of equipment capacity.

And we are doing other actions rather than closing plants across the board.

We are going to short work weeks and other things.

So, are we -- we don't think it is going to be going back up to 15 million units any time soon but I don't think it is going to stay down at below 10 either.

So it really depends on what the operation is and whether it is a painting operation, a molding operation, a stamping operation.

How far can we ship products?

There's a lot of variables going into it.

But we are looking at all the variables and trying to figure out what the best solution is.

Rich, in terms of try and figure out optimal capacity, you just can't look at a macro level on our business.

What you have to look at is each one of our facilities.

What the outlook is for customer business?

Are they in painting, as Don talked about, are they in stamping?

What's happening to the OEM assembly plants?

And when you do that thorough analysis and you figure out what the right capacity level is for a particular plant.

It is not an easy thing to say we are capacitizing for 10, 11, 12, 13 million units.

It really depends.

We also want to have the ability if it turns out that other suppliers fail or go into restructuring, we are able to get takeover business.

We want to be able to put them into open assets immediately not have to open up plants again.

So we like to have some open capacity, certainly until we see where the industry is going.

Okay.

That's helpful.

But I guess would it be fair to say though that you are not going to be capacity -- you are not capacitizing for a return back to 15 million units in North America and 21 or 22 in Europe?

Certainly not.

We are not adding a lot of new capital anywhere if we can produce it where it is, but we are also not going to be shutting plants down and disposing of assets.

So we are not anticipating we are going to be going back to those levels.

If we do then we can always add later.

Okay.

Then on the tier 2, tier 3 supply base -- back about a month ago or so in Detroit.

Vince, you indicated and, Don, in fact I think you indicated there's going be a lot of stress in the tier 2, tier 3 supply base.

What have you seen so far?

What are your expectations going forward?

North America we are seeing a lot of weakness.

We are seeing a number of failures in various size tier 2 and tier 3 suppliers because they can't get financing.

And as we predicted back then, I think it is coming to fruition because of the low production and because the receivables have dried up, basically.

We are sort of at a low point based on the low production in December and January.

So we are seeing a lot of tier 2 and tier 3 failures.

We have been in sourcing business where it makes sense to fill up broken capacities and to utilize our own facilities and our employees.

Where we see somebody is going to get in trouble we want to be proactive.

Either consolidate the number of suppliers we have and [do] -- and move the business into somebody who will survive.

But we are seeing a lot of activity.

I think the failure rate of the big suppliers is still unknown.

A lot of those are our competitors.

I think the general understanding of the Governments in Canada and the US is you can't allow the supply base to collapse by not supporting receivables if one of the car companies goes into a restructuring process.

I think that's a very positive sign that they understand how connected the industry is.

So assuming that the receivables aren't cut off, I think you are going to see quite a few failures of the suppliers; our tier 2, tier 3 and other competitors to us.

But hopefully it will be manageable.

I think it is going to be painful.

I think it is going to be relatively expensive but it is probably a necessary restructuring.

And as long as the Governments continue to support the receivable payments then you will see a relatively orderly -- probably scrambling around -- but relatively orderly restructuring in the supply base.

In Europe, I think we are just starting to see a lot of the impact now because it has been later for the lower productions and the down times.

So I think we are going to start seeing a lot more failures over in Europe.

Okay.

And then final question in terms of development programs with OEM customers.

How are you funding that now?

Are you asking the OEMs for most of the capital or all of the capital up front before you embark on something or are you still fronting some of the costs and the cash regarding those programs?

It really depends on what is the program, what is the platform, and who the OEM is.

We are not asking people to fund capital because in most cases we don't necessarily need capital.

We've open capacity.

If it is specific tooling for programs, as in the past we will be asking our customers to continue to fund them.

If it is a customer that we think could be in imminent danger, then before we take on additional expenses and additional exposure and working capital, we have been asking in some cases them to pay us as we go.

And we have been relatively careful in the last number of years if we are taking on new programs and we are having to pay for the engineering and amortize it without a volume guarantee.

So it is really all over the map.

We are doing our best to keep our working capital to a minimum.

And if we believe that it is a good program and it is going to survive and the customer is going to survive, then it is a good opportunity to take over business.

So it is a bit of a negotiation what they're willing to pay for and what they're not willing to pay for.

Okay, great.

That's helpful.

Thanks so much.

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

Please proceed with your question.

Yes, good morning.

Just on the North American EBIT benefit from R&D tax credits.

Are they large enough that it will make a big difference in the current quarter versus the previous quarter?

David, no.

No, it is just one of the items but no.

Okay.

And then Vince, could you give the same sort of walk through for Europe on the EBIT line as you did for North America because the drop was pretty spectacular sequentially.

Sure.

I think when you look at Europe, just to summarize what happened -- overall production sales?

Yes.

Were almost $2.4 billion in the third quarter.

That includes -- that's assembly as well.

1.7 going down to 1.3 in Q4 and a lot of that would be currency I would think.

Sorry, I have got to roll here with -- let me just talk to you about production and assembly; 2.4 to about 1 -- just under, just over, just under 1.8 billion.

Right.

A drop of about $140 million.

And EBIT has gone from positive 52 to negative 61, so a drop of about $123 million.

And the biggest item there was just volumes, right?

And sales with a big reduction in sales.

That's had a negative impact overall on EBIT.

There's some other contributing things.

On the negative side, we have got a couple of start-ups in Europe where we've had some inefficiencies.

Commodity costs have been negative for us.

We do have a number of launches on going in Europe.

So we are investing in those.

And one of the positives quarter over quarter was lower corporate fees to Magna as a result of lower sales.

Right.

But most substantial item there when I look at group by group it is sales.

Okay.

Sales are down and that is impacting EBIT.

And is that highly concentrated at Steyr or the assembly business given how far the sales fell there?

It is throughout the organization.

Okay.

Sales are down at every one of our groups in Europe and EBIT has been negatively impacted as well.

It is everywhere.

Okay.

Some have been effected a little more than others, but it is down in every one of the groups.

Okay.

And then can you just sort of review how the new process gear wind-down, if that is the right word, will happen?

And any idea whether this is going to make a material impact on your financials as it happens?

I will make a couple of comments.

I don't want to get into too many details.

It is a difficult situation down there because volume has been going down.

We have been losing a lot of money as you know.

Unfortunately we, we had to go back and try and reduce costs across the board, which is internal costs.

Some further actions we were requesting from our employees down there.

Assistance from our customers, the government, it's all areas.

And we have been having large losses.

The current status is we went back, asked the membership if they would be willing to make further concessions and they decided not to.

It is their prerogative.

I can understand how frustrating it is for everybody because it is sort of an on going saga down there.

But the current plan is we are putting together the final details of a wind-down plan.

And the financial impact of what we are doing there and the finalizations of where everything is going hasn't been concluded and we are not talking about the financial impact yet.

We can update probably next quarterly.

Just to give you a little bit of cover, David, when you look at that facility, we took -- we have been taking impairment charges; substantial impairment charges in the third quarter.

So the fixed assets in process here are essentially written off at salvage value.

Okay.

The other assets on the books is deferred wage buy down, which we have talked about the previous quarters, which will be amortized income over the next little while.

And if you have, when you have plowed through the detail in our financials, we talked about goodwill testing.

And we updated -- we did our annual -- we redid our annual goodwill and impairment testing again in the fourth quarter given what happened with volumes in the industry.

When you look through goodwill there's a couple of tests you need to do.

We failed the first test for our powertrain group in North America, which would include Syracuse.

When we looked at the second test we were fine on our goodwill on the books, but this is a preliminary estimate.

It is our best estimate at this time, but we are going to have to do some more work to see whether there's a potential impairment on the goodwill for the powertrain business in North America.

That's all really being driven by Syracuse.

Right.

Okay.

Fair enough.

The financial losses stay at the same level as like in '07 there?

You know what, David, there's just a whole bunch of things going on.

You have the wage buy down, you have the impairment.

I think when you look we had a lot of people that were unfortunately let go as well as sales dropped off.

I think if you look at whether from an operational standpoint we have seen some improvements, I would say that the teams are working really hard.

And we have seen some efficiency improvements but just with the substantial drop in sales, the result hasn't been good.

Year-over-year they improved.

Our objective was to get it to breakeven.

We didn't get anywhere near breakeven but year-over-year it was such horrendous losses the year before, it improved.

Okay.

That's great.

Thanks very much.

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

Please proceed with your question.

Good morning.

Vince, I noticed that in your segmented reporting that corporate had a $16 million loss.

Could you explain what is underlying that?

Sure.

Let me just flip to the details on corporate.

Do you have another question in the meantime, Peter, while I look at this up?

Sure.

Don, I had a question for you.

On I guess it was last week's restructuring plans that were submitted by GM and Chrysler and a couple of things I was wondering if you can comment on.

First with respect to Chrysler, I noticed in their plan that they said that they're seeking a 3% price give back from their suppliers effective April 1st.

I assume that's above and beyond their normal pricing that they demand.

I am just wondering if you could comment how if they have approached Magna and how you think that is going to unfold within the industry.

It seems to me that the industry is just not in a position to offer this price back above and beyond what they're already giving Chrysler.

Yes, I am not going to comment specifically because it is -- what we are doing with any particular OEM and ourselves is we just don't get into it.

But I guess in general everybody is trying to reduce costs.

I would agree with your statement.

In good times if somebody is in trouble and they ask for a reduction, it is easier to agree to it if there is something long-term we can get in return.

The supply base right now, as everybody knows, is so weak.

I don't think you can have across the board price reductions.

However, there's other things that can be done to try and reduce costs and whether it is through -- you followed the industry a long time, whether it is through VAVE.

Whether we can look at consolidating the number of suppliers, moving business around, adding extra business at a contribution margin level.

So I think Chrysler's net objective is to get a 3% reduction in what they are paying to the supply base.

Potentially could be achievable if they make the actions necessary.

And I think whether you look at General Motors, Ford, Chrysler, anybody else including in Europe.

If you look at all the actions that are possible, I think those -- you just have to start making the tough decisions to consolidate the supply base.

And whether it is through -- not necessarily through [decontenting] but through looking at getting more aggressive on VAVE implementation.

So, where they are going to end up?

I don't know.

I know that's part of their plan.

We have been having discussions with them.

It has been constructive discussions with Chrysler.

We understand the situation they're in but I think it has be something more creative than just reducing margins for the supply base for any OEM including Chrysler.

Peter, just your question on the corporate EBIT.

If you look at last year's fourth quarter, we reported no income but included in there was a CTA gain.

So on a normalized basis, we had $4 million of corporate EBIT last year.

And this year there aren't any unusual items.

So the reported number is negative 16; a variance of 20 million.

And the big change to that is on the negative side is just reduced fees that we are collecting globally.

It is the most substantial sort of negative driver.

The other negative driver to corporate EBIT is some of the spending we are doing for the electric vehicle.

There are a couple of offsets.

As you can imagine with reduced profit levels that compensation is down.

So that would have increased EBIT quarter over quarter.

And last year, in the fourth quarter, we took a $6 million impairment charge on asset backed commercial paper and there was no similar charge in the fourth quarter of '08.

So big picture, the reduction to EBIT is due primarily to fees and our investment in electric vehicles offset by compensation and reduced asset backed or no asset backed commercial paper write-down.

Okay, thanks, Vince.

Don, just getting back to the restructuring plans.

Just had a question on GM.

I mean when I looked at GMs plan, when we look closely at it, I believe what they are saying is that they plan to reduce their supply base by 30% over the next two years.

But obviously, trying to help the supply base through economies of scale and higher levels of capacity utilization.

Just wondering have you seen any evidence of this from GM yet?

And if you think, I mean, to me that seems like a pretty aggressive goal, if you think that's achievable for them to reduce the supply base by that scale and at that particular pace which they outlined.

Probably achievable.

Partly by actions they're going to do proactively and partly by actions that are going to be caused by market forces.

You look at the production volume as being down 25%, 35%.

You are going to have probably that percentage of suppliers going out of business, either voluntarily or going through restructuring.

So I would say it is achievable and I think the mindset of the car companies is they have to make the moves.

It is a difficult decision.

You hope somebody is going to hang on but if you just wait around until people go bankrupt -- we can see the signs of our suppliers or our competitors when they're getting into financial difficulty.

The first thing they do is they cut off engineering and then they cut off R&D expenditures.

They cut off program management then they have quality problems.

They have financial problems.

There's delivery problems.

So this is not going to turn around.

And the quicker people make the move to get the supply base restructured, the quicker you are going to have some healthy suppliers left and you are going to have less pain getting there.

So I think there's a realization out there.

And I agree with what General Motors is doing is you have got to be proactive.

You have got to move quickly on it.

I think you will see the same with many other customers where they know that it is going to happen.

So why not get it done quickly as efficiently as possible and get ahead of the curve.

Or else you go through an awful lot of pain and awful lot of expense.

I think it is achievable and I think they are taking actions to get there.

Okay.

Thank you for your comments.

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

Please proceed with your question.

Good morning.

You have got ample liquidity with all of that cash.

I just wondered if you could talk, I guess, expand on whether that is adequate liquidity given the grim circumstances and whether you are confident you can borrow, draw on that other $1 billion of credit available?

Nick, just to go through the liquidity that we had at the end of the year.

When you look at cash and bank indebtedness, we were about $1.8 billion.

We had about $1 billion of undrawn facility.

Since year-end we have paid down some of our bank indebtedness and the offset has just been an increase in our bank lines.

Overall, when you look at short-term liquidity, we are roughly about $2.9 billion.

We are confident that if we had to drawdown on our lines that the banks would be there to support us.

We are very confident of that.

And we have had discussions with our major banks.

When we look at the industry and if you do a whole bunch of what if scenarios, our conclusion is in a worse-worse scenario that we have the liquidity to make it through a really bad scenario.

Which we don't think is likely given all of the financial support being given to OEMs, not only in North America but across the world.

And Nick, my opinion is you are going to have to have an automotive industry both in Western Europe and North America because I just don't think the Governments would be short sighted enough to let the whole industry collapse and disappear.

So assuming that happens and because they seem to understand and they're trying to figure out how to deal with it, but they can't have a supplier or a customer go under and stiff all the suppliers because of the free fall it would cause.

But I think Magna is in one of the best shapes of any company out there.

And I think we've still got an awful lot of capability from production engineering.

So we are being seen as one of the surviving, strong suppliers.

So I think we will get through it.

We are assuming we are not going to lose our receivables from anybody.

And if we had to we could cut further, but we don't want to cut into the muscle of the company.

And we are basically managing the company for positive cash.

And I think -- I don't know how long the industry will take to turn around but by the end of the year, if we are coming back to some sort of normalized level, I think we can be in pretty good shape to take advantage of things.

Thank you.

Can you just expand on why you don't think you are at risk on your receivables?

Because I think the -- from the discussions we've had with people in the Government.

I think they understand that if they just let somebody go into a noncontrolled bankruptcy and they don't pay the supply base, you will see a collapse of the supply base.

And I think they're hearing the same thing from every car company and all the suppliers.

While I don't think it is likely they are going to go out and start picking and choosing what suppliers they want to survive, I do think there is an understanding that you can't just have a free fall.

Because if you have a free fall and you have 100 suppliers or 200 or 300 suppliers all basically have a liquidity crisis and they all go into restructuring, then every car company in North America goes down.

And the same thing would probably happen in Europe.

And by the time you go through a restructuring process the whole industry could be down for a month.

I just don't think the economy can afford it and I think that there's an understanding of that.

And with the amount of money that is being put in to try and prop up various OEMs, I think putting the money in to make sure that all the supply base doesn't lose all the receivables would be money well spent.

And again, I am saying that because I believe the governments don't want to lose a whole industry.

They just can't afford it.

Thank you.

Good luck.

Thank you.

And our next question comes from the line of Michael Willemse with CIBC World Markets.

Please proceed with your question.

Great.

Thank you.

Don, you've mentioned a lot about weakness in competitors and tier 1, tier 2 suppliers.

Is it safe to assume that primarily all of the weakness is for suppliers to the Big 3, or are you seeing a decent amount of struggling suppliers that might be large suppliers to the Asian or European OEMs?

I am talking more competitors now.

It is a combination.

We are seeing -- because there's not a unique set of suppliers to all the different OEMs.

There's a lot of supply base that is supplying all of the companies out there like ourselves.

So I think there has been an acknowledgement by the non-Detroit 3 customers that when the supply base gets weak and starts going under they're being impacted.

So we are seeing a lot more, I guess, selective sourcing by the non-Detroit car companies; which suppliers they want to work with.

They are much more interested in how strong is the balance sheet?

How strong is their capability and engineering program management?

Because it has been -- they've had some very painful experiences.

So I would say we have seen some failures in the smaller some of the transplant suppliers.

But I would say a lot of the supply base to the Europeans, as well as the Korean, Japanese based car companies, have been the traditional supply base.

So we are seeing opportunities to get some of their business as well.

Is there some out there that you are kind of waiting for -- just waiting for the bottom to fall out?

We are tracking a lot of different suppliers and I wouldn't say we are sort of sitting there waiting to jump through the door but we are tracking all of our supply base the best we can.

And we are also trying to watch what our competitors are doing.

But we typically will get some sort of advance discussion from our customers, if they're getting worried.

So we have our opinion on where people are.

But we will typically get a better indication when we start getting calls from our customers to put plans together in case there's a failure.

Is there a certain time period where you think when this will all -- a lot of this will take place?

Is it March?

Is it second quarter?

Is it third quarter?

Or is it going to be kind of throughout the year?

I think it will be throughout the year.

But let's assume that production comes back and doesn't run at the low level it has in December and January.

So I think we are going to have to be up and down but the whole industry I don't think stays at this level.

So I think you would expect the real liquidity crunch for most of the supply base is going to be happening in probably March, April.

Do they fail then do they hang on a few more months?

But I said a couple months ago that I thought it was going to be sort of end of February, March and going into April.

I still think that's probably when we are going to start seeing a lot of activity.

Europe is probably further out.

They have just recently got into the situation of really low volumes.

And I don't know the balance sheet of a lot of suppliers over there but I would suspect by mid-year we will start seeing some failures there as well.

But it will be scattered.

Okay.

Then just one more quick question.

The loss in the EBIT, you said it was related to spending for electric vehicle programs.

Do you think that spending will increase or decrease going forward?

It will increase based on the projects that we have got going on.

As with every other project, we believe there's going to be a big market for electric vehicles in the future.

A lot of that demand is going to depend where oil price is.

Where the Government policies and how serious are they in electrifying the infrastructure.

But on the programs we have -- we have been working on them.

But as we get closer to production, you typically have higher expense levels until you get into production.

Okay.

Thank you.

Our next question comes from the line of Pat Nolan with Deutsche Bank.

Please proceed with your question.

Hi, guys, good morning.

Good morning, Pat.

Can you give us an update on your receivables exposure to GM, Chrysler and particularly SAAB in light what happened with this week?

Pat, in terms of our overall exposure at the end of December, our overall exposure is down.

The reason for that is production has been down and our customers continue to pay on schedule.

So our exposure at the end of December and even at the end of January is going to be lower than what it has been.

But as production ramps up and our receivables grow then our exposure is going to grow.

Our exposure to SAAB, and we did look at that.

We did have some receivables outstanding at the end of December.

Those receivables already have been paid but there are some new receivables for production that took place post-December 31st.

But that exposure is insignificant.

We understand or we have been reading that GM is going to support suppliers on their receivables but that if we don't collect on the receivables it is not going to be a significant impact to operating results or cash.

Could you give us an idea of how large the exposures are to GM and Chrysler currently?

We haven't done that in the past, Pat.

But I think if you look at the way to sort of come around it and do your best guess is if you think about what our split between North American and European sales.

And if you think that our Detroit 3 customers are roughly 80% of our North American sales, that will give you a flavor for what that exposure could be.

Okay.

Got it.

Just kind of a housekeeping thing, I noticed that the short-term debt came up.

I imagine because the revolver.

Why is that classified as in current liabilities?

Well, what we did in December -- there was just so much uncertainty as to the upcoming discussions in Washington that we thought it was prudent to have some more cash on hand.

And we drew down our revolver for a short period of time.

We drew down about $800 million.

Since the end of December, we have paid half of that back and the other half we will probably pay-off in the next week or so.

So from our perspective that is just a short-term borrowing that is reversed.

Is there any like agreement as part of your revolver that has to be repaid within a certain amount of time or no?

When you actually draw on a revolver you have to indicate whether you are drawing for a month or two or three.

And there is an automatic rollover at the end of that period.

So with some of the -- when we drew it down, the maturity dates on the drawings, we scattered them over a couple of months.

So to the extent that we are able to pay down just some of the debt matured, we paid that off.

That has already been done.

The balance will be, expect to be paid off in the next couple of weeks.

Got it.

Thank you.

Our next question comes from the line of Itay Michaeli with Citigroup.

Please proceed with your question.

Great.

Thanks, good morning.

Just wanted to follow-up just again quickly on the cash and the debt borrowings.

Just walk us through the decision to pay the revolver back now?

I mean what kind of gives you the comfort given all of the uncertainty that still out there regarding potential restructuring for some of your key customers?

And then I wanted to maybe get a little bit more into what you view your sort of comfortable minimum cash balance through a tough year like '09.

How bad does a cash burn have to get before you would think about supplementing some of your cash with additional potential long-term borrowings?

Well, I think when you look at why we are maybe a little more comfortable now than we were in December, there's been a lot of funding that has been provided to both General Motors and Chrysler since December.

The restructuring plans have been submitted.

I think just as Don talked about, it is just a better recognition of how important it is to pay supplier receivables.

The receivables aren't paid to suppliers, there's a complete collapse of the entire industry.

So when you look at all those factors, our confidence level on collecting our receivables and what is going to happen to the Detroit 3 is higher than what is was at the end of the fourth quarter.

With respect to raising long-term debt, I think when you look at our cash availability and the maturity of our bank lines.

And with net cash at the end of December of $1.8 billion, we have adequate cash resources to take us through 2009 and beyond.

And not only fund operations but to look at potential opportunities.

And we believe that if we needed a gain that they're going to live up to their commitments as well.

So there's no point incurring the interest charges.

Okay.

Then is there, to give a flavor of what a sort of minimum comfortable cash level is?

do you have a target set that we don't want cash to go below X amount before we think about borrowing or --

We haven't set a specific number.

I think it would depend on where we think the industry is going and what is happening with the health of our customers.

It would be a lot of different things.

Our belief is that if we need it then they will live up to their commitment.

So, it really depends on if we think there's a catastrophic event then we would (inaudible), then we will draw on it.

Otherwise, it is really a question of how much interest you are paying for the safety of having it in your bank rather than theirs.

Okay.

Great.

Thanks.

And we have a follow up question from the line of David Tyerman.

Please proceed.

Yes.

A number of my clients have expressed concern about the MI development; MEC situation.

Concerns that some of Magna International's money could end up there.

Can you provide any thoughts on that?

We are actually paying monthly rent to MID, so there is some of our money.

No, aside from the rent thing.

But I mean actual funds being flowed in.

David, I -- just to be absolutely clear, we spun out MID some time ago, 2003.

Right.

And that is a separate entity.

There's common control with the Stronach Group but our management team is focused on the automotive business and that will be our focus going forward as well.

But there is no limit or limiting factor like what you said with the forbearance agreement, right?

Right now?

Yes.

There's no forbearance agreement.

There is under our corporate constitution, there is just a limited to the amount of investments that we can make in nonautomotive investments.

But, David, I think if you go back and look at what has happened over time, when we first made our investment MEC and sort of where we ended up with the spin out, I think everyone understands in our organization.

That we need to be focused on what we do best at in our business and that's automotive.

That's what we have done since the spin out of both MEC and MID.

Keep in mind that there is a whole bunch of third party rules on any transaction we currently have with MID when we are leasing a new building or renewing a property.

Right.

Right now, whether it is MID or any other landlord, we are trying to reduce costs everywhere.

Sure.

So the lease comes up, we treat them as a third party.

Go through the same sort of discussion we would have with anybody.

Right.

It is -- they're a landlord for us.

No, I understand.

There is some anxiety though I can tell you I get it from the investor base.

Just Vince, can you review what is the limit on nonautomotive investment?

It is limited to -- the maximum amount we can invest in nonautomotive activities is 20% of equity.

20% of equity.

Okay.

Thank you.

Thanks very much.

Operator, we will take one more call this morning.

Actually, there are no further questions at this time.

Okay.

Well, appreciate everybody joining us this morning.

Obviously, we are facing an automotive environment that is as bad as we have experienced in many years in the industry.

At some point, we will find the bottom and we'll begin down the road to recovery and we expect to remain a key supplier.

And we believe we will be extremely well positioned to benefit through the recovery whenever it occurs.

So appreciate everybody joining us and enjoy the rest of your day.

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.