Magna International Inc (MGA) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Magna International third quarter 2009 results.

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

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

(Operator Instructions).

As a reminder, this conference is being recorded Thursday, November 5, 2009.

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

Please go ahead, sir.

Thank you.

Good afternoon and welcome to our third quarter 2009 conference call.

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

This afternoon, our Board of Directors met and approved our financial results for the third quarter ended September 30, 2009.

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

You will find a press release, today's conference call Webcast, and a slide presentation to go along with the call, all on our 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 today's press release and attached MD&A for a complete description of our Safe Harbor disclaimer.

The third quarter North American vehicle production improved significantly from Q2, increasing 32%.

As previously reported, volumes in the first half of 2009 had declined 50% relative to the first half in 2008.

North American vehicle production for the third quarter of 2009 was a decline of only 20% year-over-year.

The increase in North American production in the third quarter of 2009 compared to Q2 of 2009 reflected, among other things, a resumption of production at a number of Chrysler and GM assembly facilities following their emergence from bankruptcy protection.

Historically low average level of dealer vehicle inventories during the third quarter of 2009, as well as US vehicles sales in the third quarter of 2009, due in particular to the implementation of the Cars Program in the United States in July.

In Europe, the 9% decline in vehicle production for the third quarter of 2009 was less substantial than the 34% decline experienced during the first half of '09 as compared to '08.

The various scrappage programs that have been in place in a number of European countries have assisted in supporting vehicle sales in those countries.

Some of these programs have reached or are close to their funding limit, which may have a negative impact on future vehicles sales and production in Europe.

Considering the industry challenges we have faced, we are pleased with our financial results in the third quarter of 2009, particularly North America.

Our total sales, which had declined 45% in the first half of '09 compared to the first half of '08, declined only 16% in the third quarter of 2009, relative to Q3 of '08.

And in spite of the sales decline, our operating income, excluding unusual items, increased $47 million over the same period.

Our operating results also improved considerably from the second quarter of 2009 to the third quarter of 2009, while sales increased $964 million from the second quarter to the third quarter, operating income, excluding unusual items, increased $263 million.

The improvement in our financial results, our first quarterly profit, excluding unusual, since Q3 of last year, largely reflects the benefits of our actions to right-size through the restructuring of our operations and the implementation of various cost-saving initiatives.

While it's difficult across Magna to quantify the benefits of these actions, we have been successful in reducing our fixed cost structure such that we can generate increased profits despite year-over-year production declines of 20% in North America and 9% in Europe.

We will continue our restructuring activities where required and we'll keep a tight rein on costs going forward.

We also continue our efforts to expand in regions outside of our traditional markets.

Our rest of world sales for the third quarter of 2009 increased 35% over the comparable quarter in 2008 to $193 million.

And our rest of world EBITDA doubled to $18 million for Q3 2009.

There also appear to be continued signs of improvement, particularly in North America.

The October US monthly SAR, surprised to the upside at 10.5 million units, despite some concerns about payback falling into the Car's incentive programs.

Used car prices and consumer expectations survey results continue to strengthen.

These are positive signs for sales and production going forward.

The positive industry signs, combined with our restructuring actions to date and planned actions, give a certain of confidence that our North American operations are stable and we should be able to continue to generate profits going forward.

Going forward in Europe, we are on the cusp of some significant launches at Magna Steyr.

This activity has and will continue to hamper our operational results in Europe.

This, combined with a general level of uncertainty about the state of the European economy, leave us more cautious about our results in Europe over the next while.

Finally, we were advised earlier this week by General Motors that its Board had decided to terminate the sale process for Opel.

It is our understanding the Board concluded that it was in GM's best interest to retain Opel, which plays an important role within GM's organization.

We will continue to support Opel and GM, and hope that our business will continue to grow with them.

I'd like to thank Sberbank, our partner, for its significant contribution and support throughout the Opel process.

We remain focused on running a world-class parts business.

This includes an ongoing assessment of our product portfolio, and investing in new technologies and growing vehicle areas, such as electronics and electric vehicles, as well as maintaining competitive facilities around the world to support our customers.

Now I'd like to turn the call over to Vince.

Thanks, Don, and good afternoon, everyone.

I would now like to review our financial results for the third quarter ended September 30, 2009.

Please note all figures are in US dollars.

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

There were no unusual items in the third quarter of 2009.

In the third quarter of 2008, we recorded certain items resulting in a net $146 million reduction in operating income; a $234 million reduction in net income; and a $2.10 reduction in diluted earnings per share.

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

In the third quarter, consolidated sales declined 16% to $4.7 billion.

North American production sales declined 14% in the third quarter to $2.2 billion, reflecting a 20% decline in vehicle production to 2.3 million units, partially offset by an 8% increase in North American content to $927.

The key contributors to the increase in content were favorable production relative to industry volumes and/or increased content on certain programs, including the Ford Escape, Fusion, and F-Series Super Duty pickups; GM's full-size SUVs and pickups; and Chrysler-built minivans.

New launches -- takeover business awarded in the first half of 2009 that commenced in the third quarter, and acquisitions completed during or subsequent to the third quarter of 2008, including several facilities from Meridian.

New launches contributed to content growth quarter-over-quarter included the Ford F-Series and the Chevy Traverse and Camaro, as well as the Chevy Equinox and its variants.

Partially offsetting these were unfavorable production relative to industry volumes and/or lower content on certain programs, including the Chevy Cobalt, Impala and HHR; the Buick Enclave and GMC Acadia; and the Ford Flex; the weakening of the Canadian dollar against the US dollars; programs that ended production during or subsequent to the third quarter of 2008, including the Saturn View, Outlook, and Aura; the Chevy Trailblazer and GMC Envoy; and the Pontiac G5, as well as incremental price concessions.

European production sales declined $158 million or 9% from the comparable quarter.

European vehicle production declined 9% to 2.9 million units, while European content was essentially unchanged at $529.

European content was positively impacted by the launch of new programs including the Volkswagen Golf, Porsche, [Anamara], The Peugeot 308cc, and the Mercedes Benz E Class.

Acquisitions completed during or subsequent to the third quarter of 2008, including Cadence and favorable production relative to industry volumes and/or increased content on certain programs including the Audi Q5.

This was offset by unfavorable production relative to industry volumes and/or lower content on certain programs in the third quarter of 2009, including the Mercedes-Benz C Class and the Porsche Cayenne, and Volkswagen Touareg.

The weakening of the euro and British pound each against the US dollar, the sale of certain facilities during or subsequent to the third quarter of 2008, and OEM price concessions subsequent to Q3 of 2008.

Rest of world production sales increased 35% to $193 million, primarily as a result of increased production and/or content on certain programs, particularly in China, Korea, and Brazil, and the launch of new programs during or subsequent to the third quarter of 2008 in China and Japan.

These factors were partially offset by a decline in reported US dollars 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 South Africa.

Complete vehicle assembly volumes declined 42% from the comparable quarter and assembly sales declined 38% or $259 million to $428 million.

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

In summary, consolidated sales, excluding tooling sales, declined approximately 14% or $707 million in the third quarter.

The primary reasons for this decline are the significant declines in vehicle production in both North America and Europe, as well as lower assembly sales.

Tooling, engineering, and other sales also declined $157 million or 32% from the prior year to $330 million for the quarter.

Gross margin in the quarter was 11.8% compared to 10.9% in the third quarter of 2008.

The increase in gross margin percentage was primarily as a result of the benefit of restructuring and downsizing activities, and cost-saving initiatives undertaken during or subsequent to the third quarter of 2008; lower amortization of deferred wage buy-down assets at a powertrain facility in the United States; productivity and efficiency improvements at certain facilities; lower commodity costs; and a decrease in tooling and other sales that are in low or no margins.

These factors were partially offset by lower gross margin earned due to the significant decline in vehicle production volumes; costs incurred in preparation for upcoming launches; the electric vehicle development costs; operational inefficiencies and other costs of certain facilities; a favorable revaluation of warranty accruals during the third quarter of 2008; incremental costs associated with restructuring and downsizing activities, primarily in Europe; costs incurred to develop and grow our electronics capabilities; and customer price concessions subsequent to the third quarter of 2008.

Magnus consolidated SG&A as a percent of sales was 6.1% in Q3 2009 compared to 6.7% in Q3 2008.

This decline was substantially due to cost-savings initiatives, including reduced discretionary spending; employer reduction; reduced bonuses; voluntary wage reductions and benefit claim changes; a $9 million favorable adjustment of our investment in active backed commercial paper compared to a $24 million impairment in the comparable quarter; and reduced spending at certain facilities as a result of restructuring activities and downsizing.

These were partially offset by an unfavorable accounts receivable valuation allowance in the third quarter of 2009.

Overall, total SG&A dollars declined from $369 million in Q3 2008 to $286 million in the third quarter of 2009.

Partly as a result of the higher gross margin percentage, lower SG&A percentage, lower depreciation expense, and higher equity income, partially offset by higher interest expense, our operating margin percentage improved to 1.7% in the third quarter of 2009 from 0.6% in the third quarter of 2008.

Our effective tax rate declined to 38.5% in the quarter from 46.9% in the third quarter of 2008.

The decline in the income tax rate is primarily a result of a decrease in losses and other items not benefited, partially offset by a change in the mix in earnings, whereby more income was earned in jurisdictions with higher income tax rates.

Net income was $51 million in the quarter compared to [$19 million] in the third quarter of 2008.

Diluted earnings per share were $0.45 compared to diluted earnings per share of $0.17 reported in the comparable quarter in 2008.

This increase in diluted EPS was as a result of the increase in net income, partially offset by an increase in the number of weighted average diluted shares outstanding during the quarter.

The increased number of shares was primarily due to an increase in the number of diluted shares associated with restricted stock and stock options.

Such shares were [anti-dilutive] in the third quarter of 2008.

Next, I will review our cash flows and investment activities.

During the third quarter of 2009, we generated $258 million in cash from operations prior to changes in non-cash operating assets and liabilities, and invested $234 million in non-cash operating assets and liabilities.

Investment in non-cash operating assets and liabilities largely reflects an increase in accounts receivables and inventories, and a decline in income taxes receivable.

These were partially offset by an increase in accounts payable.

The increased accounts receivables and payables were primarily due to higher sales in the quarter relative to the second quarter of 2009.

The increased inventory relates to several tooling programs and production inventory [fell], due to higher volumes.

The decline in taxes receivables is due to the increased income tax liability associated with higher income.

In the fourth quarter of the year, we typically recover some of the investment and working capital that has built up in the course of the year.

2009 is not expected to be an exception to that trend.

For the quarter, investment activity amounted to $264 million, comprised of $153 million in fixed assets; $100 million increase in investments and other assets; and $11 million to purchase subsidiaries.

Finally, we announced today that on December 7, we will redeem all of our 6.5% convertible subordinated debentures that are due in March of 2010.

Approximately 100 million Canadian principal amounts of the debentures remain outstanding.

The redemption will result in some interest savings going forward.

Despite the difficult environment over the past year, we have maintained a healthy financial position with $1.4 billion in cash and $865 million cash net of debt.

We also have an additional $1.7 billion in unused credit available to us from a credit facility that extends until July 2012.

Following the redemption of our debentures, we have very little in near-term debt repayments to make.

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

This allows us to invest for the future.

This concludes our formal remarks.

Thank you for your attention this afternoon.

We will now open the call for questions.

(Operator Instructions).

John Murphy, Banc of America.

Following the Opel deal being voted down by GM -- and obviously, that's not going anywhere at this point; at least that's what appears at this point -- are there any other transactions out there like that?

Because there's big assets like Volvo; Saab could be up for grabs.

Is there anything else out there that you'd be interested in doing?

Or was this just where you thought there would be a really good fit and those other transactions aren't that appealing?

It's Don here.

We're not looking at any other transactions in that space.

We got involved in the Opel discussion from a fairly unique set of circumstances and we were going to be a minority partner working with General Motors.

So, right now we're focusing back on the core business, which is automotive parts and we have no discussions going on right now on any other vehicle-type acquisitions.

And a large part of why we got involved before was at the request of the government, so.

Okay.

And then if we think about taking that down a notch to the actual supplier business, I mean, you clearly have been winning takeover business.

I'm just wondering if you could quantify where you are here year-to-date and if you could give us maybe a general ballpark of where you might for full-year '09?

John, it's Vince.

I'll answer that.

We reported last quarter that when you look at takeover business and acquisition really of troubled suppliers, which I sort of still put in the same basket as takeover business, we had about $650 million of book business end of Q2.

The amount of takeover opportunities in North America has declined, but we booked probably about another $50 million of takeover business in the quarter.

So, on a year-to-date basis, we're about $700 million of business.

I think when you look at the impact that that's had on Q3, only about $35 million of that business has been booked in Q3.

So, the bulk of that revenue is going to come in to Q4 and 2010.

And most of that takeover business, or essentially all that takeover business has been in North America.

And you can appreciate with the substantial reduction in production volumes that there's been more distressed suppliers in North America as compared to Europe, which has created more opportunity for takeover work.

Okay.

So, thank you.

And then that leads me to my next question on incremental margin, as we step from third quarter to fourth quarter.

I know it's always a little bit odd to be looking at things sequentially, but given that the rapid change or the big changes we've seen in production volumes, it's somewhat helpful.

It looks like the incremental margin from the second quarter to the third quarter was about 27% when you adjust for Forex.

Is that something that you think is a ballpark that we should be using, as we step from third quarter to fourth quarter, on the revenue change or the potential revenue increase in the fourth quarter?

John, there's a lot of moving pieces when you look at overall incremental margin.

I think when you look at North America, we probably -- I would say we're more in the recovery stage.

Volume just started to pick up.

We're taking a lot of restructuring and downsizing activities.

So if revenue does pick up, we should see some bottom line improvement, continued improvement.

In Europe, we've got more of a mixed bag.

Volumes pick up, again, we should see some improvement to the bottom line.

But we do have a number of significant launches taking place in Europe, particularly at Magna Steyr.

I think as you look at Q4, we're going to see some headwinds, particularly at Magna Steyr, as we're ramping up for some important launches that are commencing in 2009 and will continue into 2010.

Okay.

And then lastly, just generally how you're thinking about mix next year, because it sounds like Europe -- there's risk to Europe -- European volumes, but it sounds like mix will improve.

I'm just wondering what you're thinking about in Europe on mix for next year just generally, as well as what you were thinking about for North America; because the mix could actually improve in North America next year as well.

John, we're right now in the middle of business plans.

I'm not quite ready to comment on that at this point.

Okay, thank you very much.

John, when you're talking about mix, you talking about who has what market share?

Well, I mean, it's clear that the GMP 900 and the F-Series were a big help in the quarter, which is a good thing.

I was just wondering how you guys were thinking about that going forward, particularly in North America.

And obviously, the A&B segment has been the strong segment in Europe so far, or recently.

And as we see the decline in volumes through potentially in the fourth quarter and going into next year, it seems like the C&D segment is going to -- whether -- to perform better than the A&B segment.

So I was just wondering if you guys were seeing that as well, and if that's something that we should think about as an offset to the decline in volumes in Europe, and potentially a benefit to the increasing volumes in North America.

I think that's an accurate assessment.

If you look at the Scrappage Program in Europe, it was traditionally the smaller cars and we don't have as much content.

So if you get back to a more normalized mix, if the Scrappage Program goes away, it should help us.

But we then may be offset by just the sheer volume over there.

And Chrysler and GM, now that they're out of the restructuring mode, if they pick up volume again, we typically have higher content than some other customers as well.

So it's hard to put numbers to it, but directionally, I would think that the statement is accurate.

Okay, great.

Thank you very much.

Himanshu Patel, JPMorgan.

A couple of questions -- my numbers could be wrong here, but I think Europe actually saw earnings decline sequentially, even though revenue was up a little bit.

Any more color on what happened there?

Sequentially?

When you look at Europe overall, revenues did increase sequentially and we did see EBIT actually decline quarter-over-quarter.

Just some flavor for you.

We took an allowance against some receivables in the tune of about $15 million in Europe.

So there was one item that's impacting us in the quarter.

We also continued to incur I would say pretty significant launch costs in a couple of our groups, in particular, Magna Steyr.

I talked about that earlier, some of the programs that are launching.

And then you've got pluses and minuses and you got a little bit of help on the commodity side, some productivity improvements.

We continue to invest in electronics, which is hurting us in Europe sequentially quarter-to-quarter.

But the bigger items I would think about would be the accounts receivable allowance as well as the startup costs.

Okay.

I mean, I guess this big picture, I mean (multiple speakers) --

(multiple speakers) we're going to expect to see those launch costs continue to impact us negatively in Q4 as well.

Okay.

I think there was a comment made that the takeover opportunities in North America have gone down this quarter.

Can you just elaborate on that?

Yes, I'm a little surprised, actually, we haven't seen a few more failures as production ramped up and it was a requirement for the supply base to invest capital.

Because I would have thought the banks are not putting money back into the suppliers that don't have a strong balance sheet.

So it will be interesting to see what happens.

I expect -- I'm not sure whether its Q4 or next year -- depends on the availability of companies to get financing, but I would suspect that we're going to continue to see the car companies trying to consolidate into fewer, more global, stronger balance sheet supply base.

So I think you're going to see a rationalization.

Assuming volumes stay up to where they have been in the past quarter, then I don't expect to see a lot of failures, but I think over time, there's going to be opportunities as suppliers are phased out.

But I was a little surprised in not seeing as many fail as we had thought.

In Europe, it will be interesting to see what happens.

If the Scrappage programs go away; if the volumes drop off, there may -- we may see some opportunities of distressed suppliers in Europe, which we haven't seen much of to date.

So it's hard to tell what will happen going forward.

We'll continue to monitor it closely, but it did slow down, as far as the opportunities in Q3.

Okay.

And then two last questions.

The 30% sequential contribution margins you guys saw in Q3, just based on what you know about platform mix and stuff as we sort of travel to the fourth quarter, any reason to think that that level should be materially higher or lower?

I think there's a number of moving pieces.

We've talked about Europe and some of the ongoing launch costs which are going to be headwinds.

It depends on the timing of some of our expenditures in electronics and electric vehicles.

And it's going to depend as well on vehicle mix.

I think -- I would look at Q4 and onwards in terms of our fixed cost structure; whether you look at SG&A or you look at overall margin.

A lot of the -- some of the pull-through coming through on the bottom line is a result of taking our fixed cost structure down.

You look at SG&A year-over-year sequentially, it's down; and that's become some of our -- the initiatives we've taken.

So that's going to continue to benefit us.

One of the other things that we have to think about as well as Q4 is if there are some more restructuring rationalizing activities, that could be a negative.

I think when you look at Q3 to Q3 last year in North America, there wasn't any additional restructuring costs.

There was a little bit more incremental in Europe; so it depends as we move forward and look at our manufacturing footprint, there may be some additional costs that we're going to be incurring in Q4.

A long-winded answer to your question but there are a lot of moving pieces.

Okay.

And then lastly, just as you look out over the next couple of years, any way you can dimension for us what percentage of your contracts have commodity costs protection?

I don't know what that would be.

I don't know what that would be.

We have a lot of steel on steel resale; not very much on the chemical side.

I don't know how to quantify that.

What about just qualitatively, directionally?

Do you think you have more in the way of recovery mechanisms built into your contracts today than, let's say, a couple years ago?

Probably not much.

We've probably got a few more of our contracts on steel resale than we had in the past, but I don't think we have -- not substantially different than the past.

I think one of the things the supply base in general has been more aware of is if the raw material, specifically oil, goes up drastically, it has impact on different types of raw material; but I'm not sure there's much more protection in it than there was in the past.

Okay, understood.

Thank you.

Rich Kwas, Wachovia/Wells Fargo.

Lower fixed costs -- you talked about restructuring and how you have lower fixed costs.

I guess either Don or Vince, could you talk about how -- at what production levels in North America you see the most leverage?

It seems like you brought down the breakeven point pretty significantly here.

How should we think about the leverage to the upside over the next couple of years, once we get back to normalized production schedule in North America?

I guess what you're looking at is incremental margin.

Yes, I guess to get back to your earnings from a couple of years ago and what production levels you get back to your 2007 earnings?

That's a good question.

We really have to look at group by group, because as we look at some of the restructuring activities that we've taken across the globe in certain areas of the business, we have had more restructuring activities than other areas.

It's going to depend on the mix of that.

What we're focused on certainly as a corporation is, we've brought our fixed costs down globally.

And we're going to be very sensitive about adding to our fixed cost structure as volumes and sales ramp up.

But we are still putting up facilities, even though we've cut some capacity out in certain jurisdictions.

We are adding in parts of the world, new regions of the world and lower cost regions.

So it's how that all sort of [blazes] in and how quickly a program launches.

It's -- as I look out two to three years, that's a difficult question to answer.

But I guess the -- in terms of the profitability, should we be thinking about it as you can generate the same level of profit on lower revenues?

Meaningfully lower revenues?

On a comparative basis?

There's a lot of moving parts to it.

In theory, as you get a $1 sale, you get the contribution margin to fall to the bottom line.

But there's pricing, there's raw materials, there's all sorts of different moving parts.

And so -- and we've cut back in all areas; as the business gets healthier again, we're probably start spending a bit more on R&D.

So in theory, the contribution margin falls to the bottom line but [in fact] always offsets to it as well.

Okay.

And then just following on that, Vince, as we think about 2010, are there a sizable amount of costs that is going to come back into the business since things are starting to become more normalized?

In particular, on the labor front with salaries and benefits and that type of stuff?

Is that going to be meaningful in terms of a put-back for 2010?

We cut back on some benefit costs for a year that we will probably reinstate some of them.

And we have cut back on in a lot of areas on salaries.

And some of that we need to go back to more normalized numbers.

So that will be an offset to any increased margins that fall through with increased sales.

But we also have taken out a substantial number of people, which is permanent and we have done a lot of improvements in the way we run our business.

So -- but some of those savings (inaudible), whether they're wages or benefits, they're actually going to straddle the year end.

In 2009, we're not going to see the full year benefit of some of those initiatives, since some of them are going to be realized in 2009 and 2010.

So if you look at '09 versus '10, is it a plus or minus?

It's probably going to be fairly neutral or roughly half of the savings are realized in '09; half of them are going to be realized in 2010.

Okay.

So it sounds like there's still a pretty nice net benefit as you look at next year, even with some costs coming back in.

Should still see some benefits from some of the activities we've initiated in 2009 benefiting us positively in 2010 as well.

Okay.

Last question -- could you quantify the costs associated with the pursuit of Opel?

Well, there's some obviously, external advisory costs that we've been billed to date.

We haven't been -- I'm sure haven't been billed everything for all the work that's been done.

And obviously, there was some management time associated with it.

With respect to what we've been billed to date, the amounts are not material.

We're going to have to tally up all the bills.

We'll have a better view once we get through Q4.

(inaudible), Citigroup.

Great, thanks.

Just a couple of follow-up questions.

Can you quantify the Steyr launch costs a little bit, particularly when you see that peaking?

Does that peak in Q4 of '09?

Or at some point early 2010?

In terms of peak, I think we're going to see some increases in Q4.

What I'm not sure of yet and I need to review the business plans as whether that's going to carry on to -- how much of that is going to carry on to Q1 and Q2 next year.

But it should be at the top or close to the top in Q4.

Right.

And then it looks like you're still keeping your CapEx pretty flat here as volume improves.

How should we think about that in the next year or two?

Does that go back up to the mid-$700 million level?

Or can you kind of keep it more at the -- sort of $600 million level?

We've been paying back everywhere, unless you have a good payback or unless you're supporting a new program, that's why our capital has come down.

We're going to continue to keep a tight watch on it, but I would suspect as we continue to win new businesses, which is what we want to do, then we will -- the CapEx would probably go up again.

And we're looking at a lot of new componentry and electric vehicles and hybrids in electronics groups, so we're not going to give projections but certainly I would think we'd be back in the $700 million, $800 million range.

But we haven't updated it yet.

Great.

And then just lastly, on the Q4 working capital, it sounds like you are expecting that to be a source.

Can you maybe quantify that?

Do you think that the full year probably ends up sort of being neutral on working capital?

Did it still come out to be a modest use?

I think it's going to be a use of cash in 2009.

We've been -- actually Q2 -- Q1, Q2, we've been building inventory banks for troubled suppliers, our supply base.

Those banks haven't come down yet.

They'll start to come down in Q4 and Q1 next year.

So that working capital won't reverse.

But as sales start to pick up, we're going to see an investment of working capital, which won't come back in its entirety.

So we will recover, I expect, a substantial amount of our investment so far, but I don't expect us to generate cash from working capital for 2009 in total.

Okay, that's helpful.

Thank you.

Michael Willemse, CIBC.

You mentioned the accounts receivable valuation allowance.

I think you said $15 million.

What did that pertain to?

And is it repeatable?

It pertains to some old receivables that we have with an OEM in Europe that had remained outstanding for some time.

We're not going to identify the customer; we're not going to provide any further comment, but it's going to be a -- shouldn't be a repeatable item.

They are old receivables that have been outstanding, as I said, for quite some time.

Okay.

And you mentioned a few other costs in the quarter -- the cost for the Russian facilities downsizing, restructuring costs and launch costs.

Are any of these others over $10 million or $15 million?

They are.

I look at the Russian costs as really an investment, as we're growing in Russia.

We do have one new facility that is going up, so we're going to be incurring some launch costs there.

With respect to the launch costs of Magna Steyr, certainly it's in excess of $10 million.

And there's a number of other launches that are in excess of $10 million.

I'm not going to get into the specifics on what those amounts are.

And with the launches at Steyr, when should we see the sales ramp up?

You're going to see sales ramp up in the first quarter, second quarter of next year on the Peugeot business and the Aston Martin; and BMW launches sort of summertime next year, so you're probably talking about the back half of next year and early into 2011 on those ones.

Okay, thank you.

And just one last question.

With the Opel discussions, did Magna end up losing any business with any customers?

And how would you describe your customer relationships now?

It's hard to quantify if we lost any business or not.

I don't think we lost any material business, but you can't tell who's making what decision for what reason.

I would say the bulk of our customers were waiting to see whether Opel happened or not; waiting to see whether their firewalls would be protected, their technology.

And for the most part, they were fairly neutral.

We had a couple of customers that were public and they didn't want to see it go through.

And I think on a go-forward basis, I would hope that, after we had discussions with them, they know it's not going to happen any more, so Magna went back to business as usual.

Peter Sklar, BMO Capital.

If you look in your segmented reporting, your corporate and other line was significantly positive versus in previous quarters, it had been showing a loss position.

Can you explain what the swing and what's going on there?

On the corporate and other line, my comments about SG&A, I talked about asset-backed commercial paper.

We had sort of a $9 million positive income inclusion in the quarter as the result of credit spreads tightening.

We have to potentially mark-to-market the asset-backed commercial paper.

As I go back a year, the comparable quarter, we had a $24 million impairment.

So you look at that net number, it's a $33 million increase in corporate income, quarter-over-quarter.

So that's the biggest item there.

Okay.

And Vince, can you talk a little bit about your tax rate expectations?

It's really been bouncing around quite a bit.

Do you have a view on the fourth quarter or next year?

Are you migrating back to a more normalized tax rate?

As we start to generate some more -- there's some larger numbers on the income side, we going to migrate to a more normal rate.

Remember, Peter, when the numbers are pretty small and income is earned in one jurisdiction not the other, you can have some pretty big swings in your effective tax rate.

Because tax rates are substantially different in different jurisdictions across the world.

I would think about our tax rate going forward sort of longer-term, that it's going to have some benefits on the tax line because it's the sort of losses that we haven't benefited under the accounting rules.

So as we start to generate some income, we're going to see some positive impact as a result of losses that haven't been recorded from an accounting perspective.

And that's just not -- [you know] when that's going to be a cash win as well.

Right.

And Don, I just had lastly, just a question about Chrysler.

I believe it was yesterday they unfolded their recovery plan.

Apparently, they're planning some new models, small car models based on Fiat underpinnings or Fiat powertrain.

I'm just wondering how you see the opportunity from Magna's respective.

I mean, my sense is your relationship has traditionally been with Chrysler.

I don't believe you've been a big supplier to Fiat in the past.

We are a supplier to Fiat, depending on the product area.

We've been a bigger supplier across the board to Chrysler.

I think the intent of the meeting yesterday from Sergio was to let people know what they are planning, because there's a lot of speculation in the media.

He did start the meeting off by talking about their cash position, that it was improving.

And he talked about what they're going to do.

And this is open to the general public, obviously -- well, not the general public, but the media -- what they were going to do in the various segments.

They are going to bring over some Fiat-based vehicles because they don't play there now.

So, the big message I think was how they're structured; how they're going to try and cooperate with Fiat; how they see benefits.

We still have got very good relationships with almost all the people that are in Fiat.

So, from the supply base in general, the big question is how healthy are they going to be going forward?

And that's going to depend on the volumes and their ability to generate cash.

I think they did a good job of going through their plan and showing what they intend to do to generate cash, so they can have the support of the supply base.

And we will continue to support Chrysler and we've got -- we're working on a lot of future opportunities and future technologies with them.

Okay, thank you.

That's all I have.

David Tyerman, Genuity.

I believe in the last call you indicated, Vince, that there was $30 million or $40 million of restructuring costs left to go this year.

I was wondering how much happened in the quarter and whether you're still anticipating that for the second half?

We didn't incur any restructuring costs that we call unusual into Q3.

We did previously communicate that there would be some -- we expect some additional restructuring in the second half of the year.

I think there's going to be some of those costs in Q4, some of them are going to be in 2010.

It just depends how quickly we move on some of our plans and whether we're able to book some of these costs in Q4 or whether they're going to drag on to 2010.

So we're still expecting to incur some but I'm not sure -- quite sure on the timing.

Would it still be sort of that $30 million, $40 million type level, do you think?

It could be $30 million to $40 million.

It could be a little bit more.

We're still working through some plans and trying to sort through what we want to do.

I think a lot of it will depend on where we see the volumes going in Europe.

Okay, that's helpful.

And then on the Magna Steyr launches, you've got the Clubman coming next year.

Would you expect to see the same kind of launch costs when you're heading into the Clubman than what you've seen with the Peugeot and the Aston?

Yes.

Some of those costs are being incurred right now.

Okay, so, it sounded like you were peaking in Q4, though I'm wondering would you get another peak again as you're heading into the summer?

Or how should I think about that?

David, I think we never look at -- some of the things you've got to consider when you're looking at what hits our bottom line.

There's a number of the costs that are actually -- are being capitalized because we are going to have recoveries from the customer.

So we have to look (inaudible) program of what are we recovering -- what costs are recurring above what we're going to recover from the customer and the timing of all that.

And so we've incurred substantial costs.

Some of them have been put on the balance sheet.

If you look at our investment in other assets, I think part of that is coming out of Magna Steyr.

We're also incurring costs that are not being [capped out] so expect to see some [significant] costs in Q4.

I talked about whether it peaks in Q4, peaks in Q1.

I think Q4 and Q1 are going to be higher numbers than (technical difficulty) into the balance of 2010.

Okay, that's helpful.

And then just the last question -- one thing that keeps standing out and it's always stood out to me is how small the rest of world sales remains relative to the Company.

Clearly, Asia has become a giant part of the world now, the auto world.

And it seems to me that you're vastly under-represented there.

I was wondering if you could give us any thoughts in terms of do you intend to try and get a sizable proportion, maybe balance to global production of Asia at some point?

And if so, how would you ever get there because it seems that it's being very slow progress so far.

It's still relatively small compared to the other two geographic areas of Magna, obviously.

We are growing more in China with a number of different OEMs.

We'll continue to do that.

We haven't grown dramatically in Japan; in fact, we haven't really grown production-wise in Japan at all.

We have some operations in Korea.

So, it is a focus of ours.

We are having a lot of tech shows.

It has been slow.

We're going to continue to focus on it.

We haven't made any substantial acquisitions over there, so that's one opportunity if we wanted to look at acquisitions to try to get a, like, a step-up.

Otherwise, I think you're just going to see continued growth but at a pace that the rest of world segment will lag behind what we're seeing in North America and Europe, unless we do a substantial acquisition.

I think, David, that our rest of world segment on the sales side is pretty small, but if you look at the rate of growth -- just in the quarter, that's 25%; that's a small space.

We've been doing that consistently for a number of quarters.

And keep in mind that our (technical difficulty) sales are down 16%.

So, it's going to continue to grow at a faster rate than our developed region.

And as Don talked about it, if we're successful in one or two or three acquisitions, then we can see a stepped-up function of sales in that part of the world.

Would the goal be to grow that business to a sizable proportion of, say, your North American business?

I mean, the Chinese market alone is very rapidly heading toward the size of the North American market.

I guess in an ideal world, we would like to see the same percentage of sales in each geographic region as the market size is.

Obviously, we're going from a much higher content per vehicle with our traditional customers.

In some of the OEMs that are based out of there have different -- they have, I would call them (inaudible) but to sort of related suppliers and some of them don't outsource as much; so it's not practical to think we're going to get there certainly in any time soon, but I think we can grow.

It's just a question of how fast we grow.

It's a long way to go to get to the same content level as we have in Europe and North America.

Brett Hoselton, KeyBanc.

Yes, it's Matt Mishan in for Brett.

Good evening, guys.

All right.

Remarkably, I still have questions that haven't been asked yet.

But -- last quarter, you had mentioned investments in electric and electronics would affect your results.

What were the impacts in the quarter?

I think when you look at electronics in the quarter, we continue to invest in electronics -- I'm not sure we really talked about the number last quarter, but it has had a negative impact.

And I look on a year-to-date basis, our electronics investment for the first nine months of 2009 is greater than our electronics investment for the first nine months of 2008.

Is that ramping and moving higher as you move sequentially from quarter to quarter?

Or is that steady?

Yes, I think when you look at 2009, it's pretty well steady quarter-after-quarter, but it's at a rate higher than what we were running at in 2008.

Again, when we look at electronics, we have a number of programs that are going to be ramping up.

We're continuing to invest for a number of components for electric vehicles as well, which cost us money from a research and development standpoint, which is all part of our -- from our perspective, the Electronics Group.

Recall Matt, that we said that we lost about $60 million in all of 2008, and we had run, after half a year, almost the same amount of loss.

So we're obviously tracking higher than we were in '08.

Okay.

Fair enough.

Thank you.

And on a pricing front, a lot of suppliers have been indicating that they're seeing the relationships with the OEMs improve.

Can you talk a little bit about the pricing environment?

As far as price reductions, yearly price reductions, upfront costs for tooling and such.

I think the expectations from the OEMs on price reduction has come down a little bit just because the supply base has been losing money, and there's been a significant amount of failure of the suppliers.

Their expectation is probably still there, but their actually achieved price reductions that come out of margin is lower.

I think one of the issues going forward will be what happens with commodity prices; and obviously, if commodity prices go up, that's got to be eaten by somebody and the ability to give more price reductions is much more difficult.

One of the things that has happened a little bit, and I wouldn't -- I don't think I'm going to live long enough to see the day where the OEMs aren't asking for money back; I think what they're trying to do is get more creative in how to actually take the costs out of the product through [VAVE] rather than just take it out of margins.

And the number of suppliers left standing that are just trying to buy business so they can flip their order book later on, has substantially come down.

And most of the OEMs I think understand that if they're getting ridiculously low quotes from people, then it's not a supplier they want to work with.

So I would say more rational decision-making on the part of the OEMs on who they want to deal with.

But the requests for pricing hasn't gone away, won't go away, although it may be -- they may understand that they can't be getting costs out continually unless we can take it out of our actual design costs, rather than out of our margins.

And lastly, your supply base -- I believe [you] said that you were increasing inventories due to some of your distressed suppliers.

What is going on there?

Are you seeing it increasing and get worse?

Or are you seeing it sort of moderate a little bit?

I've been surprised at how well we've gotten through it in North America, because we haven't seen a lot in Europe.

We've seen a little bit; but in North America, we generally expected to see a lot of failures of our tier 2 and tier 3 as we ramp back up production after the extended shutdowns from GM and Chrysler.

For the most part we haven't seen a lot of impact to us.

We moved hundreds of tools, we in-sourced, trying to support our own employees and utilized our capital.

I've had discussions with other suppliers and the OEMs, just generically, to see if they're seeing anything different.

And for the most part, I think people were worried about if they were proactive in moving tools; other people are going to go bankrupt.

And we did invest in extra banks in anticipation we might see some failures.

And now we're going to bring those banks down, which will help our working capital.

But my expectation -- and we talked a little bit about what our costs might be in a previous conference call -- the actual cost to us on our tier 2 supply base has been less than we expected.

And I would say we're probably through the worst of it; we have a pretty good handle on who our watch list is.

It's not over yet, but I think we're in pretty good shape.

It will be interesting to see if the market goes down in Europe, if they have more tier 2 supplier failures over there.

I think it's too early to tell.

Thank you very much and a really nice quarter.

Chris Ceraso, Credit Suisse.

This is Joe on for Chris.

Back to the corporate other line, if you don't mind for a second.

It looks like that even excluding the $9 million of CP markup, it's still running higher than normal.

I'm wondering if there's FX in there and how we can think of that line going forward over the next few quarters?

When you look for the quarter, I talked about the biggest item was the asset-backed commercial paper.

There's certainly -- the other thing that comes into corporate is affiliation fees from our groups.

Quarter-to-quarter, that was a little lower.

And there's also some cost-saving initiatives at the corporate office to reduce costs, which have benefited us.

In going forward, the biggest impact on the corporate item is going to be the profitability of our operations globally, because that's going to impact affiliation fees.

Okay.

All right.

So, then -- I guess, can you talk a little bit about Magna's vision of its role in electric powertrain?

And I guess specifically, there seems to be a debate going on about the intellectual property here around developing a battery pack and who's going to own that technology, whether it be the OE, who has traditionally owned the propulsion system, or whether it's going to be a supplier who designs the battery pack and owns that IP.

Who's going to be doing that in-house, that -- will it be the OE doing it in-house?

Will it be the supplier?

Do you guys have a view on that?

And what is Magna's role in the process?

Well, I'm answering in about a minute and a half what could be about an eight-hour answer.

We see hybrids and electrics increasing as a percentage, but I see some estimates out there that are probably higher than what we'll actually see, because there are offsetting gains in internal combustion engine diesel and supercharged and things like that.

But as far as hybrids and electrics, every customer has their own strategy on what they want to come out with.

Some believe in pure electric; some I would say, don't.

Hybrids, everybody's got their own strategy there as well.

So some will -- I don't think anybody is going to make their own cells; some will do their own battery packs, which is [going to talk] to the vehicle itself.

Everybody again has their own strategy.

I think long-term and short-term may be different strategies internally.

There's going to be a lot of technology required; there's going to be warrantee liability risk.

So there's no generic answer.

What Magna is doing is we've looked at cells who we think is going to be a good technology, whether it's for hybrid or electric.

And there are different cells and different technologies.

We do have battery pack capability and we could do that.

As a design under contract, we could provide it to various OEMs.

So we are looking at that.

Our main thrust in electric vehicles is we can do a complete vehicle, including the electrical control unit; sort of modify an existing vehicle.

We have looked at our own concept, which we would like to bring to market in cooperation with other customers.

But all the componentry, whether it's the powertrain on the transfer case, chargers, motors, inverters, the motor control units -- we're looking at all those as core competence.

And I think for the most part, those components will be outsourced by the OEMs.

Okay.

Thanks, guys.

Operator, let's take one more question, if there is one.

Certainly.

The last question comes from Michael Willemse from CIBC again.

Just another question on the startup costs at Steyr.

Was there a big increase in the startup costs in the third quarter relative to the second quarter?

Yes, there was, Mike.

(multiple speakers)

(multiple speakers) [$10 million]?

I'm sorry?

Over $10 million?

Yes.

And in the cash flow section, there's investments in other assets of $100 million; so just -- in the MD&A [suggests they're] related to Steyr and that it's fully reimbursable.

When would you expect to be reimbursed for this investment?

The big bulk of that is Steyr, but there's a couple of other groups that are involved.

Just looking at my list over here, there's probably about five or six groups that are involved.

The biggest bulk of it, as soon as we start production on some of the new programs, we'll start to recover that as a cash flow item.

So, starting in -- most likely in 2010 over the life of the program.

Over the life of the programs?

Yes, typically over the life of the programs.

So it will be out for some time before we recover it all.

Okay, thank you.

Mike, that's not unusual with what we've done in the past.

Okay.

Okay.

Appreciate everybody calling in.

Be interesting to see where the volumes go going forward.

It looks like the economy is going in the right direction and we're going through the business planning process.

By the end of the next quarter, we'll probably have a bit more detailed information to share with everybody.

Thanks again.

Goodnight.

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.