Magna International Inc (MGA) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Magna International Inc.

second quarter 2009 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 friendly reminder this conference is being recorded today, August 7th, 2009.

I would now like to turn the conference over to Mr.

Don Walker, co-CEO.

Please go ahead, sir.

Thank you.

Good morning and welcome to our second quarter 2009 conference call.

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

Yesterday our Board of Directors met and approved our financial results for the second quarter ended June 30th 2009.

We issued a press release earlier this morning for the second quarter of 2009.

You'll find the press release, today's conference call website, or Webcast, and the slide presentation that goes along with the call all they the Investor Relations section of our website at www.magna.com.

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 this morning's press release and attached MD&A for a complete description of our Safe Harbor disclaimer.

The second quarter of 2009 was another challenging period for Magna, particularly in North America.

Vehicle production in North America declined 49% compared to the second quarter of 2008.

And increased only modestly compared to the depressed level of production in the first quarter of 2009.

Continuing weak automotive sales and high dealer inventories entering the second quarter on a number of vehicles and the bankruptcy filings of General Motors and Chrysler United States were largely responsible for the significant year-over-year decline in second quarter vehicle production.

Chrysler substantially ceased its vehicle production for the duration of the period.

It was under bankruptcy protection.

Consequently, Chrysler's North American vehicle production in the second quarter of 2009 declined 84% as compared to the second quarter of 2008.

Although General Motors did not cease operations at all of its North American vehicle assembly facilities under bankruptcy protection, a number of facilities were shut down for extended periods of time, leading to a 53% decline in General Motors vehicle production in the second quarter of 2009.

In addition, Chrysler's vehicle production declined 61% from Q1 to Q2 2009.

European vehicle production for the second quarter of 2009 declined 28%, compared to the Q2 2008.

Although it improved 21% from the first quarter of 2009, vehicle scrappage programs this year in a number of European countries benefited European automotive sales and contributed in large part to the quarterly improvement in European vehicle production from the first quarter to the second quarter of 2009.

Recently, the US Government implemented the cars incentive program which appears to be stimulating sales of new vehicles in the United States.

Given the early success of the program, US Congress yesterday passed a bill to allocate an additional $2 billion in funding to the program.

The difficult automotive environment, particularly in North America, adversely impacted our financial results for the second quarter of 2009.

Our consolidated sales decreased by 45%, and we posted a diluted loss per share, excluding unusual items of $1.29 for the second quarter.

There's some bright spots to consider.

Despite the significant year-over-year declines in sales and earnings, we improved our financial results, excluding unusual items from Q1 2009 to Q2 2009.

While total sales in the second quarter of 2009 increased only $131 million from the first quarter, we reduced our operating loss, excluding unusual items by $48 million.

Second quarter 2009 financial results benefit from a higher sequential European automotive production, continued restructuring activities, the implementation of additional cost saving measures and recent acquisitions, all relative to the first quarter.

New Chrysler and General Motors companies were formed in June and July of this year respectively.

In connection with the bankruptcies of these OEMs, and the continuing operations of these new companies, are no longer subject to bankruptcy protection.

As a result of the US administration's efforts to protect the automotive supply base in the bankruptcy process we were able to avoid a significant adverse impact on our profitability and financial condition.

There also appeared to be signs of improvements in certain of our key automotive markets.

Recently ,US monthly sales rates appear have stabilized with July's US auto sales rate being the highest thus far in 2009 driven in part by the cars incentive program.

North American dealer inventories have declined and are now below long-term levels while Western European auto sales have been improving in recent months.

OEM production schedules in North America and Europe while still low by recent historical standards, point to increases in the second half of 2009 compared to the first half.

And we have taken steps to further improve our competitive position.

In the second quarter of 2009, our customers awarded us a significant amount of takeover business, adding to the amount awarded to us in the first quarter.

We continue to make selective acquisitions such as Cadence, located primarily in the Czech Republic and several facilities in Mexico and the US from Meridian automotive systems.

We believe that production lows that we have reached in our core markets will continue to lead to opportunities including further takeover work and acquisitions.

Because of Magna's financial strength and operating capability and we continue to restructure operations in our traditional markets to right-size our capacity.

In addition to reduced discretionary spending, we have initiated a number of cost saving actions, including employee reductions, short work-week schedules, reduced bonuses, voluntary wage reductions, and benefit plan changes.

Some of these actions began to benefit our operating results in the second quarter of 2009, while others will be effective in future quarters.

It's difficult across Magna to quantify the impact of all these activities, but the savings are significant.

Next, I would like to discuss a couple of areas in which Magna is making significant investments which we expect to be contributors to future growth in the medium to long term, but that have been and will continue to be drag in earnings and cash flow in the near term.

Our strong financial position allows us to continue to invest in innovation for our future.

Our quarterly reports over the past few years have explained that we have made and continue to make investments, both in North America and Europe in order to further develop and grow our electronics capabilities.

I want to shed some more light on the activities here.

We recognized a few years back that certain areas of electronics, for example, driver assistance systems, had significant growth potential, given the continued emphasis on active safety in the vehicle.

We started with some core technologies that were within Magna Donnelly with one plant in the US.

Over the past few years we have invested to expand our electronics capabilities and have added a manufacturing footprint that now also includes Mexico, Europe and China.

We estimate that the global driver assistance market is over $1 billion today, but growing to over $3 billion over the next five years.

We have become recognized as a strong Tier 1 supplier of such driver assistance systems as reverse cameras, lane departure warning systems, internet control units and ultrasonic parking assistance systems.

We have booked a significant amount of new business in this area over the past few years across multiple customers and across different regions.

And as technologies continue to converge, we believe we're well positioned to supply competitively priced driver assistance systems utilizing a number of different technologies to aid the driver.

Electronics in the vehicle continues to evolve and further investments are necessary in order for us to capture the expected growth in the driver assistance systems market as well as other selected markets which will lead to growth and sales and returns in our investments in electronics.

Another area which we recently been investing in is hybrid and electric vehicle systems.

The global trends towards CO2 reduction and improved fuel economy, particularly important in our core markets in North America and Europe, are important drivers of future growth in hybrid and electric vehicles.

Many forecasts show meaningful growth in alternative powered vehicles.

Through a combination of internal resources, acquisitions and cooperation agreements, we have been developing capability in such systems as investors, chargers, converters, electric motors and motor control units, vehicle control units, electric pumps, electric transfer cases, et cetera.

Magna has complete vehicle expertise and battery understanding, as well as Cosma and our exterior group's emphasis on light weight technologies add to our capabilities in hybrid and electric vehicles.

We have booked a considerable amount of business in this growing area.

We'll continue to invest in hybrid electric vehicle technology, which will negatively impact earnings in the short run, while we build up both our expertise and our book of business.

We're pleased with our progress both in electronics and hybrid and electric vehicle systems.

Two exciting growth areas with tremendous potential for Magna, notwithstanding the near term negative impact on our financial results.

Finally, we last want to announce that together with Sberbank we jointly submitted a revised offer to acquire 55% interest in Opel as part of a proposed solution that is intended to assure the long-term viability of Opel.

Under the offer, the acquired 55% interest in Opel would be owned by a 50/50 Magna-Sberbank consortium, with General Motors retaining 35% interest, and the Opel employees acquiring 10%, as part of a new labor framework.

The offer was made in response to a request by General Motors for final offers regarding Opel.

The offer contemplates a total equity investment by the consortium of EUR500 million over time.

The Opel trust, whose advisory board includes two representatives of the German government and two representatives of General Motors owns 65% of the shares in Opel and is expected to review the submitted offers supervise the sales process.

If the offer is successful, any transaction between the consortium and General Motors would be subject to finalization of definitive agreements and other conditions including government backed financing.

Therefore, there is no assurance at this time that any transaction will result from the current involvement of Magna and Sberbank.

If the consortium is successful in completing the acquisition, Magna will put in place appropriate fire walls to ensure that its current business will operate independently from Opel.

We are not going to comment any further with respect to Opel.

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

Thank you, Don and good morning everyone.

I would now like to review our financial results for the second quarter ended June 30th, 2009.

Please note all figures are in US dollars.

Appendix A in the slide package accompanying our call today includes a reconciliation of certain key financial statement lines between reported results and results excluding unusual items for the second quarter of 2009 and 2008 respectively.

In the second quarter of 2009, we recorded restructuring and impairment charges as well as a curtailment gain, which together resulted in a $55 million reduction in operating income, a $61 million reduction in net income, and a $0.54 reduction in diluted earnings per share.

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.

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

In the second quarter, consolidated sales declined 45% to $3.7 billion.

North American production sales declined 55% in the second quarter, to $1.4 billion, reflecting a 49% decline in vehicle production to 1.8 million units, and a 10% decline in North American content to $768.

The key contributors to the decline in content were the extensive plant shutdowns at Chrysler and General Motors during large parts of the second quarter, affecting a number of programs including the Chrysler and Volkswagen minivans, vehicles on the Chrysler LX platform, the Dodge Journey, the Jeep Wrangler, the Jeep Liberty, the Dodge Avenger and Chrysler Sebring, the Jeep Grand Cherokee, GM's full sized SUVs and pickups, the Chevy Cobalt and the Saturn Vue.

A weakening of the Canadian dollar against the US dollar, programs that ended production during or subsequent or during the second quarter of 2008, including the Chevy Trailblazer, GMC Envoy and Dodge Durango and incremental price concessions.

Partially offsetting these declines were the impact of higher production and/or content on certain programs including the Ford Escape, Fusion and Edge, GM's Lambda platform and Mercedes M, G, L and R classes.

New launches and acquisitions completed during or subsequent to the second quarter of 2008, including Plastech.

New launches contributed to the content growth quarter-over-quarter included the Ford F Series and the Chevy Traverse and Camaro.

European production sales declined to $1.4 billion, representing a decline of 33% from the comparable quarter in a period when European vehicle production declined 28% to 3.1 million units.

European content declined 7% to $467.

The key contributors to content decline in Europe were programs that experienced lower volumes and/or content in the second quarter of 2009, including the Mercedes-Benz C-Class, Ford Transit, and Volkswagen Toureg, Volkswagen Transporter, Opel Vauxhall Novarro and Astra twin top, Nissan Primastar and Renault Traffic, Mercedes-Benz SLK, BMW X3 and Audi Q-7.

The weakening of the Euro and British pound each against the US dollar, the sale of certain facilities during or subsequent to the second quarter of 2008, and OEM price concessions subsequent to the second quarter of 2008.

These factors were partially offset by the launch of new programs including the Audi Q5, the Volkswagen Gulf, the Mini Cooper Convertible, the Audi A-5 Cabrio and the Peugeot 308CC.

Acquisitions completed during or subsequent to the second quarter of 2008 including Cadence and Technoplas, and increased production and/or cotton on certain programs including the Opel Vauxhall Insignia and the Volkswagen Tiguan.

Rest of world production sales increased 4% to $154 million, primarily as a result of increased production and/or content on certain programs, particularly in China and Brazil.

The launch of new programs during or subsequent to the second quarter of 2008 in China and the strengthening of the Chinese currency against the US dollar.

These factors were partially offset by a decline in reported US dollar sales as a result of the weakening of the Brazilian and Korean currencies against the US dollar, and decreased production and/or content on certain programs, particularly in Korea and South Africa.

Complete vehicle assembly volumes declined 65% from the comparable quarter, and assembly sales declined 60% or $631 million to $423 million.

The sales decline was as a result of lower assembly volumes for all vehicles assembled at Magna Spire as well as the impact of the weakening of the Euro against the US dollar.

In summary, consolidated sales excluding two-in sales declined approximately 47% or $2.9 billion in the second quarter.

The primary reasons for the decline are the significant reductions in vehicle production in both North America and Europe, declines in North American and European content per vehicle and lower assembly sales.

Tooling, engineering and other sales also declined $63 million or about 16% from the prior year to $336 million for the quarter.

Gross margin in the quarter was 7.5%, compared to 13.3% in the second quarter of 2008.

The change was substantially as a result of lower gross margin earned due to the significant decline in vehicle production volumes.

In addition, the gross margin percentage was negatively impacted by a favorable settlement on research and development incentives during the second quarter of 2008, a favorable revaluation of warranty accruals during the second quarter of 2008, electric vehicle development cost, increased commodity costs, incremental costs associated with restructuring and down-sizing activities, primarily in North America, amortization of deferred wage buydown assets at a powertrain systems facility in the United States, costs incurred to develop and grow our electronics capabilities, costs incurred in preparation for upcoming launches, additional supplier insolvency costs and customer price concessions subsequent to the second quarter of 2008.

These negative factors were partially offset by productivity and efficiency improvements at certain facilities, lower employee profit sharing, a decrease in complete vehicle assembly sales, which have a lower gross margin than our consolidated average, the decrease in tooling and other sales that are low or no margin, and the benefit of restructuring and down-sizing activities that were undertaken during or subsequent to the second quarter of 2008, and the benefit of cost savings initiatives including employee reductions, short work-week schedules and benefit plans changes.

Magna's consolidated SG&A as a percentage of sales was 7.4% in Q2 2009 compared to 5.4% in Q2 2008.

The increase was substantially due to the significant decline in sales as a result of the substantially lower vehicle production volumes, partially offset by lower incentive compensation, reduced spending at certain facilities as a result of restructuring activities and down-sizing and various management cost savings initiatives including reduced discretionary spending, employee reductions, reduced bonuses, voluntary wage reductions and benefit plan changes.

Overall, total SG&A dollars declined from $364 million in the second quarter of 2008 to $275 million in Q2 2009.

Largely as a result of the lower gross margin percentage and a higher SG&A percentage, lower equity income, higher interest expense, partially offset by lower depreciation expense, our operating margin percentage declined to negative 4.9% in the second quarter of 2009, from a positive 4.9% in the second quarter of 2008.

Our effective tax rate declined to 21.1% in the quarter, from 29.6% in the second quarter of 2008.

The change in the income tax rate is primarily the result of an increase in losses not benefited primarily certain facilities in the US and Europe.

Net loss was $144 million in the quarter, compared to $234 million of net income that we recorded in the second quarter of 2008.

Diluted loss per share was $1.29, compared to diluted earnings per share of $2.04 reported in the comparable quarter in 2008.

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

The decreased number of shares was primarily due to the repurchase and cancellation of our Class A shares subsequent to the second quarter of 2008, under the terms of our ongoing normal course issuer bid and the reduction in the number of diluted shares associated with debentures and stock options since such shares were anti-dilutive in the second quarter of 2009.

I will now review our cash flows and investment activities.

During the second quarter of 2009, we generated $87 million in cash from operations, prior to changes in non-cash operating assets and liabilities, and invested $55 million in non-cash operating assets and liabilities.

The investment in non-cash operating assets and liabilities largely reflects the decrease in accounts payable and accrued salaries and wages, as well as an increase in inventories, largely offset by decreased accounts receivable.

The decreased accounts receivable and payables are primarily due to lower sales related to the downturn in the automotive sector, partially offset in part by Chrysler receivables that were collected subsequent to June 30th, 2009.

The increase in inventories relates to several tooling programs in Europe, and production inventory builds, largely in North America, to ensure availability of parts in the event of supply disruptions.

The decline in accrued salaries and wages was primarily due to the reduction in employee profit sharing and the payment of the second installment of wage buydowns at New Venture Gear.

The increase in income taxes receivable was primarily due to losses that can be carried back to prior years in Canada, net of tax refunds received in Canada and the US.

For the quarter, investment activities amounted to $273 million, comprised of $150 million in fixed assets, an $84 million increase in investments and other assets and $39 million to purchase Cadence and several facilities from Meridian automotive.

Our cash preservation actions have allowed us to maintain a healthy financial position with $1.7 billion in cash and $1.1 billion cash net of debt.

We also have an additional $1.6 billion in unused credit available to us from a credit facility that extends until July 2012.

We have modest near-term debt repayments to make.

We are confident that we have the balance sheet to remain strong, relative to many of our competitors.

This allows us to invest.

This concludes our formal remarks.

Thank you for your attention this morning.

We will now open the call for questions.

Thank you.

(Operator Instructions).

Our first question comes from the line of Mr.

John Murphy from Banc of America.

Please go ahead, sir.

Good morning, guys.

Good morning, John.

You mentioned significant takeover business in your presentation and in the press release.

I was just wondering if you could give us sort of the magnitude of what significant really means.

I mean, you said you won $400 million of takeover business in the first quarter.

Is it twice the rate that you were winning in the first quarter or is it a similar rate?

If you could just ballpark that for us.

Sure, John.

Just to correct you.

In the first quarter, what we said was that we had about $200 million of takeover business that was awarded in the first quarter.

If you look on a year-to-date basis, we're at about $500 million of takeover work that's been awarded to us so far in 2009.

If you think of about some of the acquisitions that we've made that really represent acquisitions of additional takeover work or troubled suppliers, that amounts to over another $150 million.

So when you sort of sum it all up, year-to-date we're at about $650 million of I would say takeover work or work from troubled suppliers that we've classified as acquisitions from an accounting perspective.

And that's all annual run rate numbers?

That's annual run rate.

And I think if you look at how much takeover revenue was actually in the second quarter, it wasn't significant in any way.

Pretty small.

Actually negligible.

We're going to start to see the revenue from this takeover work start to flow through our income statement starting in Q3.

Okay.

And then when we think about programs where you're dual sourced like an F Series on the frame with a competitor that's certainly a lot weaker, in a much weaker position than you are, are you seeing any push or reallocation of the share in that contract towards you where you'd be getting a larger slice of that dual sourcing?

We haven't seen anything specific.

There's a lot of discussions going on.

I think just generically, the OEMs have recognized that they want to be working with companies that have stronger balance sheets so we can support launches.

We can continue to support R&D, but also there's no risk of us going under and then having a gun put to their head for premium payments or bailing them out.

So I'd say there's lots of discussions going on.

Anything we have seen on the numbers that Vince just mentioned, be interesting to see what happened over the next few quarters, how many people go under, but I think the long-term trend will be continuing for the OEMs to work with fewer and fewer well-capitalized suppliers.

So I think the trend we're seeing will continue.

Okay.

And then just lastly, I mean, how should we think about raw materials as we go through the back half of this year?

Are there any tailwind that you're going to get from those?

John, we talked about a lot of costs being negative in the quarter.

Actually wasn't that substantial in the second quarter.

Been more pronounced in previous quarters.

So as we're looking out kind of Q3 and Q4, I think our best at this point either positive or negative, it's not going to be a substantial impact on our overall numbers.

Okay.

Year-over-year.

Great.

Thank you very much.

Thank you.

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

Please go ahead.

Hi, good morning, guys.

Good morning.

The sequential decline in North American content per vehicle, can you just give a little bit of light on how much of that was tied to some of the key platforms at Chrysler and General Motors that went offline during their bankruptcy and how much of that would you expect to reverse in the third quarter?

Himanshu, a substantial amount of the decline in our content is related to mix and it relates almost entirely to Chrysler programs and GM programs, the new GM programs, so if you look at the change in content sequentially, the vast majority of it relates to those programs.

I think when you look at the balance of the year, we're certainly anticipating a pretty significant improvement in overall mix and a significant improvements to overall content per vehicle.

We're going to end up exactly, we don't know, but certainly we should be moving up in a substantial way and we can start -- we'll start to see that affecting us positively next quarter, Q3.

Would you expect NAFTA content per vehicle to sort of start -- I mean, in Q1, you were running I think in the low 900s.

It was actually above a year ago.

Should we start seeing that trend in the third quarter again?

I think we're still going to see year-over-year probably negative mix.

It may get up to that level but it may be a little bit under that as well.

Under the 900 level.

Okay.

But an improvement from the 768 from Q2.

Okay.

And then in terms of margins, as GM, Chrysler and Ford sort of ramp up production into the second half, how should we think about contribution margins sequentially in the business, just given the level of cost cutting that's happened.

Should we think of $0.25, $0.30 on the dollar on the way up or is there anything that you see over the next three to six months that would suggest that contribution margins would be below that?

That's a -- there's a lot of moving pieces, right, because we've got North America, we have Europe, we have launches, and we're continuing to invest as Don talked about in a number of business areas that are important to us and that's electronics and electric vehicles, so when I start thinking about North America, as volumes pick up, certainly we're going to have some positive impact to contribution margins.

Some of the cost savings initiatives that we introduced, we're going to continue to see more benefits in the third and fourth quarters so that's all going to be positive.

When we look at Europe, we are launching a substantial amount of business in our assembly operations and as those programs become closer to launch, our launch costs are going to ramp up.

So that will be an offset.

We'll see some cost saving initiatives also benefiting us in Europe in the third and fourth quarter.

But we're going to continue to ramp up our spending and our investment on electric vehicles.

So that will be a drag.

So I think when you put that all together, it's not sort of easy to say for every additional dollar of revenue, this is what you should get at the bottom of line because there's a number of moving pieces within the organization.

Okay.

The investment in electric vehicles, I mean, you guys have talked about that before.

It sounds like you're talking more about that now.

Is there a big step change, just in the absolute dollars that are going to be spent in the second half of the year versus the first half?

Not going to be a significant step change.

The reason we want to break it out, we've been having discussions on how people model the Company and we really haven't talked about it in the past so what we're going to try and do specifically in the area of electronics, because it's a relatively new area for us and we're spending a fair amount of money launching it and also we expect electric vehicle spending on the components and systems is going to -- will continue to go up as we develop the capability and we launch the product.

So I think from a modeling perspective, we're going to try and give some sort of an indication of how much we are spending just so people can get a better idea how the core business is doing.

So far the first half of this year, but as we look out through the balance of the year, there will be a step up in spending.

Okay.

On electric vehicles and the components business.

And then just last question.

On the whole Opel issue, what is your initial sense on how European customers, other European customers of yours are reacting to you potentially being a shareholder of one of their competitors?

I mean, is it to the stage where you're getting them comfortable that the firewalls are going to be there and you're thinking at this stage there shouldn't be a big impact or are the discussions sort of mixed by OEM and some are more agreeable than others on this?

We've had various initial feedback but I think generically, people are waiting to see, number one, does the deal happen.

Number two, how do we put the firewalls in place and we recognize we have to have a complete firewall in place so there's no risk of technology transferring from other customers to Opel and Opel to other customers so I think it's a wait and see attitude at this point in time but we recognize it could become an issue, specifically with some customers more than others and we're going to have to make sure the firewall is put in place.

Great.

Thank you.

Our next question comes from Patrick Archambault from Goldman Sachs.

Please go ahead.

Hi, good morning.

Good morning.

Just wanted to I guess a couple quick ones.

First, on working capital obviously you guys -- that was a pretty big positive for you guys this quarter.

As production ramps up, is that something that's going to flip the other direction or is there maybe some additional room on receivables and inventory to maybe keep that as a source of cash?

Keep a couple things in mind.

Traditionally as sales are going to ramp up, your working capital is going to grow as well but we do have some offsetting things.

First, as we talked about with respect to receivables in the second quarter, some of the Chrysler payments which would have normally have been paid by June 30th, 2009 in normal course, were paid post June 30th, 2009.

So our receivables were I'd say above normal because of that, which are going to come back to normal, so that's going to be benefiting us.

We talked about the inventory build and it's quite substantial in terms of how much inventory we're building.

Some of it's tooling for new programs.

So that's going to come back.

And the other part is we are building some inventory banks to ensure that we have supplies in the event of destruction of the supply base so as we move on past the third and into the fourth quarter, as we start to look at our supply base and whether we're resourced or not, I think we have the opportunity to bring inventories down.

So all in all, we'll probably generate some cash from working capital by the time we get to the end of the year in the fourth quarter.

But third quarter may still be flat or a slight investment.

Okay.

Great.

That's very helpful.

And maybe just drilling down a little bit more into supplier distress costs, can you just characterize the environment for us?

I mean, how are things now in terms of the additional costs you're having to bear from Tier 2s and what's your expectation?

Obviously there's a lot written about distress levels going up when production comes back online, which it is clearly doing.

I would say if you look at the expectation of what's happening, just asked a question about working capital, as production comes up again, people need access to cash.

We haven't seen as many people fail in the last quarter as I would have anticipated.

I think there's a lot of restructuring going on, specifically in the Tier 1.

In the Tier 2, it doesn't get the media that much.

Where we expect we might have some problems, that's where we're building inventory so we don't get stuck, as Vince just mentioned.

I still think there's going to be a fairly big fallout in the Tier 2 supply base because there's no back stopping from any government programs and the Tier 1s are going to be restructuring or go out of business so we're going to see an impact going through the Tier 2s.

It's hard to tell what's going to happen.

I think by the end of Q3's going to happen.

We've built up an internal team to look at our supply base and they've been operating for some time.

I'm a little more comfortable in terms of us understanding what our potential exposure could be today than what I would have been a year ago.

I think we're better prepared in the event that some of of our supply base does run into trouble.

One of the things we have been doing, where we're concerned, have also been in-sourcing some work to try to keep our factories and our people going which also reduces the exposure somebody might go under.

So we haven't seen a significant amount of issues in Q2 and I'm not aware of a lot in Q3, but I don't have the details either.

Okay.

Great.

Thank you very much.

Our next question comes from Rod Lache from Scotia Bank.

Please go ahead.

Hi, it's Rod Lache from Deutsche Bank.

Just can you just elaborate a little bit on the takeover business.

Does this come in profitably on day one?

Are these turn-arounds?

It's a fairly substantial amount of additional revenue.

Vince had mentioned the dollar amount.

The one good thing about takeover business is it's immediate.

If you win a new contract, you have start-up costs, launch costs, financial capital.

Typically in takeover work, there's a reason why it's being moved and sometimes it's because of price.

Normally, we will take a look at it and if it's underpriced we won't take it but like other suppliers but if you need equipment, we'll normally cut some sort of a deal in conjunction with the person losing the business and the OEM to get whatever equipment we need.

So we should start seeing the contribution margin happen as soon as we take the -- as soon as we start production, which will be primarily in Q3 and I can't comment on the profitability because I don't know what it all is, but I would say on most of the takeover work -- well, on all the takeover work we make a conscious decision on whether we want it or not.

I would say in most cases it is business that is strategic.

We expect to get the replacement business and it has a reasonable amount of positive contribution margins and it also will help us not have to have as much restructuring because we're putting into operations, we're not letting people go.

So is it all as good as margins as we quoted?

I can't really comment because I don't know but typically we would expect it to be in the same range.

Okay.

And I was hoping you could also just talk a little bit about what your objectives would be for cost structure headcount at this point.

Earlier in the year I know you had indicated that you wanted to move methodically because of the cost associated with kind of ramping back up if you take capacity out.

Is most of the restructuring at this point in your mind behind you?

Do you still have a significant amount of head count reduction ahead of you?

Could you just give any thoughts also on what the full year fixed cost reduction is likely to be?

Let me take a crack at it and Vince can add something.

We have been looking at restructuring our business, if it's not competitive on a global basis, for years now.

Obviously, that ramped up pretty dramatically with the downturn that we've seen in the market, specifically in the first half.

Most of the major restructuring actions that we expect we're going to have to take we've announced internally and from an accounting standpoint.

We have a couple of other consolidations we are -- we're implementing right now.

The cost to ramp back up again is most significant if you don't have equipment in place or you don't have plant space.

So we don't want to down size so much that we physically can't -- we can't run the production or we don't have the equipment.

It's relatively easy to hire people to produce the production, so from a direct labor side.

So the comment we made earlier was that we don't want to cut too much and then find out that we have to run overtime or we have to be rebuilding or spending new capital.

So I think we've -- what we've done so far is in anticipation of where we think the market is going with market share with particular customers.

We're fairly happy with what we see going forward and I don't expect major restructuring if the market comes back to where we expect it will in the next couple years.

That's in North America.

depending on what happens in Europe, we've seen a pull-forward in production because of Scrappage programs.

It's anybody's guess where the economy is going to go and where the market goes, so we may have a little bit of restructuring to do in Europe but that's going to be completely dependent on where we see the market.

Just to add a couple things, with respect to employee count, just the press release, we had about 70,000 employees at the time we issued the first quarter press release and we're about 71,000 now.

So that implies an increase of about 1,000.

You've got to take into account that we did consolidate Cadence in the second quarter and Cadence added over 2,000 employees to our employee base so ex-Cadence, you continue to see the reduction in headcount and that's coming necessarily only on the plant floor but indirects and SG&As.

You can see from quarter-to-quarter, Q1 to Q2, or Q2 to Q2, we've had some significant reductions in SG&A.

A lot of that is headcount.

A lot of it is cost saving initiatives and so on.

With respect to restructuring costs, at the end of Q4 what we said was that we expected restructuring costs to impact our P&L by about $50 million to $60 million for 2009.

When you look at our first quarter, the amounts were not significant.

In the second quarter, we talked about $6 million being an unusual item and that was one facility, Syracuse facility, but there probably was another $13 million to $14 million of restructuring costs across the Company.

On a year-to-date basis, we've incurred about $20 million of that $50 million to $60 million that we were expecting for 2009.

So based on things that we're discussing and planning today, it's probably safe to assume that we're going to incur another $30 million to $40 million of restructuring costs in the second half of the year.

Okay.

And just lastly, was hoping you could talk a little bit about your expectations based on current builds that you're seeing for content per vehicle in Europe and the assembly business and on the hybrid and electric opportunity, regionally, where are you seeing the greatest opportunities for you?

I'll answer the second part first, then turn it over to Louis or Vince and the first part of the question.

We're doing a -- continuing to look at where we think the market's going for pure electric vehicles, electric vehicles, range extenders, hybrids, mild hybrids and I would say if you looked back about a year ago, there wasn't a lot of talk about it in Europe.

I think their solution was more on high efficiency diesels and other potential solutions but we're seeing a fairly high -- I wouldn't say demand yet but a fairly high interest in hybrids and electric vehicles in North America, Europe and in Asia.

And there's a lot of activity going on behind the scenes.

I think some of it becomes public knowledge, some of it is -- people are just doing development.

So I think there's a big opportunity in specifically North America, but I also think there's going to be a pretty big opportunity in Europe and I think Asia will also be a fairly significant build-up of hybrids and electric vehicles as well and there's a lot of activity going on in China right now.

Our major focus is on North America and Europe and it's difficult because you can see all sorts of different analysis out there but I think that it is real and it is going to be significant and as people are spending money in R&D and the volumes go up, you'll start seeing the costs come down, especially with the incentives we're seeing from the various governments.

So it's going to be a fairly material part of our business when you look out five, ten years down the road.

I think when you look at the content per vehicle, you asked about European content per vehicle, quarter-over-quarter, content was down about 7% in Europe so when you start to look at the details, and you ignore the impact of foreign exchange business, our contents actually grew in the second quarter, compared to the second quarter of 2008.

We had some negative mix as I talked about in my formal comments so we had a number of programs that we're launching.

So overall, when we looked through our numbers we had about $9 to $10 of true content growth so that's negative mix and programs going away and new launches.

The acquisitions of Cadence and Technoplas, that added about $12 net of some disposals that we had last year.

But translation was a significant item.

It reduced content year-over-year by about $55.

So as you kind of look to the balance of the year, again, it all depends on where volumes are going to be but if you look at cost of dollars, we're seeing content in Europe being more likely up than down.

But again, it all depends on mix.

And even if you look at North America, for example, on content per vehicle, as I talked about in my formal comments, the impact of GM and Chrysler was very significant in the quarter.

We were also hurt in North America as a result of translation of the Canadian dollar weakening against the US dollar, and just the translation impact was a negative of $25 in the quarter.

With respect to assembly programs, we're going to start to ramp up one of the Peugeot -

We're ramping up on Peugeot [Arsizette] the later on this year.

Ramping up -- early next year we'll be launching the Aston Martin IP.

Of course next we're we're launching the Tribune as well.

Vince talked about the launch costs coming up.

We've got obviously some revenues coming up in the next year or so to offset that.

So the back half, any way to sort of give some parameters around what that business is going to look like?

Not meaningful in 2009.

Really just gets started in terms of the Peugeot.

It's more of a 2010 story.

Okay.

All right.

Thank you.

Our next question comes from the line of Michael Willemse from CIBC World Markets.

It's Mike Willemse.

Good morning, Mike.

Thanks.

Just going back to investments in hybrid electric vehicles.

Is there a kind of a year that you're looking at where you think you'll see a decent sized ramp-up in revenue, I'll say 2011, 2012, or is this something more like 2015?

Well, depends what you mean by decent size.

I think it's going to be a continuing growth.

We won't see much in 2010.

I would think 2011, that's when the Ford the EV will be coming to market.

We've also got a lot of other programs we're looking at.

So I think you'll see the market for electric vehicles starting in the last part of 2010, if you look at what people have been saying publicly, more in 2011 and we'll continue to grow, I don't know if it's straight line growth or not, but I would say by 2012, 2013, I think you'll start seeing some volume.

I can't quantify it.

I just don't know what the numbers are at this point in time.

Could you see this being a $1 billion business for Magna some day?

I would say absolutely, just trying to think of what some day is.

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

But I think it's -- we've got a lot of capability.

It's a focus for us.

So I think -- we'll have to do some analysis and try to get some more clarity.

We want to start giving a little bit more information on what we're spending from an expense standpoint, R&D standpoint, in electric vehicles and electronics and there's a little bit of overlap there, obviously.

So we'll try and at some future date give you an indication of what we think the market size might be going forward.

We've been talking about the electric vehicle, there's been a lot of questions on that, and if we go back in time, we started to invest in electronics a few years before we started to invest in electric vehicles and if I look at last year's results for our electronics group, we had about approximately $500 million in sales that we recorded last year.

And we were investing money for a bunch of new launches on research and engineering and you look at EBIT the last year, it was about a $60 million loss for full year 2008.

When you look at the electronics business which is more mature than what we're doing currently in electric vehicle, over the last 18 months in electronics we booked approximately $500 million of new business.

So you can see the quantum leap in that business alone.

Again, when I look at P&L, even for the first half of this year in electronics, last year we were running at about $60 million for the year, we're just shy of $60 million for the first half of the year in electronics.

That's sort of the -- call it a drag or the investment that we're making to launch this business, which negatively impacts our results short-term but certainly creates -- will create value for us as the sales start to be recorded on the top line.

And are you expensing most of your investments in electronics and electronic vehicles or how much are you putting in CapEx?

The number I just told you was expense.

That's not capital.

I mean, there's some capital there, but the substantial part of the electronics business is being expensed.

Being expensed.

Okay.

Then just one more question, second question, on that $650 million in takeover business you talked about including acquisitions, how much of that would be Europe and how much would be North America?

I think when you look at that, Mike, I would say that substantially all of that is in North America.

Okay.

Thank you.

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

Please go ahead.

Hey, thanks.

Good morning.

Good morning, Chris.

Just a follow-up on the hybrid questions.

Can you quantify how big the book of business is if you look at it over, say, the 2010 to 2012 period and what type of components are you focused on specifically in that market?

I think it's too early to talk about sales in that area.

Maybe we can do that the next two or three quarters.

Yes, from a components, I think we've probably guided around.

Depending what the project is, we're looking at inverters, chargers, there's high voltage systems, motors, the call it we call it a transfer case or gear box to drive from the output of the motor to the wheels.

We've done a lot of development there as well.

We're also doing the motor control units, which is a lot of electronics.

We are looking at battery pack technology.

We are doing some R&D in cells as well and also the electronic control unit that is really the brains that ties all of the components to an existing vehicle.

So if you look at the Ford EV program for example, you have an existing vehicle.

You want to electrify it so you have to take all the components, tie them together electronically.

But then you also have to tie all of that together with the vehicle system, we call it an electronic control unit, and there is significant content in the motor controllers and the electronic control units and the battery packs.

So those are the major areas.

We also talked about lightweight components but that really applies to all vehicles.

Body panels, body structures or seat structures.

Those are the major components we'd be talking about from an electronics standpoint.

On the theme of components, can you give us an idea of the business, the $650 million in takeover business, is there any concentration, whether it's by customer or by geography or by component that you've noticed?

I would say, Vince can just look it up here, a lot of what we've won has been more in the driver assistance type product areas, rather than the hybrid areas so far.

We've also got brushless motors, things like that.

So I think we're going to start seeing more of the awards.

We're doing a lot of the R&D and development work right now.

We'll start seeing more of the awards I just talked about in electric vehicles I think over the next few quarters.

Just in terms of takeover work and geographic regions substantially most of it's in North America.

There is some takeover work that we've been awarded in Europe and the rest of the world as well.

When you look at sort of what areas of our business it's in, it's pretty well across most of our groups in North America are being successful with takeover programs.

If it's North America, Vince, is it big three stuff or is it more transplant stuff?

I'd say that it's more big three work, Detroit three type work.

Okay.

And then just the last question, this has come up a little bit earlier and Don mentioned in his prepared remarks, but on some of the cost actions that you've taken in the first half and you said it was difficult to quantify, can you maybe help us with that a little bit more?

Can you tell us how many people have come maybe in the second quarter so we can do our own math and think about what the sequential benefit might be as we walk to the second half or what other types of actions that you might have taken?

Chris, I had tried to allude to that headcount earlier.

I'll just repeat that.

I think if you go to our press releases for Q1 and Q2, you'll see if Q1 we had about 70,000 associates around the world and we're at about 71,000 at the end of Q2.

But in Q2 we consolidated Cadence and Cadence has over a couple thousand employees so ex-Cadence we're down from Q1.

With respect to sort of the impact of cost savings, kind of where we're seeing it is in our reduction of overhead because our contribution margin what I look at sort of the various business units has been fairly constant, like ups and downs, but explainable.

But we have had some success on overhead and that's why when you look at decremental margin percentage it's less than contribution margin.

I think where you can look to is SG&A.

If you look at Q2 to Q2 SG&A's down about $105 million ex-unusuals.

So that's quite substantial.

And even from sort of Q1 to Q2, I think we're down about $30 million to $35 million.

So you can see some of the cost savings initiatives and they're numerous, not just one item.

It's several items impacting bottom line positively.

Okay.

Thank you very much.

Our next question comes from Itay Michaeli from Citigroup.

Please go ahead.

Great.

Thanks.

Good morning.

Don, going back to the takeover business, how should we think about the opportunity for the rest of the year?

You know, how would you characterize the conversations you're having so far in Q3 versus Q2?

Should we expect that to incrementally slow in the second half of the year?

Do you think this is just sort of the beginning?

Good question.

I'm sure there's lots of discussions going on but I wouldn't necessarily be aware of them all because the groups would have them.

I think there's been so much emphasis on Chrysler and GM's part to get through the restructuring, so now I'm sure they're more focused on what their long-term strategy is going to be, and as they ramp up the production we'll start to see which supply -- Tier 1 suppliers just can't get financing, so there's a fair amount of discussions going on right now about acquisitions or buying assets.

I don't know.

I'd be guessing so I don't really want to guess on it.

I think we'll continue to see takeover work but I don't know how much it's liable to be.

We're certainly focused on it, though.

Sure.

When we look at -- we do have some potential, I know some of the groups are working on the takeover work but we'll just have to wait until the end of the quarter to see what we've realized in the quarter.

Okay.

Great.

And then just going to the balance sheet quickly, I saw there was a reference that you subsequently paid about $150 million of bank debt in Q3.

Was that payment enabled by a positive working capital in-flow or did that come directly out of your cash on the balance sheet?

I think what we try to do is we try to run with -- since we have cash, we try to keep our bank indebtedness to sort of a bare minimum.

We've been investing in Europe.

For example, we're putting money into a number of new programs in Russia for example, we're investing money in some of the other operations so we were drawing down on our bank lines to fund that and since that time we've used our existing cash resources, we've been able to move it around the world to reduce the bank indebtedness in Europe.

Okay.

Great.

And then just finally, Don, I know you mentioned the global driver assistance business you won but could you just refresh us on what the cadence of that business looks like in the next couple of years?

As far as sales?

Yes, as far as when that comes in.

Is it more back end loaded, 2011, 2012 or just how that would flow into the income statement.

Yes, there's a lot of different products there.

When we talk about driver assistance it includes a lot of different things and we have been booking sales on rear view cameras, on head light controls, so we're ramping the business up.

I think if you look at some of the technology we're bringing to market, there is going to be some substantial consolidation of how the information is fed to the driver.

So I think we're going to see bigger and bigger awards coming out and I don't know what the time period of that's going to be.

It's going to be 2011, 2012 and there's a lot of technology coming to market which we're trying to stay -- we're trying to be one of the leaders on.

I'm not sure, do you have some numbers.

We have some sales right now and that's going to grow slightly from 2009 to 2010.

But where you really start to see some ramp-up is 2011, continuing in 2012 and 2013.

Okay.

That's very helpful.

Thanks.

Okay.

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

Vince, when you threw out some numbers for electronics, you cut out a little bit and I just can't catch all the numbers.

Did you say that in 2008 your electronics sales were $500 million that you incurred -- you had absorbed a loss in that business in the magnitude of $60 million.

That's correct, Peter.

I believe you said so far this year you incurred a loss of about $60 million.

I said we're slightly under the $60 million so far for the first half of this year.

My question is is what is the path that you foresee that's going to put this business from loss to breakeven and then profitability?

Do you need critical mass that could be acquired through acquisition or do you just need to wait for these programs to ramp?

Included in our electronics segment is our lighting business.

You almost have to carve that out because that is -- that's mature business and sort of breakeven depending on volumes, make a little bit of money.

On electronics is relatively new.

We have a lot of that in Magna Donnelly.

We have looked at acquisitions in the past.

We'll always consider it.

We're looking more at acquiring technology and we recently bought Blue Wave that had a lot of technology.

We've got a relationship with Brusa.

We've got different technology centers over North America.

I think our best guess right now would be we'll see internal growth coming to market from the R&D programs we've got going on.

We're not giving any projections on when it's going to be breakeven.

We've got our own internal business plan.

We might try to give more clarity by the end of the year.

We're looking to grow that business organically and the way we're looking at it, quite frankly, is if we calculate how much money we are putting into it, and if you look out, say, four years from now, we'll look at the sales, the profitability and what the value of that -- we think that Company is.

As long we feel we're creating value then we'll stay the course.

It looks like we're not going to get significant growth in sales or profitability in out years, then obviously we'll pull back on it but obviously it looks like it's a good business opportunity.

Based on the numbers that Vince quoted in terms of awarded business, we have pretty nice share in some of these product areas.

Critical mass once we ramp up.

Similarly, on your hybrid fish high initiative, are there any numbers you could throw out there just to give us an indication of how much of a drag that is currently.

Peter, it's less than our electronics business right now.

But as I mention, it's going to step up in Q3 and Q4 as we move closer to the launch of the electric vehicle.

Okay.

And lastly, Don, on Opel, as you know, Opel as it's currently configured as a division of General Motors loses money from a very high level point of view.

Can you outline what Magna's plans are in terms of restructuring and repositioning this business to make it profitable.

There's obviously been a lot of chitchat about Russia.

Then there was talk about having an assembly plant in Canada.

And I mean, kind of things that are leaking out seem to be all over the board.

And I'm just wondering what your thoughts are, what kind of the fundamentals of the plan will be going forward.

Yes, we're not going to go into any details.

Obviously if you look into growth into Russia, it would be a new market.

If you look at what the bottom line would be and what the investment would be, we're really not commenting on that.

As far as anything in North America, that would be well down the road as far as capital.

So like any other business, a lot of it is revenue driven.

You have to look at where we are in the cycle and what the cost reductions you can implement in consolidation, then you can run the business plan from there.

I think it's too early for us to talk in any detail other than what's been in the press already about what we would be doing there.

Okay.

That's all I have.

Thank you.

Our next question comes from the line of Rich Kwas from Wells Fargo Securities.

Go ahead.

Hi, good morning, this is David Lim in place of Rich.

I apologize if you've already mentioned this but as production returns to the 11 million plus unit level would this dissuade OEMs from resourcing business.

As far as takeover work?

Yes.

I don't think so.

I think each of the OEMs will have their own philosophy or strategy on what their sourcing is going to be.

They're always looking for multiple sources, or almost always but I think they also have recognized that on a go forward basis if you don't have a supplier that's healthy from a cash flow and balance sheet standpoint, then it can be very expensive and the likelihood that somebody who is on the edge financially has good engineering, good program management, can launch well and invest in R&D is less likely.

So everybody will have a slightly different strategy.

But I would say as the volumes come back, it allows them in a more systematic way to execute whatever their supplier strategy is.

When you're in panic mode, you don't have a lot of opportunities to do it.

But I won't comment on any particular OEM but they all have sort of stated strategies, how many suppliers they want to work with and how they want to work from a logistics standpoint.

So I think as people have restructured the business, as volumes come back on the supply side as well as the OEM side, hopefully we get back in a more normal cadence and people can execute the strategies in and the healthier our customers are, I would say the more rational they can operate and look at long-term win-win rather than short-term arguing over a nickel here and a dime there and you throw away a dollar.

I would hope that after going through this very difficult period and also the restructuring of Chrysler and GM, that we can get back to normal business.

Because the only way you take cost out and become competitive in product and quality and cost is through engineering.

Engineering and R&D.

And hopefully we'll get back in into more discussions on what products they want to bring to market and how we can help them make more cost effective, whether that's weight or energy efficiency.

So I'm looking forward quite frankly to getting through this and getting back to day-to-day operations where we can have a more normal working relationship.

Then can you also provide some more detail and color about the overall tax rate and if that's something that we're going to probably see in successive quarters?

David, the tax rate's going to bounce around a little bit as it has in the last couple of quarters.

And when you're in jurisdiction, you're making some money, some you're not.

The percentages go way out of whack.

All I can tell you, David, is as we start -- as production starts to ramp up, both in North America and Europe, that we do have some losses that we're going to be able to access.

I know that will be a benefit to us from a cash flow perspective as well from a rate perspective.

But we're really looking beyond 2009 to see that materialize.

Beyond 2009.

One point of clarification.

The electrical business also includes your lighting business.

The numbers that Vince gave you, part of our electronics group includes our lighting.

We're not huge in lighting.

That's sort of normal business rather than start-up.

Great.

Thank you very much.

And sir, we have no further questions at this time.

Okay.

We appreciate everybody's interest and dialing in today.

Obviously, we've had a very interesting first half of the year.

We'll look forward to see what happens with the economy and the releases going forward and hopefully we'll be back in more normal business operations mode going forward.

Thanks everybody.

Have a good day.

Ladies and gentlemen, this does conclude the conference call for today.

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